from the National Review Online
September 25, 2008 2:00 PM
The Tyranny of Good Intentions
By Alex Castellanos
And it’s Republicans who are bringing back the Era of Big Government. The New Deal set off a trend of higher taxes and more government that only got worse. Similarly, this generation will find it difficult to explain why the same paternal state we called upon to rescue Wall Street can’t bend down a little lower to provide government-paid health care, energy subsidies, and every imaginable social service.
So is this the time to pull our nation back from an economic precipice? Yes, for America cannot afford to play Russian roulette. If Congress votes down this bailout and our economy collapses, Americans will be at Washington’s door with torches and pitchforks. Remember when Republicans shut down the government? Imagine if Republicans shut down the economy. There is a liquidity crisis. Whether with loans or a bailout, our government must meet it.
Now, we must account for decisions made long ago. Washington’s dream was an America where every person could borrow enough money to buy a home. The Community Reinvestment Act, signed by President Carter and strengthened by Bill Clinton, encouraged bankers to loosen underwriting standards to “meet community needs.” Communities, of course, were not the ones obliged to pay the loans back.
As one former banker recently shared, “It is easy to recall sitting around bank board meetings in the last decade where it became a badge of honor for bankers to give loans to those who could not afford them. From that came lesser rates, larger loans and chicanery galore.” With this came the perverse incentives of sub-prime lending: loans without down payments, loans without equity, loans without verification of income or assets. New lenders like Countrywide lent money without tempering the risk with savings deposits.
It worked, as long as the value of the underlying asset, the American home, kept increasing: If a homeowner couldn’t pay the mortgage, he could sell the home for a profit. In 1997, Bear Stearns started securitizing these poisoned loans, packaging and reselling the tainted candy in large, Wall Street-sized containers. More Wall Street money chased risky loans and more speculative borrowers chased easy money.