Monday, September 22, 2008

So much for "free markets"

Decisions about how systems and institutions work have consequences in the lives of real people.

It's just a fact.

This is particularly true when it comes to public policy relative to work, wages, protection or the lack thereof from so-called "free markets," home ownership, education, nutrition. . .the list goes on.

So far this year in the U. S. we have seen the loss of over 600,000 jobs.

Home foreclosures continue to soar.

During the last chaotic week, we've witnessed the near meltdown of our financial markets, a series of events that rivals the circumstances preceding the Great Depression. Major, historic financial institutions failed or have been bought for a song.

People who argue ad nauseum for unregulated, "free markets" make assumptions about human nature that simply don't hold up. When living in an effective community in which the rights, needs and dreams of all are to be honored; common values, mores and standards of behavior need to be regulated.

We are now witnessing the results of a policy trend committed to deregulation that has been in play since at least 1980.

Completely "free markets" might be something to consider if we all were operating from the same position of strength and opportunity. But, of course, this is not the case today and will never be the case.

Regulation imposes safety guards against the exploitation that always results when systems are built to maximize profit for one group at the expense of other groups, usually much larger in sheer numbers, but much weaker in economic power and political influence.

No system of regulation is perfect. But, it doesn't need to be perfect, just workable, consistent and engaged in the important work of defining and enforcing standards of fairness and equity for everyone.

Consider the subprime mortgage crisis. Lots of people in this country have been talked into or better, pressured into mortgage agreements that allowed them to purchase homes far beyond their ability to pay. The agreements were designed not to assist the prospective homeowner, but the lender. In fact, some deals worked better for lenders when agreements failed after a couple of years thanks to credits and write offs that were built into the systems at work in such real estate transactions. Variable rate mortgages, coupled with sub-prime approaches to financing the deals at the outset, vaulted the nation to the brink of absolute economic disaster.

Greed kills.

Possibly home buyers should have been smarter. But, really now, let's face it, that is not what the system required or even desired. And then, there is the nation's attitude toward homeownership as an essential element in realizing the "American dream."

Since the mid-1990s, we've observed a commitment on the part of the federal government in both Clinton and Bush administrations to open up home ownership to more and more Americans.

As this policy unfolded, it became clear that a major part of this commitment would be financed by cutting funding from programs designed for the poorest Americans--we watched as the U. S. Department of Housing and Urban Development (HUD) cut funding for programs aimed at people who likely will never own homes to benefit those who might play in the amazing expansion of ownership made possible by unregulated markets.

While everyone agrees that the number of Americans owning homes needs to increase, we grew more and more uncomfortable with how the new process was being funded with both public and private dollars. Furthermore, our government explicitly and implicitly encouraged private sector funders to get in the game on terms that were favorable to lenders, but not necessarily the new homeowners.

No regulation.

"Free markets" often cut people to shreds because they are not designed with the community, with everyone in mind. (By the way, can we agree that Wall Street is not the community for which we are most concerned here?)

Greed kills.

Paul had it right when he warned that "the love of money is the root of all evil."

I'm sure I'll catch it big time from lots of folks who read here who believe that freedom in the marketplace is the most sacred value of all.

Frankly, if you can make that argument this week, I know there is nothing I can say to change your mind.

But, I'm not writing for you. I continue to post because I believe sound public policy devoted to justice and fairness will be a big part of any solution to the problems facing both the poorest of the poor and the middle class in our nation. And, it is crucial to sustaining workable communities.

In fact, I'm trying to get these two groups to see how much they have in common these days! If these two groups ever partner with one another and consider how their mutual self-interests could work together, we'll wake up in a new America.

One last note. Through all sorts of situations and circumstances from Y2K to 9-11 to the War in Iraq to escalating fuel costs to our current financial crisis, the poor serve as my instructors. People who know grinding poverty teach me how to cope and to live one day at a time. Their friendship and faith is a priceless gift in my life.

Markets come and go.

The faithful endure.



Anonymous said...

It was not free markets that caused the crisis in sub prime lending. It was federal legislation that mandated home loans to those who would not have been qualified to borrow otherwise. You might call it another socialist democrat program in the crapper. Capitalism and free markets work! Socialism and government artificial controls on the market do not.

Charles said...

Is there an example of legislation requiring mortgage loans to buyers who didn't meet Fannie/Freddie requirements? Is there an example (pre-collapse) of a single bank or employee of a bank complaining of being "forced" to make low-/non-collateral loans that virtually guaranteed thousands of dollars in interest followed by disclosure?

Sorry to ask for facts - rhetoric's much easier, especially when you're anonymous.

