THE LIMITS OF HELPFULNESS: GOVERNMENT AND THE MORTGAGE MELTDOWN

“The average price of unleaded gasoline in San Diego County this week is $4.36. That’s eleven cents less than a week ago but a dollar and thirty cents more than this time last year.”

This mantra has become so familiar that many media hairdos can recite it in their sleep. What’s amusing about this formulaic sound bite is how little “news” it contains. No price in the country is so publicly advertised or so regularly observed by so many individuals.

The example is useful, however, to illustrate the typical depth of analysis offered by television and radio—and sometimes by newspapers. The preferred media storyline is simplistic, with a hero and a villain. The villain-victim format is also immensely popular.

So it is with the mortgage meltdown story where “predatory” lenders take advantage of innocent consumers who are struggling to achieve the dream of home ownership. The heroes are politicians with bailout funds.

The actual dynamics (as economist Thomas Sowell, among others, has recently shown) are more complex. The inconvenient truth for do-gooders is the extent to which the foreclosures that clutter several North County neighborhoods are actually a function of government helpfulness.

The most direct example of this “helpfulness” is the Community Reinvestment Act, a piece of federal legislation that makes sure banks and other lenders aren’t using “arbitrary and outdated criteria that effectively disqualify many urban or low-income minority applicants.” Included among these “arbitrary and outdated criteria” are an individual’s income, net worth, and credit history.

Lax underwriting standards were bound to proliferate when lenders like Countrywide received government kudos for loaning cash to folks who wouldn’t be candidates for home ownership absent regulatory pressure and the “helpful” efforts of community action groups like ACORN. It’s more than ironic that this particular “predatory” lender found itself going belly-up for offering loans that couldn’t all be fobbed off on other financial institutions.

The two government-created institutions for buying up most of these dubious loans, Fannie Mae and Freddie Mac, served as financial backstops until the political goal of extending home ownership to every American brought even these huge, amphibious institutions to the brink of insolvency.

Sowell notes that state and local governments also contributed to the mortgage fiasco by putting ever-greater restrictions on home construction—a practice that helped send home prices in California skyrocketing. Those higher prices demanded more “creative” financing, and creative financing was further stimulated by the Federal Reserve’s artificially low interest rates. When rates were finally adjusted upward and home prices peaked, the limits of “helpfulness” became apparent.

Put succinctly, government promoted and guaranteed bad loans, discouraged due diligence, and helped drive up home prices. Now those same governments are called upon to make everything better. Never mind that Sacramento and Washington are awash in red ink and that San Diego’s pension woes persist. The quick-and-easy solution to our problems is always more government control—making sure financial markets work as well as our public schools.

Imagine what gas prices would be if the DMV were in charge.