Our elected government's naive desire to help every America own a home appears responsible for the current credit crisis and a potentially long and harsh recession.
- The Community Reinvestment Act of 1977 and the Gramm-Leach Bliley Act of 1999 have removed the safe guards for our economy.
- The removal of the Up-Tick Rule in 2007 encouraged market violatility.
- The housing boom was unsustainable and resulted in the increased packaging of Mortgage Backed Securities into Collateralized Debt Obligations.
The Federal Reserve (Ben Bernanke) and Treasury (Henry Paulson) may be just as naive. For some time, the Federal Reserve has been lowering the banking reserve requirements and buying high quality assets on the open market as way to inject money into the economy. When it became obvious in Sept 2008 that the Federal Reserve could not manage the credit crisis, the Treasury proposed a bailout plan using tax payer dollars.
The participation of the Treasury is significant. Unlike the Federal Reserve actions the Treasury can obligate the US tax payer.
The following chart highlights the main government actions that lead to the current economic crisis.
Figure 1 - The Mortgage Crisis Time Line
The government does not intend to ask the irresponsible lenders or sub-prime borrowers to pay for their actions. The government expects the responsible investors and borrowers to pay for the credit crisis.
If the responsible are asked to subsidize the irresponsible, the responsible may disappear.
Good intentions really are the road the hell.
|