Politics & Culture said...

Charles -- here's an article that partially addresses your question. It shows how the Democrats are to blame for the current financial mess:

Click Here

Barry Obama has received a lot of money from Fannie/Freddie. Sounds like he has some explaining to do!

Daniel Gray said...

Yes P/C, any time we can find the materials to single out one party, we must have the right answer. Seriously, do you think this kind of partisan hack attitude really contributes to the discussion?

Anon- no one required anybody to make loans to anybody. A combination of the fed weakening the money supply, lax restraints on who private industry lent money to, and the assumption that housing prices would continue to skyrocket all created a a perfect environment to kill our financial system. If you're going to resort to senseless name calling and the blame game, then please for the sake of our country, don't try to suggest any solutions. And before you name call, you should have a name.

Anonymous said...

Not only was BARRY receiving support from Fannie and Freddie, he was the number one BENEFICIARY of 'contributions" from these groups during his time in Washington. Moreover, three of his top campaign aids stuffed their pockets with parachute money and bonuses BEFORE THEY DEPARTED THEIR HIGH LEVEL MANAGEMENT POSITIONS AT FANNIE /FREDDIE.

Anonymous said...

politics &amp: culture:

Certainly an interesting opinion to add to the discussion. The link you provided is for an editorial, however, not an article:

"(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He is an adviser to Republican Senator John McCain of Arizona in the 2008 presidential election. The opinions expressed are his own)"

Hassett expresses the opinion that the Democrats are to blame for the financial crisis, he doesn't "show" that they are.

I don't claim to be anything approaching an economic expert, but I do think it's important to consider the source of any information we use to make up our minds about what has happened and to take the writer's bias into account.

Anonymous said...

Amazing to me how everyone wants to point fingers of blame rather than deal with the effect on people, as Larry seems to attempt here and elsewhere.

c hand said...

Larry, are you now denying your own advocacy of easy credit for low income homebuyers? This crisis is at least partly due to regulations DIRECTING loans to people who would not repay.

Charles said...

Chris, does this mean you have a factual source on "regulations" requiring reluctant banks to make subprime loans? Sorry P&C, commentaries from campaign staff without documentation don't count, and don't point to any instructions from the government to make bad loans.

Daniel Gray said...

c hand, there's a major difference in lending practices.

The subprime market targeted people buying homes more than 10x their income. If I made $50,000 a year, lenders were convincing me to by a $500k house. A normal mortgage at that level would be $40k+ a year. That makes no financial sense. But private lenders were telling me that prices were skyrocketing, I could buy an interest-only mortgage, and resell the house 5 years later for a big profit.

Helping low-income households into homes is much more financially sound, but lenders have been ignoring them to go for the big bucks. It's not very exciting or profitable to help a family with $25k income get into a $60K house. And stigma about low-income people being poor investments makes it worse. A $60k mortgage will run you $450 a month, be on par with your rent payments, and buy you a starter house.

Larry James said...

c hand, I don't recall ever advocating loans for people who could not repay. I have advocated for people who wanted to buy homes to be able to do so with some subsidy, but never with ARM approaches that can't be clearly and easily understood or calculated versus real income. I have also advocated against funding home ownership programs with funds previously marked for much poorer people. Just for the record, I don't know of any directives from any part of gov't that forced banks or lending organizations to do business with people who were not credit worthy.

Larry James said...

Daniel, what you say here reflects accuratelymy experience among low-income, first-time home buyers.

bpb said...


Deregulation is a very bad thing!

Anonymous said...


You know I love you brother, but I have to say something. If I am dumb enough to sign on for a loan at 10x my income then I shouldn't whine if I can't pay it back. I have never, never borrowed what I could to buy a house. At least a part of this problem rests on the shoulders of people who for whatever reason did not have the sense to know that they would not be able to pay the loan back.


Anonymous said...

In a very real way, those who borrowed more than they could afford were just convinced to speculate on the market. They may have been naive and unsophisticated, but that's what they were doing. They were doing just what Lehman Bros. was doing, and may have to pay the same price. Using the example above, do we really want to keep that $50K/yr person in a $500K house? Why should the rest of us pay for that? I may feel some sympathy with them, but that's just bad policy - protecting people from their own gambles and serious mistakes.

Daniel Gray said...

RC - I was only making the point that we're talking about two different groups (low income v. speculators). But in reality, people fall all over the spectrum. Some people bought way over their means on speculation - that's wrong and they need to learn a lesson. But there are also many normal Americans who bought within or on the edge of their means and the housing bubble crashed their financial situation.

