Politicians: Greed Caused Financial Crash

Politicians are all clamoring mightily that greed caused the financial crash. They claim this greed was entirely that of Wall Street fat cats with multi-million dollar golden parachutes. They are right that greed had much to do with the crash. They are wrong to locate that greed primarily on financial company executives. The primary source of greed was Washington, state, and local politicians. The greed was primarily for power and secondarily for campaign contribution money and favors to keep them from messing with business. This greed circumvented the usual constraints that financial business executives have to keep them reality-oriented. This political greed forced businesses to take foolish risks to satisfy politicians who claimed they were guilty of racial discrimination if they did not loan enough money to people who did not have enough income to pay back the loans. This was the purpose of the Community Reinvestment Act given primarily to us by the Democrats.

Fanny Mae and Freddy Mac were set up as government-sponsored businesses to encourage risky home mortgage loans to people and package those in the form of securities that financial businesses and retirement funds would buy. The oversight of the Securities and Exchange Commission was minimized by Congress. Low interest rates set by the Federal Reserve further fed the madness. Local and state governments drove up the cost of housing with building restrictions often called growth management. People in managed growth places such as California where homes cost 8 times their average family incomes clamored for subprime mortgages and Congress saw that Fanny Mae and Freddy Mac provided them. Finally, when the financial companies found that they held mortgage loan-based securities with large subprime obligations and no one would pay anything like their purchase price for them at this time, they had to write their value down to almost nothing to be compliant with Congress' Sarbanes-Oxley accounting legislation. This further insured that no one could afford to buy these securities, even though only a fraction of the mortgages they are based on will not be repaid.

Some business executives went more overboard than others, thinking that the government policies would protect them from the consequences. Most of these executives have lost their jobs and most of the value of the company stock that was used to reward them for their work has vanished. But.....as usual, our politicians are unscathed and unrepentant for their dastardly roles. They have been able to use the crisis to grab even more power. The more they clamor, the more responsibility they generally have for the mess our economy has been put in. Look primarily to these polititicians, who are so good at distracting us from the real issues, for those most responsible for this catastrophy. Remember that many of these same rascals are backers of catastrophic global warming theories that will allow the government to take control of our use of energy, as well as our financial industries. Doubt their motives at all times! Throw these rascals out of office. Sweep the House and Senate clean.

Unfortunately, both of the major presidential candidates are busy spouting the nonsense that the crash was caused by the greed of Wall Street and of fat cat executives. They are among those trying to distract us from the real issues of governmental interference in the free market. When the market is free, businessmen act to make sound investments, not unsound investments. The scale of this financial crash is itself a great indicator that it was primarily government policies that fed the problem. This was clearly the case in socialist Europe as well.

We are now unreservedly the Socialist People's Republic of the United States! We must call a spade, a spade. Rational men will soon be retiring to Galt's Gulch as Atlas shrugs everywhere. The next president of the United States will either be a moderate socialist or he will be a very committed and very radical socialist. This socialist president will have a very socialist Congress to work with. The sovereign American individual will find nothing but disrespect and, increasingly, chains.

Alan Reynolds has written an interesting article on the plight of those businessmen who most followed Washington's lead and who most went overboard with risky loans and subprime-mortgage based securities.

Growth Management Laws Created Housing Bubble

For some time, I have been pointing out that the rapid increases in home costs are limited to some areas of the country and that these rapid increases have been largely determined by local governments, or in some cases by state governments. Even the Federal government has contributed in some areas out west where the Federal government owns a large fraction of the land. Where growth management planning by governments is not practiced or has been very newly implemented, the cost of housing has simply increased at about the inflation rate. Home sales are still brisk in areas without such growth management and people have little need to resort to subprime home mortgages in such places. The story is catastrophically different in California, Oregon, Washington, Arizona, Florida, Hawaii, Maryland, New Jersey, Rhode Island, and Vermont, where the states have mandated growth management laws. The Denver and Minneapolis-St. Paul areas have also been hit due to local government restrictions. Randal O'Toole, a senior fellow at the Cato Institute, has written an excellent article on this called Big Burdens from Growth Management.

