One of the most alarming things about all the bailout talk is that the Community Reinvestment Act is still in the books .
Why should this matter?
Because it’s at the heart of the current credit crisis. Harvey Golub writes in today’s Wall Stret Journal, Getting Out of the Credit Mess
The last thing we need is policy that encourages or incurs more debt.
To begin to understand today’s problem, we have to have a sense of how we got there. Between 1994 and second quarter 2008, the U.S, housing stock more than doubled in value from $7.6 trillion to $19.4 trillion. Almost three quarters of that increase was due to a speculative bubble, the root cause of which was government policies designed to increase home ownership, largely among people who would be considered nonprime borrowers — i.e., people without sufficient documented income or employment history and little or no savings or credit history.
The intellectual start of this mess was in a flawed Boston Federal Reserve study published in 1992 that purported to show that minorities were treated less well than whites. That study led to increased political pressure on banks to modify their standards with increased emphasis through the Community Reinvestment Act, and aided by U.S. Department of Housing and Urban Development regulations in the Clinton administration that required parity of outcomes in the lending process.
The effect of all of this meddling was compounded by the lax or incompetent supervision of Fannie Mae and Freddie Mac. All in all, the government got into the business of encouraging and then forcing lending institutions to make mortgage loans to people who could not pay them back. What we ended up with is a failure of government, which we have erroneously termed a failure of capitalism.
What to do?
In the longer term, our nation must delever — either by reducing the amounts of borrowing or by increasing consumer earning power through economic growth. Relying on growth alone implies a growth rate higher than we have ever experienced in our nation’s history. Nonetheless, our public policy must encourage economic growth by lowering tax rates for corporations and individuals while at the same time avoiding what would be growth killers, including “card check” legislation and trade restrictions. Public policy should support higher savings rates, and avoid encouraging increased consumer spending funded by further debt, which may be helpful in the short term but catastrophic in the longer term.
For as long as the CRA is still a policy guideline, it will be extremely difficult, if not impossible, for the nation to delever.
All these bailouts have the effect of keeping alive debtors who further sink the economy into more debt. Failing businesses should be allowed to fail. Collateral should be seized. Risk should be accepted.
Over at Red State, Textbook Case: How Government Can Create A Depression. Money quote:
Go back and look at the history of the Great Depression. State legislatures enacted all kinds of statutes throughout the Thirties to make it harder for banks and other financial intermediaries to sieze collateral and do other normal things to manage their risk. There’s ample evidence that these statutes, well-intentioned as they were, exacerbated the fundamental problem that remained in the US economy after the financial crises of the early Thirties were quelled.
In short, from about 1933 until the war, credit formation by private banks ran well below historic and sustainable levels. That’s the true reason the Great Depression lasted as long as it did.
It’s not looking good.
More from Capitol Commerce: Obama’s Depressing Economic Delusion
« The State of the Credit Crunch
Blog Entry Comments (0) Obama’s Depressing Economic Delusion
December 09, 2008 11:06 AM ET | James Pethokoukis | Permanent Link | Print
Jimmy Carter had his “malaise” speech. Barack Obama may have just given his “malaise” interview. See, it looks like there’s a new addition to Obama’s lexicon. Along with “hope” and “change” and “Yes, we can!” you can now toss in “It’s going to get worse.” (I’m sure a semihypnotic will.i.am YouTube video is coming soon.)
1) Obama reminded Americans of that unpleasant economic reality—at least as he apparently views it—a couple of times during his Meet the Press interview with Tom Brokaw. Now, certainly the next president is on the same page as Wall Street when it comes to depressing economic forecasts. JPMorgan Chase, for instance, sees unemployment, currently at 6.7 percent, hovering above 8 percent through 2011. The same goes for IHS Global Insight, a respected economic consulting firm. Maybe before long, the Washington-Wall Street consensus will be as publicly gloomy as Jared Bernstein, slated to be Joe Biden’s economist, who predicts that “we’ll be lucky if the unemployment rate is below double digits by the end of next year.” Ouch.
2) But is the economy under Obama really doomed to an extended period of pain and poor performance? “The road ahead will be long. Our climb will be steep,” Obama said on election night. And there’s no doubt that many other countries plagued by imploded asset bubbles and resulting banking crises have suffered a long stretch of bad times. In Sweden, between 1990 and 1993, the economy shrank by 6 percent. Japan experienced a “lost decade” in the 1990s. Then, there was the 1990-91 recession here in America. Even after the economy started expanding again, the unemployment rate kept rising until it hit 7.8 percent in June of 1992 vs. a low of 5.2 percent in June 1990. So, certainly America is at risk for an extended case of the blues.
3) And that’s what is so frustratingly weird about Obamanomics and the plan for hundreds of billions, if not trillions, of dollars in “stimulus” spending. If the goal is to turn around the economy as quickly as possible, why would we turn to the same economic playbook that America ran in the 1930s and Japan in the 1990s? In both cases, massive government spending failed to bring back prosperity. And it’s unlikely to work this time, either. Economists Susan Woodward of UCLA and Robert Hall of MIT are dubious. In their cowritten blog, the duo opined that “timing may be a problem . . . Complicated projects take time to ramp up to high spending and employment levels. . . . All of these proposals for stimulating state and local spending suffer from a common problem—they will end up generating employment for highly specialized businesses and workers, rather than stimulating economic activity more broadly. A large-scale infrastructure program will drive up the profits of the limited number of firms.” That conclusion dovetails nicely with a 2005 study, “What Are the Effects of Fiscal Policy Shocks?” which looks at U.S. economy policy since 1955 and concludes that “a deficit-spending shock weakly stimulates the economy.”
4) What would create what economists like to call a “V shaped” recovery? This: a plan that creates confidence by enhancing the long-term rewards for working, saving, and investing. Take the 1980 Reagan tax cuts, for instance. As Arthur Laffer, Stephen Moore, and Peter Tanous point out in their new book, The End of Prosperity, the bulk of the Reagan reductions didn’t kick in until 1983, and they were somewhat offset by the 1982 corporate tax increases. But when the full weight of the tax cuts was felt, the economy took off like a rocket, rising 4.5 percent in 1983 and 7.2 percent in 1984. Imagine if the capital-gains tax were slashed immediately. The stock market would soar, automatically increasing the net worth of tens of millions of Americans. Or what if all income-tax rates were permanently cut? Or what if the corporate income tax were suspended for two years and followed by a permanent reduction? As economists Brian Wesbury and Bob Stein at First Trust Advisors put it: “Tax cuts have worked before, so if deficits don’t matter, why not try a different kind of surge—a private-sector, incentive-creating one?” This downturn does not have to be a long one.
5) Then again, an economic crisis that you can continually blame on a previous administration can be politically advantageous. (Heck, it got Obama elected.) It’s the gift that keeps on giving. As incoming White House Chief of Staff Rahm Emanuel said last month, “You never want a serious crisis to go to waste. This crisis provides the opportunity for us to do things that you could not do before.” With our current economic woes providing momentum for the liberal agenda on healthcare reform, infrastructure spending, and “green” energy investment, the Obamacrats might be thinking, “Fix the economy? What’s the rush?”