The Libertarian idea that overregulation caused the banking crisis.

[Smith_3]

I have a libertarian friend who made a statement about the banking crisis. I also heard Ron Paul make a similar one on CNN a while back: That overregulation caused the banking crisis.

My friend told me that she had read that banks were forced to give loans to people who normally weren't credit worthy and that it was also a government program to combine these loans into crappy funds and resell them (and again forcing other banks to buy them). In this picture it was government intervention all the way that had caused the bank failures.

So how much truth is in this story? I personally find it hard to believe, but it seems to be floating around out there somewhat (I have also read similar things on different blogs). My answer to my friend was that this story is completely false, but I am no longer so sure since I realized that I lack the whole facts.

[ProfessorGAC]

1. Nobody Forced Anyone To Give Loans. That's A Lie

Your friend's information is grotequely skewed.

First, let's talk about the low income loan law. I've been on the board of directors of a community bank for nearly 25 years. So, when those laws were renewed and encouraged, the banks had a clear option.

They could lower the threshhold for what constituted a mortgage.

Instead of saying that they would not write paper on a home that didn't at least cost $75k, they could have lowered that standard to $35k. Then lower income people would buy cheaper homes with a long term mortgage with affordable payments, rather than have to lend as short term real estate collateralized signature loans at much higher interest.

That simple move helps lower income folks buy homes. No mansions, just their own home. A good thing.

Instead, banks decided to moderate risk by raising their debt to income and loan to value ratios. So, they could offer low down payment loans, but of course, the payment would be too high. So they manipulated the payments for the first few years by offering ARM's, knowing full well that they would sell the bundles of paper before the loans repriced.

But, at the time the loans were bundled and sold, the payment history was still solid, so they were sold as AAA paper. (Which was, of course, illusory.)

So, it was the underregulated banks that did this and nobody made them.

And, of course, i'd sure like to have your friend explain how one bank "makes" another bank buy a bad risk loan. The LACK of regulation created a situation where the originator could hide the real risk when they sold them off. So, the LACK of regulation created the secondary purchase option.

Anybody who thinks that too much regulation was the problem is probably irretreivably stupid, and no amount of explaining will sink into their thick skulls.

But, at least you now know that the whole "gov't made them" excuse is claptrap.
The Professor

[Orrex]

7. That's a great analysis

Clear and concise and easy to repeat. I've heard Libertarian wackos howling about over-regulation for years, and your post provides an effective means of counteracting at least some of their bullshit.

Thanks!

[ProfessorGAC]

8. Actually, It's Not Much Of An Analysis

Not much analysis needed, really. It's simply the truth and it's simply what happened. I was there. I saw it happen. My bank never did the latter. We just started writing mortgages at smaller amounts. Lower income people got homes. We made loans. Our delinquency ratio did not go up. The paper we sold off all turned out to be solid investments. Everyone got happy.

And, thanks for the compliment.
GAC

[BeFree]

2. Well

It does appear that the bush government did all those things and more. But it wasn't a regular government that allowed bush to do so, it was an irregular government that caused our problems.

And bush comes to an end pretty soon. And we can all be regular again.

[mckara]

3. Go Here and Read This:

http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?tid=true

I made a PDF document out of this article and sent it to my friends. Send an email address through the private messages at DU, and I will send the PDF file.

[mediaman007]

4. They couldn't give the money away fast enough! It was an industry!

ttp://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom#page1

[Greyhound]

5. It is both a distortion and an outright lie.

There was nothing to compel the banks to lend to unworthy borrowers, but their deregulation lobbyists did get the restraints to their limitless greed eliminated, and surprise, surprise, they did exactly the same thing that crashed the economy and caused the regulations to be implemented the first time.

See Einstein's definition of insanity.

[madmom]

6. Here's an article from a couple days ago, very interesting read!......

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x4458808

[old mark]

9. Those loans for mortgages were caused by greed on the part of the lenders.

Bundling the risky mortgages and selling them as a package to another lender was another step in the process motivated by greed. There was little or no government oversight or regulation in these areas, which is what enabled this to get so far out of hand.

FWIW, libertarians also have the answer to the health care crisis in the US - Don't get sick.

They have some good ideas, but are living in a dream world mostly.

mark