Wednesday, February 25, 2009

The Root Cause of The Current Debacle

J. Timothy Howard, chief financial officer, who in 2004 was considered the architect of Fannie Mae's success.

In this article published by the NY Times on September 30, 1999 we are offered a stark reminder of the root causes of the current financial crisis. Here are the introductory paragraphs:

In a move that could help increase home ownership rates among minorities and
low-income consumers, the Fannie Mae Corporation is easing the credit
requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15
markets -- including the New York metropolitan region -- will encourage those
banks to extend home mortgages to individuals whose credit is generally not good
enough to qualify for conventional loans. Fannie Mae officials say they hope to
make it a nationwide
program by next spring.

Notice the two key sentences highlighted by me. Here is a program designed to circumvent the laws of common sense economics. Banks don’t want to lend money; it must mean they are discriminatory and racist. Well, we have lent money for people to buy houses they cannot afford, and here it is where it brought us. Now the same characters are designing the blueprint for the recovery.

I was going to conclude with “the road to hell I paved with good intentions” but I realized that even this is not true. The road to hell now is paved with a look towards the next election. We have complained about the amount of money spent in election campaigns when a senator or congressman might spent spend millions of dollars. Well, the elections the next four years have just cost the taxpayers one trillion dollars.

To think that I miss the days when a senator could be elected by just spending 100 million dollars. Now read the whole article linked above.

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