Given the unprecedented financial crisis and the government's proposed $700 billion so-called bailout, I have to say I am a little sick of hearing how greedy Wall Street bankers are to blame for getting us into this mess. I agree some of them do bear some responsibility. I also agree that many CEOs are grossly overpaid. (So are many professional athletes for that matter.) Yet the fact is that the government bears at least some of the blame for the current crisis.
Many years ago (circa 1993), I listened to a lecture delivered by a then prominent Federal Reserve governor. He argued that banks had to be pressured to lend money to those who were otherwise not creditworthy. The government in its wisdom had decided that home ownership was a good thing and wanted to see more of it. It is often argued that neighborhoods are safer, cleaner, and better kept when a large number of people own (rather than rent) the homes in which they live. The government wanted to promote home ownership so it pressured lenders to make mortgages available to those who did not qualify under traditional standards.
The New York Times (not known for espousing a conservative point of view) published a prescient article in 1999 (that's before George W. took office) exposing all this. Steven Holmes wrote, "Fannie Mae...has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people..." The article then went on to predict the current crisis. It warned, "In moving, even tentatively, into this new area of lending, Fannie Mas is taking on significantly more risk, wihch may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s."
I thank Cesar Chekijian for bringing this article to my attention. Click below to read the article's full content.
Fannie Mae Eases Credit To Aid Mortgage Lending