Saturday, July 21, 2012

Banks Not Responsible For Housing Crash

Consumers do not always make choices in their own interest even when they have more then enough information. However, I question how pervasive such decisions are and also where the blame should be placed often someone acts as an enabler. Today I want to  concentrate on concerns I have about using the government to try to improve consumer choices. It is not clear that government bureaucrats generally understand why consumers make defective decisions, and even less likely that governments policies will help improve these decisions. It should be mentioned, government officials, including regulators, legislators, and executives, are subject to powerful pressures from interest groups that often greatly affect public policies to the detriment of consumers.

One might say that it was government policy that was responsible for the nasty housing crash in the first place, government policies encouraged offering those least able to resist, a deal they should never have been offered. Sure, some families may not have bought their homes if they had known a crash would be coming, especially families that took out mortgages just prior to the crash. But how could they reasonably be expected to know disaster was looming  when few housing market experts were predicting a crash?

To illustrate the harm done by acting as an enabler, consider sub-prime borrowers in the housing boom, "or should we say bubble",  that came crashing down with the financial crisis. It is frequently argued that these borrowers were ignorant of the risks they were taking or fooled by lenders and others into buying houses with mortgages that they would be unable to handle financially. Yet the decisions by sub-prime borrowers made a lot of sense in light of the very low, and sometimes non-existent down payments that lenders required. Coupled with the lowest interest rates in decades, these borrowers had perhaps a once in a lifetime opportunity to be owners rather than renters.

Much of the fault lies with the federal government, including the Federal Reserve that encouraged rather then cautioned sub-prime and other home-buyers. At the time leading members of Congress and other government officials pressured banks to offer mortgages on generous terms to consumers with bad credit histories and poor job prospects. The Fed contributed to the housing bubble by keeping interest rates low. Consumers made their housing decisions in an environment where both banks and governments actively promoted the purchase of homes with low interest rates and low down payment requirements.

While few people have a love for the banking and financial institutions in general they did not orchestrate the housing crash. In truth banks merely played along and raked in the profits flowing from bad government policy.  It is time we stop blaming the banks, a better target for our scorn are the Government Sponsored Enterprises such as Fannie Mae and Freddie Mac that bought these mortgages from the banks, had the banks known they would have to be responsible for the loans and had to keep them on their books, much stricter standards would of prevailed.

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