Too much money makes many people stupid. After the prosperity and growth of the 1980’s, Clinton thought that he could expand the prosperity to more people by enacting government programs without consequences.

In the Investor’s Business Daily editorial, Bill Clinton, Home Wrecker, the writers explore the policy that began the housing bubble and collapse.

Rewind to 1994. While everyone was worried about Clinton socializing health care, he was busy socializing mortgages. To boost minority homeownership, Clinton toughened anti-redlining rules and launched a federal assault on mortgage underwriting standards.

He enlisted no fewer than 10 federal regulatory agencies to crack down on prudent lenders. He named his anti-bank SWAT team the Interagency Task Force on Fair Lending.

“I want to target new (housing) markets, underserved populations, tear down the barriers to discrimination wherever they are found,” Clinton said. “We have to do a better job of reaching the underserved; of eradicating discriminatory practices that prevent minorities from finding, financing or buying the home of their choice.

“We can widen the circle of homeownership beyond anything we have ever seen,” he added.

Indeed, Clinton’s policies for the first time threw millions of previously unqualified buyers into the mortgage mix, fueling an unprecedented housing bubble.

Between 1995 and 2005, according to a new book, “The Great American Bank Robbery,” minorities accounted for nearly two-thirds of household growth and contributed a whopping 49% of the 12.5 million rise in homeowners over the decade.

HKO comments:

It is hard to avoid the desire to share the wealth when there is plenty to share, but when this overrides basic prudent lending standards then the prosperity shared is short lived and in this case very destructive.

This does not excuse reckless leverage in the case of the banks, but it does raise the risk of regulators who are pressured politically to become blind to reality.

Too much money often makes for bad decisions in the private sector as well, but it is more likely to cause systemic failure when it precipitated by the volume, power and force of government.

“Fannie and Freddie played the political game even more fiercely than their opponents, spending millions of dollars on armies of lobbyists on Capitol Hill. Each company was a revolving door for the powerful in Washington- both Republican and Democrat. Newt Gingrich and Ralph Reed, among others, worked as consultants for Fannie or Freddie; Rahm Emanuel was a board member of Freddie.”

“By the 1990’s, Fannie’s chief executive could boast, without much exaggeration, that “we are the equivalent of a Federal Reserve system for housing.”  At their pinnacle the two mortgage giants- neither of them and originator of loans- owned or guaranteed some 55 percent of the $11 trillion U.S. mortgage market.  Beginning in the 1980’s, the two companies also became important conduits for the business of mortgage- backed securities.  Wall Street loved the fees it collected from securitizing all kinds of debt, from car loans to credit card receivables, and Fannie’s and Freddie’s portfolio of mortgages were the biggest honeypot around.”

“But in 1999, under pressure from the Clinton administration, Fannie and Freddie began underwriting subprime mortgages. The move was presented in the press as a way to put  homes within the reach of countless Americans, but providing loans to people who wouldn’t ordinarily qualify for them was an inherently risky business.”

From Too Big To Fail by Andrew Ross Sorkin

“Social engineering may aim to create stronger citizens, but it usually ends up producing weaker people.”

Tim Cavanaugh in the October 2009 edition of Reason in an article entitled “The Ownership Society”.

Tim explains how federal programs aiming to increase home ownership have ended up reducing the average American home equity. The percent of people who own homes has grown but the percent of their homes that they actually own has shrunk from 58.4%in 2002 to 41.4% in 2009. In 1985 it was as high as 70%.