Blame government, not the market

Meltdown melodrama
Thomas Sowell

From television specials to newspaper editorials, the media are pushing the idea that current economic problems were caused by the market and that only the government can rescue us. What was lacking in the housing market, they say, was government regulation of the market’s “greed.” That makes great moral melodra­ma, but it turns the facts upside down. It was precisely govern­ment intervention that turned a thriving industry into a basket case. An economist specializing in financial markets gave a glimpse of the history of housing markets when he said: “Lending money to American homebuyers had been one of the least risky and most profitable busi­nesses a bank could engage in for nearly a century.” That was what the market was like before the govern­ment intervened. Like many government interventions, it began small and later grew. The Community Reinvest­ment Act of 1977 directed fed­eral regulatory agencies to “encourage” banks and other lending institutions “to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions.” That sounds pretty inno­cent, and in fact it had little effect for more than a decade. However, its premise was that bureaucrats and politicians know where loans should go, better than people who are in the business of making loans. The real potential of that premise became apparent in the 1990s, when the Depart­ment of Housing and Urban Development imposed a requirement that mortgage lenders demonstrate with hard data that they were meeting their responsibili­ties under the Community Reinvestment Act. What HUD wanted were numbers showing that mort­gage loans were being made to low-income and moderate­income people on a scale that HUD expected, even if this required “innovative or flexi­ble” mortgage eligibility standards. In other words, quotas were imposed — and if some people didn’t meet the stan­dards, then the standards needed to be changed. Both HUD and the Depart­ment of Justice began bring­ing lawsuits against mort­gage bankers when a higher percentage of minority appli­cants than white applicants were turned down for mort­gage loans. A substantial majority of both black and white mort­gage loan applicants had their loans approved, but a statistical difference was enough to get a bank sued. It should also be noted that the same statistical sources from which data on blacks and whites were obtained usually contained data on Asian Americans as well. But those data on Asian Americans were almost never mentioned. Whites were turned down for mortgage loans more often than Asian Americans. But saying that would under­mine the reasoning on which the whole moral melodrama and political crusades were based. Lawsuits were only part of the pressures put on lenders by government officials. Banks and other lenders are overseen by regulatory agen­cies and must go to those agencies for approval of many business decisions that other businesses make without needing anyone else’s approval. Government regulators refused to approve such deci­sions when a lender was under investigation for not producing satisfactory statis­tics on loans to low-income people or minorities. Under growing pressures from both the Clinton admin­istration and later the George W. Bush administra­tion, banks began to lower their lending standards. Mortgage loans with no down payment, no income verification and other “cre­ative” financial arrange­ments abounded. Although this was done under pres­sures begun in the name of the poor and minorities, peo­ple who were neither could also get these mortgage loans. With mortgage loans wide­ly available to people with questionable prospects of being able to keep up the payments, it was an open invitation to financial disas­ter. Those who warned of the dangers had their warnings dismissed. Now, apparently, we need more politicians intervening in more indus­tries, if you believe the politi­cians and the media. Thomas Sowell, a former economics professor and the author of a dozen books, is a senior fellow at the Hoover Institution at Stanford University. He grew up in Harlem, served in the Marines and graduated magna cum laude from Harvard. He earned his PhD in economics at the University of Chicago. His Web site is www. tsowell. com.