* * * * *
                                        
               No wonder economics is called the “dismal science”
                                        
> For starters, Fannie Mae and Freddie Mac are "government sponsored
> enterprises". Though technically privately owned, they have particular
> privileges granted by the government, they are overseen by Congress, and,
> most importantly, they have operated with a clear promise that if they
> failed, they would be bailed out. Hardly a "free market." All the players
> in the mortgage market knew this from early on. In the early 1990s,
> Congress eased Fannie and Freddie's lending requirements (to 1/4^th the
> capital required by regular commercial banks [1]) so as to increase their
> ability to lend to poor areas. Congress also created a regulatory agency to
> oversee them, but this agency also had to reapply to Congress for its
> budget each year (no other financial regulator must do so), assuring that
> it would tell Congress exactly what it wanted to hear: "things are fine."
> **In 1995, Fannie and Freddie were given permission to enter the subprime
> market and regulators began to crack down on banks who were not lending
> enough to distressed areas. Several attempts were made to rein in Fannie
> and Freddie, but Congress didn't have the votes to do so, especially with
> both organizations making significant campaign contributions to members of
> both parties**. Even the New York Times as far back as 1999 [2] saw exactly
> what might happen thanks to this very unfree market, warning of a need to
> bailout Fannie and Freddie if the housing market dropped.
> 
> Complicating matters further was the 1994 renewal/revision of the Community
> Reinvestment Act of 1977. **The CRA requires banks to to make a certain
> percentage of their loans within their local communities, especially when
> those communities are economically disadvantaged. In addition, Congress
> explicitly directed Fannie and Freddie to expand their lending to borrowers
> with marginal credit as a way of expanding homeownership**. What all of
> these did together was to create an **enormous profit and political
> incentives** for banks and Fannie and Freddie **to lend more to riskier low
> income borrowers**. However well-intentioned the attempts were to extend
> homeownership to more Americans, forcing banks to do so and artificially
> lowering the costs of doing so are a huge part of the problem we now find
> ourselves in.
> 

“An Open Letter to my Friends on the Left [3]” (emphasis added)

I want to quote the whole thing as this explains my thoughts behind the
recent financial markets, but really, why should I quote the entire thing
when I can just point to it and say “read the entire thing”?

So … read the entire thing already!

[1] http://www.ibdeditorials.com/IBDArticles.aspx?id=307241242284619
[2] http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575A
[3] http://myslu.stlawu.edu/~shorwitz/open_letter.htm

Email Sean Conner at sean@conman.org

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