He points out that a four-bedroom, two-and-a-half bath home in San Jose, CA costs $1,100,000, while the same home costs $550,000 in Seattle, WA and only $250,000 in Raleigh, NC. San Jose has practiced growth management since 1970, Seattle since 1985, and Raleigh has the wisdom not to interfere. Housing costs in urban areas depend heavily upon how long growth management policies have been followed. O'Toole points out that several fast-growing states such as Texas and North Carolina have home price to buyer income ratios of less than 2.5. In comparison, the average ratio is more than 9 in San Jose! In Dallas, this ratio is slightly more than 2 and the area growth rate is 40% since 1990, compared to San Jose's growth of only 10% in that time. The average home price to buyer income ratio in all of California is more than 8. If more than 30% of your income goes to making your mortgage payment, you will most likely have to take a subprime mortgage. Consequently, it is most in the growth-managed areas that subprime mortgage loans have become a major problem.

The difference in home price brought on by government growth management requirements is such that in 2006, home buyers paid more than $250 billion in planning taxes, the cost of this government meddling in the home and land markets for that single year. Needless to say, these costs keep many families from owning the homes of their dreams, which is exactly what they are supposed to do. From 1940 to 1960, homeownership grew from 44% to 62%, but has grown to only 69% since. Homeownship has grown better in most states with no growth-management laws. This is important, because a home is the biggest investment most families have. It also provides the most common means for people to finance a new small business.

It is commonly said that growth management prevents the "urban sprawl" that planners hate, but that most people's dream of a single-family home with a yard requires. Yet, all urban areas now account for less than 3% of the land in the U.S. California requires 95% of its people to live in 5.1% of that state's land, but with no growth management, only about 8.5% of the state would be urban. In order to keep 3.4% of the state's land unoccupied, the state has tripled the cost of a home. Oregon requires its people to live in 1.25% of the state, but with no requirement and assuming the same densities of people in urban areas as in the rest of the country, they would occupy less than 1.7% of the land in Oregon.

O'Toole points out:

"Of course, when we say a particular law has 'protected' open space from development, we usually mean that the law has denied rural landowners the right to use their property as they see fit. Because landowners receive no compensation for this taking of their property rights, it should be viewed with even greater outrage than the Supreme Court recent decision allowing cities to take people's land by eminent domain -- with compensation -- and give that land to private developers."

"Russians say that Americans do not have any real problems, so they have to make them up. Urban sprawl is one of those made-up problems. Unfortunately for U. S. citizens, efforts to control sprawl have led to very real difficulties: unaffordable housing, higher land costs for business and industry, housing bubbles and busts, and increasing barriers to homeownership for low- and moderate-income families."

In an effort to address some of these problems, local governments create subsidized housing, which adds to the tax burden. They sometimes require builders to build money-losing housing so they will be allowed to build other single-family and townhouse homes, to which they shift the costs. This makes them more expensive. The federal government uses Fannie Mae and Freddy Mac to help insure a market for subprime home mortgage loans. Fanny Mae and Freddy Mac fed the bubble in the securities based on these unstable loans to the max, while greasing the palms of many Congressmen with heavy donations to keep them onboard with the program. It also used the Community Reinvestment Act to force lenders to make subprime loans to many of the riskiest borrowers. Critical error was piled upon critical error has governments wrecked havoc on the free market and addressed every problem with more government mandated havoc. Without the government interference, no one would have been interested in loaning out their money in so many risky subprime loans.

The financial problem we are facing today was not caused by Capitalism or by the free market, as the socialists in government and in the Democrat Party are claiming. They have been clamoring mightily to try to prevent the people from understanding what did cause the problem. It was caused by socialist governments all the way from the local to the federal levels.

This is not the first housing bubble that has burst. A bubble occurred in the 1970s in the few states with growth management then, while a worse bubble erupted in the 1980s with more homes involved as urban planning spread. O'Toole says this present bubble affects about 40% of the nation's housing. The bubbles are becoming worse as more and more areas turn to urban planning.