How We Got Here & How Best to Get Out

The Foundry, Morning Bell: According to the E.J. Dionnes of elite media groupthink, the current economic troubles are due solely to unfettered Wall Street greed and the federal government’s only sin was not enough command and control of the economy. Former National Economic Council director Lawrence Lindsey sets the record straight:

Contrary to the claims last year of Sen. Barack Obama, it was never the financial services industry (in my experience) that lobbied for easier lending terms. Rather it was politicians who sought easier lending regulations so more constituents could borrow. Community activists (Mr. Obama’s occupation before becoming an elected official) also put on the pressure.

And as Heritage scholar Ronald Utt details, the government’s drive to increase homeownership rates is at the heart of the current financial crisis. After mortgage lenders lowered their standards so credit-impaired borrowers could afford larger loans (usually including no down payment, interest-only payments and negative amortization), homeownership did soar from a historical average of 64% to 69% in 2004. But along with the increased homeownership came a ballooning of the share of “subprime” loans in the overall mortgage market. In 2001 these loans accounted for just $330 billion or 15% of all residential mortgages. By 2006 there were $1.4 trillion of these loans accounting for 48% of all residential mortgages.

Things started to go south for subprime borrowers when housing prices began to fall. As many subprime borrowers found their house worth less than what they owed the bank, the percentage of delinquent borrowers soared to 17%. Many are hopeful that the bottom has been reached and that the market will soon revive, but this seems unlikely. As a consequence, the homeownership rate is likely to fall from its record levels near 69% to something closer to the long-term historic norm of 64%. Under the circumstances, government policies should focus on cost-effective ways to facilitate the transition to a sustainable housing market of fewer homeowners and/or lower home prices, as opposed to a costly exercise to prop up the inflated and unsustainable market that characterized 2004 to 2006. The sole role of government in this process is to ensure that markets are functioning, that full and accurate information is available, and that contracts are honored . . . [Read More]

---

Tags: Barack Obama, Heritage Foundation, home ownership, Morning Bell, subprime, the economy, The Foundry To share or post to your site, click on "Post Link". Please mention / link to the ARRA News Service. Thanks!