The point being made was in response to people such as c hand or P/C who make reductionist statements about the work of CDM and similar organizations, in essence trying to implicate CDM's work as part of the financial crisis.

Anonymous said...

This had nothing to do with low-income people buying homes they could not afford. It was all about greed and lack of oversight. Too many banks throwing the dice along with speculators and realtors all wanting to get a piece of the action is what created this monster. A lot of people made some big bucks until the bubble burst. Remember the Savings and Loan bust years ago? This one is even worse because of all the “creative” financing the brokers and banks developed to keep the ball rolling. I do blame the speculator who gambled and lost, I don’t blame the average Joe who wanted the American dream and was convinced that an ARM or over purchase was the way to go. Na├»ve, possibly, or maybe they lost a job and have no hope for refinance to save their home. Just because someone loses their home does not mean they were not credit worthy or were speculating when they purchased it. It is too late to point the finger of blame at one party or segment because there are multiple causes. What we DO need to make sure of is that this never happens again. That cannot be done without regulation and oversight.

Anonymous said...

If you have not read Gerald's blog today on the crisis this country is in, I think you might find it a good read.

Conservative said...

“These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis…the more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” Representative Barney Frank (Democrat, MA)

”I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,” Representative Mel Watt (Democrat, NC)

Did you know that in 2003 President Bush proposed more oversight on Fannie and Freddie? Did you know that the above quotes are from what the Liberals thought of his proposal? What a joke.

Anonymous said...


I would love to hear a word or two the Bush proposal which was shot down from the dems. Great comments.


Chris said...

"I don't know of any directive from any part of government that forced banks or lending organizations to do business with people who were not credit worthy."

Larry,the Community Reinvestment Act (CRA) OF 1977 forced banks to loan money to low-income borrowers as a way to ensure that financial institutions would "meet the credit needs of the local community."

Fast forward to the Clinton administration. The CRA was strengthened. Lending institutions were so afraid of being labeled racist that they did not even ask for income verification. Attorney General Janet Reno stated, "No loan is exempt, no bank is immune, for those who thumb their noses at us, I promise vigorous enforcement."

The Clinton-Reno threat of "vigorous enforcement" pushed banks to make now infamous loans to people who could not afford them.

Then followed the sub-prime mortgage as a way for people who otherwise did not qualify for a normal 30 year mortgage. It offered a "way out" for banks to loan to low income people, for it was understood that the government was behind it.

The Bush administration has tried several times(12)to reign in this mess to no avail, thanks to Senators Chris Dodd, Barney Frank, Chuck Schumer, Nancy Pelosi, Harry Reid and other Socialist Democrats and probably a few Republicans. See the quotes from "conservative" above.

For more detail, google Community Reinvestment Act.

Larry James said...

chris, you obviously have no on the ground experience with how banks account for and satisfy their CRA responsibility. Most small banks make donations to organizations like CDM. Larger banks find ways to do community development deals with stronger, larger community organizations and even cities like Dallas. There is no quick and easy loan process, no system flush with money flowing toward the "irresponsible poor." The poor never see such funds directly and getting funds for projects is difficult, guarded and complete with all sorts of accountability. In Dallas the large CRA projects (if you want to call any of them "large") have been positive for the city, especially in underdeveloped communities. It would be helpful here if you would try to reference more objective analysis of programs like the CRA. I remember that Sen. Phil Graham wanted to end the entire CRA requirement, actually a form of deregulation for him that would have freed banks from any obligation to low income neighborhoods. CRA has been positive for the inner cities of the U. S.

Anonymous said...

The CRA is actually beneficial for most banks. Banks under the CRA are proven to engage in less risky behavior and have less problems than mortgage lenders:

Cindy said...

Another sad point is what has happened to good people in these lower income housing areas who have done the right thing and have mortgages that they can afford but are surrounded by foreclosed houses which have destroyed their neighborhoods. Pleasant Grove for expample was devasted by this in the 80s. Those who have "pulled themselvese up by their bootstraps" will pay the price too even if they have not defaulted on their loans.

c hand said...

Larry wrote: "...on the ground experience with how banks account for and satisfy their CRA responsibility. Most small banks make donations to organizations like CDM. Larger banks find ways to do community development deals with stronger, larger community organizations"

Can you see how this government backed extortion racquet could interfere with a free market and cause some bad financial decisions?

Anonymous said...

c hand, read the Traiger piece I linked.

c hand said...

Is it suprising that CRA lawyers who opperate on OPM(other peoples money) would now assume a CYA position?

Whether it's Lehman Bros parachute, Freddie Mac CEO bonus, or CRA shakedown, if its done with OPM, theft has occured.