So why are we in the financial mess we’re in?
First, the technical explanation. In 1977 during the Carter administration, legislation entitled the Community Reinvestment Act, or CRA, was passed. Quoting from the Federal Reserve’s Web site:
The CRA requires that each depository institution’s record in helping meet the credit needs of its entire community be evaluated periodically. That record is taken into account in considering an institution’s application for deposit facilities.
Neither the CRA nor its implementing regulation gives specific criteria for rating the performance of depository institutions. Rather, the law indicates that the evaluation process should accommodate an institution’s individual circumstances. Nor does the law require institutions to make high-risk loans that jeopardize their safety. To the contrary, the law makes it clear that an institution’s CRA activities should be undertaken in a safe and sound manner.
During the Clinton administration, the CRA was amended to put more teeth into the law. In essence it now forced all financial institutions into providing loans, be they for individual property ownership or business, with little regard to the ability of those receiving the loans to pay them. The revisions also allowed the practice of securitization of CRA loans containing subprime mortgages.
A couple of explanations. Securitization is the practice of combining multiple assets, such as loans, into one package that is then sold to investors. It works much in the same fashion as how lotteries are often paid out. Do you want a lump sum now, or do you want to wait and be paid out over X number of years? You earn more in total that way, but if you need money right away you go with the lump sum payment. Subprime mortgages are loans given to people who do not qualify for a regular loan. The institution making the loan usually attempts to offset the higher risk of the loan not being repaid by some method of deferred cost system. These make the payments as low as possible at the beginning of loan, later increasing with the hope whoever holds the loan will by that time be better off financially and thus able to afford higher payments. You can see the potential issues with this arrangement. If the person with a subprime mortgage fails to better their financial condition prior to the deferred cost system ending, there’s no way they can afford the new higher payments.
It can be argued such a person should have never been given a loan. True. That said, while predatory lending practices in order to make quotas and bonuses are in no small manner one of the causes for the current situation in many cases not offering the loan would have been in violation of the law. While the CRA’s intention to eliminate discriminatory lending practices based on non-economic factors was good, one is reminded that good intentions are used to surface a road leading where none wish to go. When put into practice, the CRA mandated many loans that otherwise would have never been made.
Now, add to the mix securitization of CRA loans containing subprime mortgages. Who bought these believing they would in time become profitable investments, and were left holding the bag when the first part of the deferred cost system process ended and it was time to pay up? Investment firms, the lifeblood of American business via providing the capital for companies big and small to enter into new ventures and hire the people for those ventures. When the debt acquired by the investment firms through buying what turned out to be a multitude of defaulted-on loans became too great, they first stopped providing funds to companies and industries seeking investment capital in order to create, grow and strengthen, stopping these companies dead in their tracks as they by themselves lacked the needed resources to move forward. Then the investment firms began to fail, crushed by their debt. Which leads us to where we are now, with the federal government preparing to create a system for assuming the debts owed by these companies and paying for it with tax revenue. In other words, the government that created the problem by being soft-headed under the guise of being soft-hearted is now going to require all taxpayers to fund the solution to the problem it created. Hey, thanks.
The whole mess is at its core testimony to a most uncomfortable truth. It is a fundamental mistake to believe the nature of man is good. It is not. Mankind, in its fallen state apart from God, is naturally predisposed toward sin. While man can and does do what is right and good, it also does what is wrong and evil. In this state it seeks to deny that it is capable of doing evil, for to admit this is the case forces mankind to contemplate its own state of being as something other than the ultimate creation it wishes to believe itself to be.
It was commanded by the God mankind seeks to dismiss as unnecessary and irrelevant to not covet what belongs to a neighbor, be it a house or anything or anyone in it. Violating this law is precisely what the CRA sought to accomplish. It is the government’s responsibility to ensure the people who created it to look after their best interests are not abused nor discriminated against. It is not the government’s responsibility, save in a socialist system, to mandate financial equality among all as part of prohibiting abuse and discrimination. If you want to say to the rich lend to the poor, fine. But you cannot then say to the poor they bear no responsibility for repaying the debt. All are responsible for their actions despite modern society seeking to shed all vestiges of personal responsibility. Having a government actively encouraging this behavior, with the result of all now suffering, is a hideous example of godlessness given full reign.
And that’s why we’re in the financial mess we’re in.
