Hsieh LTE on the Bailout

 Posted by on 3 October 2008 at 9:34 am  Activism, Economics, Finance, Politics
Oct 032008

The September 30, 2008 Denver Post did publish my LTE on the proposed bailout, but only in the online edition, not the print edition. (All of the LTE’s on this topic were online-only.)

It’s the second LTE on the page:

The current financial mess is not the fault of the free market, but rather of government interference in the free market. It’s clearly not in the interest of banks to loan money to people who can’t pay it back. The government created artificial incentives (such as the Community Reinvestment Act) that rewarded lenders for doing so, with the implied promise that taxpayers would pick up the tab if anything went wrong. The current mess is exactly the result one would expect.

To blame the free market for problems caused by government interference in the free market is like blaming one’s automobile accident on the car, rather than the fact that one was driving while yakking on a cellphone while looking at the onboard GPS system while reaching for a stick of gum in the glove compartment…

Paul Hsieh, Sedalia

For a longer discussion of this issue, see “The Long Road to Slack Lending Standards” by Steven Malanga. Here’s an excerpt:

Many defenders of the government’s efforts to prompt banks to lend more to minorities have claimed that this effort had little to do with the present mortgage mess. Specifically they point out that many institutions that made subprime mortgages during the market bubble weren’t even banks subject to the Community Reinvestment Act, the main vehicle that the feds used to cajole banks to loosen their lending.

But this defense misses the point. In order to push banks to lend more to minority borrowers, advocates like the Boston Fed put forward an entire new set of lending standards and explained to the industry just why loans based on these slacker standards were somehow safer than the industry previously thought. These justifications became the basis for a whole new set of values (or lack of values), as no-down payment loans and loans to people with poor credit history or to those who were already loaded up with debt became more common throughout the entire industry.

What happened in the mortgage industry is an example of how, in trying to eliminate discrimination from our society, we turned logic on its head. Instead of nobly trying to ensure equality of opportunity for everyone, many civil rights advocates tried to use the government to ensure equality of outcomes for everyone in the housing market. And so when faced with the idea that minorities weren’t getting approved for enough mortgages because they didn’t measure up as often to lending standards, the advocates told us that the standards must be discriminatory and needed to be junked. When lenders did that, we made heroes out of those who led the way, like Angelo Mozilo, before we made villains of them.

Now we all have to pay.

A deliberate policy of elevating “lack of value” above value sounds almost like something from Atlas Shrugged. The end results certainly looks like it…

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