Economic Crisis 101

Who’s to blame? It would seem we’ve forgotten history…again.

It seems we have forgotten the mistakes of the past. All one needs to do is look back in history to see how government interference into the free markets worsened the depression turning it into the “Great Depression”.

The depression of the late 20’s and 30’s was blamed on the free market and it was believed the only way to fix the problem was to reign in the greedy capitalists by government regulation and the courts.

Today it is recognized by many economists and historians that the blame for the Great Depression lays squarely on the shoulders of government. First Herbert Hoover miscalculated when he signed the Smoot-Hawley Act into law granting protective tariffs for American business which resulted in trade with Europe coming to a grinding halt. The Federal Reserve reacted with a series of disastrous interest rate hikes that sent the economy into depression. Then anti-business measures such as FDR’s “National Recovery Act” deepened the depression.

Government deserves the lion’s share of the blame. According to UCLA economists Harold L. Cole and Lee E. Ohanian, it was FDR’s policies that needlessly exacerbated and prolonged the great depression by 7 years.

Not only did FDR’s “New Deal” Policies make the depression worse, they also changed the way government and the courts operate putting the country on a course towards destroying the integrity of private property rights and towards becoming a collectivized nation.

The Great Depression, which was caused by government intervention in the first place, was blamed on capitalism and the cry was for more regulation.

Once again we have been told that the current economic crisis is the result of the failures of capitalism. Government leaders especially within the current ruling Party have constantly blamed today's financial problems on the lack of government regulation.

The truth is government has long exercised massive control over the housing and financial markets. Let me explain. The government has embarked on an altruistic campaign of promoting the “right” to the American dream, which is the artificial right to own a home.

Today’s economic crisis can be traced back to the “Community Reinvestment Act” of 1977 and the Carter administration. The “Community Reinvestment Act” or CRA was created to protect low income borrowers from discriminatory credit practices.

In 1995 President Bill Clinton asked Congress to make some regulatory changes to the “Community Reinvestment Act” by strengthening enforcement. In 1999 with the help of Senators Christopher Dodd and Charles E. Schumer, President Clinton was able to expand the “CRA” even further, giving it even stronger teeth explaining that it "establishes the principles that, as we expand the powers of banks, we will expand the reach of the [Community Reinvestment] Act.”

The Clinton administration directed federal agencies to expand credit and government began pressuring banks to lower their lending standards to allow low income wage earners to qualify for loans. This was achieved by abandoning the long time practice of insuring the borrower could afford the loan by means of income verification, credit history, and savings history.

See video clip of the Clinton administration's "BANK AFFIRMATIVE ACTION" program that forced banks to make bad loans:



Community organizations were empowered by the Clinton administration to promote these loans. One such organization was ACORN. ACORN began applying pressure to banks to lend money to those who did not qualify for loans under traditional industry standards by holding protests, sit-ins, and through civil litigation.

But it wasn’t by stick alone the government bullied private banks into lowering their standards to promote home ownership. The government also employed the carrot of Fannie Mae and Freddie Mac to secure and buy up these loans.

The final nail in the coffin was the Federal Reserve, which began a campaign of easy money by artificially lowering the interest rates priming the pump for future disaster.

All these factors contributed to creating a situation in which lenders were enticed to lend, or punished for being responsible, which lead to a lending frenzy that artificially drove home prices skyward (bubble) that sooner or later had to painfully come crashing back down to earth.

The insistence on subsidizing the American dream, which is just another form of welfare rather than promoting responsibility, caused this crisis. This crisis--to the extent it has become--would have never happened under normal free market conditions. But instead of accepting the blame, Washington and the media would rather demonize Wall Street and sound the all familiar cry for more government regulation.

In light of this knowledge it isn’t logical to believe that the situation today is the result of a lack of regulation. The problem is not the failure of the free market, but of perverting the principles that allow the free market to work.