Secretary of Treasury Henry Paulson released a statement today regarding the plan of the US government to bail out the financial companies that are in such a mess. If there was any doubt in anyone’s mind about what this is all about, there should be no doubt any longer.
The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.
As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford. We are seeing the impact on homeowners and neighborhoods, with 5 million homeowners now delinquent or in foreclosure. What began as a sub-prime lending problem has spread to other, less-risky mortgages, and contributed to excess home inventories that have pushed down home prices for responsible homeowners.
You ask, why were all of these risky mortgages written? Why would banks do that? The answer is, they were coerced into it by Democrats and their Community Reinvestment Act of 1977. You should Google it. You can read Thomas Sowell’s take on it here.
Banks and lenders were accused of racism because more blacks were denied mortgages than whites. (They didn’t point out that more whites were denied mortgages than Asians.) The lenders weren’t being racist, they had a fiduciary responsibility not to make loans to those with bad credit histories. The politicians didn’t care about any of that, all they cared about was getting votes.
From there things spiraled out of control. The lenders had to sell the loans so they could raise capital to make more loans, and so on, and so on. What’s happening now is a culmination of many years of political corruption and cronyism. The Democrats (and now for some inexplicable reason, John McCain) are blaming the Bush Administration.
That’s so typical of these people. They create the monster, then blame the Republican for not taming it.
Great post. Wish EVERYONE could read it. Thanks for the Sowell link.
Maggie
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I’m sorry, but the bill did not mandate blantent stupidity. nor the ‘inventive’ fiscal instruments that were supposedly created to spread the risk, but only served to concentrate it or hide the true risk. Capitalism only works if failure is punished and it will be; either by a bigger collapse later or the slower death by socialism. It appear Bush and his crew have chosen the latter.
Not what I ever would have expected from the GOP when I started getting involved in the Goldwater years.
Hugo Chavez probably called in his congratulations to George.
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This is what happens when the government gets involved in what should be private business. Fannie and Freddie became piggy banks for the politicians. Jamie Garelick(sp?)couldn’t loot enough from the Justice Dept. after she enable the 9/11 attacks, so she and her fellow political hacks looted the taxpayers, thanks to these gov’t – backed failures. More of Congress’s “unforeseen consequences”
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