Deregulation, yet another huge buzz word of the campaign. The Bush Administration allowed the nation to run wild, and the result is our current economic malaise. Deregulation was the beast that rose from the depths and shook the foundation of our economy.
This article is Part 2 of a 3-part series. Part 1 is here.
Getting back to reality, deregulation has occurred of course, but not to any degree significant to this administration. Regulations change as a matter of course. Many of these changes in regulations had little to do with the Bush Administration, but with specific agencies responsible for their oversight. Alan Greenspan was a huge proponent of deregulation, for example, but was not under the control of Clinton or Bush.
It is difficult to pinpoint any specific recent event that resulted directly in the problem we face today. Certainly, financial instruments based on bad loans and sold on Wall Street magnified the problem and contributed substantially, but those financial instruments would never have been concocted if the bad loans did not exist in the first place.
It is easy to use the buzz-word “deregulation” and leave it at that, but research demonstrates the problem began decades ago with the weakening of mortgage requirements. Mortgage requirements that protected banks from taking on bad loans were severely impacted over a much longer period than the tenure of the Bush Administration.
So, how did the requirements for mortgages become so lax? Why were qualification requirements discarded that would have prevented the “sub prime” mortgage meltdown? Who supported it and backed it, and more specifically who blocked legislation to regulate it?
The entire problem began in government, as so many of our national crises often do. The smoking gun that led to the entire problem points directly at two bills passed, not to help Wall Street, but to help Main Street!! Specifically, this was an effort to provide affordable housing to the poor.
During Jimmy Carter’s short term as President, these regulations began to take hold. Note we are not using President Carter as a scapegoat here, we are just using his term for historical reference. Affirmative action policies forced banks to offer loans to many that did not qualify. The result? The banks began taking on loans that otherwise would never have been considered. Failure to comply was criminal, subjecting the institutions to huge fines and class action lawsuits if they did not comply:
Failure to comply with the Equal Credit Opportunity Act or Regulation B can subject a financial institution to civil liability for actual and punitive damages in individual or class actions. Liability for punitive damages can be as much as $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor’s net worth in class actions.
Regulation B Equal Credit Opportunity
In the late 1980s, banks were pressured heavily to become more lenient on loans to minorities and the poor. Federal guidelines actually started to guide banks away from using credit history as a determination of one’s qualifications for a loan. The Community Reinvestment Act was passed. Banks were not only encouraged to make bad loans to people that did not qualify, they were forced by law to do so. Other mortgage lenders followed suit. Unfortunately, this scheme of supplying risky mortgages to the unqualified only works as house prices rise. Once they stopped rising, it wasn’t long before the house of cards collapsed.
The facts demonstrate it wasn’t the removal of government regulation that caused the problem. It was just the opposite. The cause was the enforcement of government regulations that forced banks to take on loans that would not have otherwise been approved. This continued for over a decade before the first signs of a crack in the levy began to form. How did the Federal Government respond?