Sub-prime Lending Disaster (Scandal).
The study is authored by Patric H. Hendershott, a part-time chair in real estate economics and finance at the University of Aberdeen, Scotland who previously taught economics and finance at Purdue University and Ohio State University from 1969 to 1999, and Kevin Villani a consultant and former Freddie Mac chief economist.
The focus of the CATO institute study is to dispel the federal government's attempt to portray the worst financial crisis since the Great Depression as solely a byproduct of private sector greed. The commission report, entitled "Financial Crisis Inquiry Report" was produced by the Financial Crisis Inquiry Commission convened as part of the Fraud Enforcement and Recovery Act of 2009. The Commission itself was established to examine the causes, domestic and global, of the current financial and economic crisis in the United States.
Extravagant Lie of Simple Truth?
The final report presenting the Commission’s findings and conclusions consists of 663 pages of which 126 pages are dissenting views. The CATO institute rebuttal required but 20 pages and contains no dissenting opinions. As dissenting opinions go, I suspect they were neither solicited or eagerly forthcoming as the truth rarely attracts a large crowd of dissenters, particularly when presented in a concise and convincing manner.
The Cato Institute rightly asks why we need government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac to finance housing when no other market economy in the world has them and puts responsibility for the crisis directly on regulators and indirectly on their political overseers. Peeling back the onion one more layer, it is clear that the boom that began in 1995 was the result of the January 1995, changes President Clinton requested to the "The 1977 Community Reinvestment Act”. His changes resulted in a dramatic increase in the number and aggregated amount of sub-prime loans and demand for real-estate the effects of which are easily recognized on the graphic above. No doubt the reason that the whitewash report enjoys bipartisan support is that the CRA reforms although recommended by President Clinton were passed by a Republican Controlled Congress...
CATO Institute Opposed CRA Reforms
During one of the Congressional hearings addressing the proposed changes in 1995, William A. Niskanen, chair of the Cato Institute, criticized both the 1993 and 1994 sets of proposals for political favoritism in allocating credit, for micromanagement by regulators and for the lack of assurances that banks would not be expected to operate at a loss to achieve CRA compliance. He predicted the proposed changes would be very costly to the economy and the banking system in general. Niskanen believed that the primary long term effect would be an artificial contraction of the banking system. Niskanen recommended Congress repeal the Act
The Bottom Line:
In January 1995, President Clinton's changes to the "The 1977 Community Reinvestment Act” resulted in a dramatic increase in the number and aggregated amount of sub-prime loans and demand for real-estate. The dramatic increase in loans caused housing prices to double in the following twenty years.
Follow the Law or Suffer
While the government's easy money schemes are seemingly endless, there is a very simple and powerful solution available to us. The United States Constitution in its current form as ratified by the states provides no authority for government sponsored enterprises to finance housing, or to provide any other form of social welfare. The very existence of unconstitutional programs guarantees that we will continue to suffer the effects of the distortions that they permit and encourage.