Down With Socialism

Let's talk about the real cause of the economic crisis (we'll work backwards). The crisis right now was directly caused by the fact that there has been a massive amount of foreclosures, and home values have gone down so much that all these investment firms can't get any value for their properties. So why are the values down? Well, home values are down because the housing bubble burst (remember, the same thing happened in the 1990's with internet companies).

So then, what caused the housing bubble? Well, usually home prices increase over time proportionally to inflation. However, over the past ten years or so, home prices were skyrocketing, and the rate of increase was no longer proportional to inflation. Hence, a bubble. So why did home prices increase so much? It's all about supply and demand. Tons more people were buying homes, so the supply went down and the demand went up. By the laws of economics, this causes prices to increase.

Okay, so why were so many more people buying homes? It's because the banks were giving out more and more home loans. And they gave out more loans because of federal regulation.

In 1977, Jimmy Carter passed the Community Reinvestment Act (CRA). The CRA required banks to offer more credit to "under-served populations" (read: minorities, lower-income borrowers), and not just people in "wealthy neighborhoods" (read: people who can actually afford mortgages). The mainstream banking community opposed the CRA, but fortunately for them, it wasn't really enforced until 1995.

In 1993, Bill Clinton ordered new regulations for the CRA that would increase access to mortgage credit for inner city and distressed rural communities. The new rules went into effect on January 31, 1995, placing more requirements on the banks, and encouraging community groups to complain when banks were not loaning enough to specific neighborhood, income group, or race. A September 2008 editorial in the Wall Street Journal argued that this law compelled banks to make loans to poor borrowers who often could not repay them and that this contributed to the subprime crisis.

You see, because banks were being forced to loan to people with low incomes and bad credit, they had to start getting creative. They starting making interest-only or ARM loans to keep the payments low (at least initially). They started letting more people use "stated income" on their loan applications (and the income they state is usually a lie. I know. I worked at a subprime servicer for 2 1/2 years and read these loan applications). They started letting people buy homes with no down payment. All of these things allowed people who really could not afford to buy homes to obtain mortgages.

In order to protect themselves for these bad loans, banks started selling them. They bundled up subprime loans in groups called securities, and sold these bundles to investors. However, after a few years, the people with interest-only loans were unable to pay their mortgages because the interest-only period had ended, and the payment amount increased. The people with ARM loans were unable to pay their mortgages because the interest rate increased, causing the payments to increase. The people who couldn't afford their payments in the first place stopped paying, because they are poor (duh). There were millions of foreclosures, home values went down, and the securities became worthless. This is where we stand today.

So it's fairly clear. This did not happen because (as the liberals/socialists say) the government needs to regulate the banking industry more. No! In fact, government regulation is a big part of what caused this in the first place! It was the wrong kind of regulation. Even those lenders not governed by the CRA were issuing more subprime loans due to pressure from lobbyists and community groups, and for fear of being sued or called racists. I mean, come on. A loan is an investment. No one really wants to make an investment unless they believe they can get a good return. These bad investments were made because of liberal/socialist lobbyists, community groups, regulations, and restrictions.

If the government wants to fix the economy, they should leave it alone and stop trying to redistribute wealth through social engineering. Down with the bailouts. We need a purging. Let the bad systems fail, and let better systems rise in their place. That is capitalism.