I ask my fellow ATSer to read this. I may be a little long, but it will hopefully make sense of one of the biggest issues in today’s world.
There are many individual issues inside the main issue: money supply (M1), regulation, deregulation, the Fed, Community Reinvestment Act (among other
Acts), poor investment, laissez-faire, bailouts, the TARP, subprime mortgage crisis, mortgage backed securities, ACORN, CMBS, and Tea Parties just to
name a few.
Let’s talk about a few of the key issues and direct causes of the situation, but first let me explain important terms and ideas.
Moral Hazard-From Wiki “Moral hazard is the prospect that a party insulated from risk may
behave differently from the way it would behave if it were fully exposed to the risk.” Wikipedia put it so eloquently I figured to just quote it.
Incentives matter- rewarding behaviors to encourage the same behavior in the future. Inversely, punish undesirable behavior to discourage that
behavior in the future.
The media distorts reality. Writing to ATSers about this is like preaching to the choir, but it is important because not even alternative media
sources have run with any real, logical explanation of how this all happened. These explanations are generally found in obscure articles written by
college professors or economists, and never covered at length in the MSM or Alt Media.
1. With those out of the way, let’s talk money supply.
In 2001 our economy faced a recession (you can probably remember this). The Fed started increasing the money supply by roughly 6% a year from
previously having several years of stable money supply. As any economist, student of economics or well informed person will tell you, a major increase
in money supply will cause inflation. This extra money directly caused the housing boom because banks now had the capital to lend significantly more
money. This is an incentive to lend more money to more people while being insulated from risk. Moral Hazard
2. So the banks had the means to lend more money. Why did they lend money to people that could not afford the house?
The banks have been making poor investment into sub-prime housing for years because of the Community Reinvestment Act of 1977 (CRA). This act has been
forcing banks to lend to low income neighborhoods as a way to end discrimination in lending. It sounds very noble, but the effect of it is poor
investment and bad mortgages, the subprime mortgage. Not a fan of ACORN now? Look up their involvement in the CRA.
The Financial Services Modernization Act of 1999 sealed our fate. It allowed banks and insurance companies to merge, while at the same time they could
only merge if they met CRA requirements. All these mergers, injection of capital by Fed, creative investments, Citicorp/Travellers Group and an
increased fear of the CRA coming down on them set us up for a classic boom-bust cycle we have seen before, called a bubble. These only can occur if
the government artificially intervenes with the money supply.
Robert B. Ekelund and Mark Thornton said in their article on this matter LINK TO ARTICLE
“The Financial Services Modernization Act of 1999 would make perfect sense in a world regulated by a gold standard, 100% reserve banking, and no
FDIC deposit insurance; but in the world as it is, this "deregulation" amounts to corporate welfare for financial institutions and a moral hazard
that will make taxpayers pay dearly.”
So why, after all of this, the media is blind to it. Or, rather, been silent in reporting this. In fact, they have been harping a different tune. They
have been blaming the laissez-faire practices of the Bush administration. Though a measure of deregulation can be blamed, it only in conjunction with
an increase in regulation in other areas of the market yields this resulting poor economy. If we are going to blame presidents for bad economic
policy, we could blame all of them back to Woodrow Wilson and the Federal Reserve Act.
We need to learn from history. The Great Depression went from bad to worse during the Hoover and Roosevelt Administrations when the government got
involved with monetary policy and stimulus. We have successfully used government involvement and stimulus in recent years (2001-2005) to get out of
recession (which is just a strictly defined depression), only to find out our medicine caused an even more dangerous disease.