Monday, November 10, 2008

Goldwater Institute: 'White House pressures banks': It's déjà vu all over again

by Byron Schlomach, Ph.D.

The Arizona Republic's front page headline on October 29 read "White House Pressures Banks." The article went on to describe how bankers were being accused of hoarding bailout cash and told to get out there and loan money.

houseThe problem is, it was politicians pushing bankers to loan money who got us into this mess in the first place. The Community Reinvestment Act (CRA) was passed in 1977 to help end racial discrimination in home loans, among other things. Until the Clinton Administration, it had not been rigidly enforced because banks generally had objective standards to determine when to loan money for a home. The main criterion was that there had to be evidence a borrower would and could pay back the loan.

Then, in the 1990s, banks were pressured by the federal government through the CRA to make more home loans to low-income borrowers. The way banks made the math work was with no-down, zero-interest, and balloon loans. It was a sure recipe for a bubble and, therefore, a sure recipe for a collapse.

Luckily, banks have learned their lesson and are tightening credit standards in defiance of the politicians. The real lesson of the mortgage meltdown is not that markets can be imprudent; it's that politicians routinely are.

Byron Schlomach, Ph.D, is director of economic policy at the Goldwater Institute.

No comments: