The Big Get Bigger

big_governmentWhen Carly Fiorina said both Democrat and Republican policies brought on the financial crisis of 2008, she was absolutely correct. This brought to mind a truism made popular by President Ronald Reagan, “government is not the solution, government is the problem.”

Politicians like to put the blame square on the nose of greedy banks and Wall Street when in fact the housing problem was pure political greed. When congress passed the Community Reinvestment Act in 1977 regulators began forcing banks and other financial institutions to make loans they would not ordinarily make. Each President from that time forward desired to leave office touting record home-ownership under their administration. This same political greed led to government sponsored enterprises, Fannie Mae and Freddie Mac, to be encouraged to take similar risks banks were now taking, and the Federal Reserve, playing it’s part, kept interest rates below their natural market levels.

It has been said; “the road to hell is paved with good intentions”. Attempting to artificially increase home-ownership, well intentioned or otherwise, was an idea that has created a living hell for many. Whom else but a government bureaucrat— far removed from the real world— would think allowing people to buy homes they could not afford to be a good idea.

In 2003, five years prior to the crash, then ranking member of House Finance and Banking committee, Barney Frank was confronted by the United States Treasury Secretary John Snow and others about concerns they had regarding the solvency of Fannie Mae and Freddie Mac, the government sponsored giants at the center of the financial collapse.  Frank responded, the agencies appeared sound and “are not in a crisis” and went on to add they should be encouraged to do even more lending. He added, “the sounding of alarms of crisis were only an attempt to hamper the wonderful job the agencies were doing.” An understanding of these facts makes it easier to see the irony that would become “Dodd-Frank”.

Watch the video Barney Frank wished didn’t exist

After the forewarned collapse of Fannie and Freddie, Mr. Frank, who went on to become the Chairman of the committee, co-sponsored with Chris Todd, former Chairman of the Senate banking committee, The Dodd–Frank Wall Street Reform and Consumer Protection Act, a massive piece of financial reform legislation passed by the Obama administration in 2010.  Critics rightly point to the fact that the bill places more trust in the same regulators who not only failed to prevent the 2008 crisis, but worse, ignored warnings from others.

As Fiorina correctly explained, the federal government created the problem, and then placed itself in charge of fixing the problem.  What the average citizen fails to realize, is that, politicians do not understand how the financial system works. When they pound themselves on the chest and declare they are going to find a solution, the solutions actually come from leaders in the financial industry. (Bank of America, Goldman Sachs, et al.) These leaders, often their friends, offer meaningless solutions that cripple their competitors (small local banks, and credit unions and mortgage brokers) and allow them to gain market share. This is how the big get bigger.

In a free market, banks and lenders should have been allowed to fail, this would have allowed for the emergence of new smaller local community banks to fill the void left by the big banks who made gross lending errors. Instead, Washington bailed out the banks, and created worthless regulations that have driven the smaller banks out of existence. The Big banks could not have asked for anything more to help their business then what the US government did.

Meanwhile, when speaking at a mortgage bankers association convention in Las Vegas last year, Melvin L. Watt Chief Housing regulator announced plans to make it easier for banks to make riskier loans once again. With the federal government keeping interest rates artificially low, we now have the same ingredients that caused the crisis of 2008. The only question left unanswered is how much bigger will the banks become this time.