Acton Institute Powerblog

The Credit Crisis: Who Brewed the Stupid Juice?

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What is the root cause of the sub-prime crisis shaking the global economy? We need to know so we don’t allow it to screw up our economy even worse.

Many point to dishonesty and poor judgment on Wall Street. There was plenty of that leading up to the near-trillion dollar bailout, and even now the stock market is busily disciplining stupid, dishonest companies.

Others point to the many people who falsified loan applications to get mortgages beyond their means. That too played a role.

But dishonesty and poor judgment are as old as Adam and Eve. Something more was at work in the present crisis, a crisis of unprecedented scope. Why didn’t profit-minded loan companies run thorough credit checks? Why did they keep pumping out low interest loans to high risk borrowers, ignoring the risks?

It’s as if somebody spiked the financial system’s punch bowl with stupid juice, driving normally prudent financiers to dash, en masse, over the cliff.

It seems that way because it is that way. The brewers of the stupid juice were largely (if not exclusively) politicians in Washington who sought to redistribute wealth from the rich and middle class to poor people with bad credit. These politicians fostered various laws and institutions that directed, cajoled and legally bullied mortgage companies to extend big loans to people with little credit.

A case in point is a group called ACORN—Association of Community Organizations for Reform Now. Stanley Kurtz explains in an Oct. 7 essay at National Review Online:

“You’ve got only a couple thousand bucks in the bank. Your job pays you dog-food wages. Your credit history has been bent, stapled, and mutilated. You declared bankruptcy in 1989. Don’t despair: You can still buy a house.” So began an April 1995 article in the Chicago Sun-Times that went on to direct prospective home-buyers fitting this profile to a group of far-left “community organizers” called ACORN, for assistance. In retrospect, of course, encouraging customers like this to buy homes seems little short of madness.

… At the time, however, that 1995 Chicago newspaper article represented something of a triumph for Barack Obama. That same year, as a director at Chicago’s Woods Fund, Obama was successfully pushing for a major expansion of assistance to ACORN, and sending still more money ACORN’s way from his post as board chair of the Chicago Annenberg Challenge. Through both funding and personal-leadership training, Obama supported ACORN. And ACORN, far more than we’ve recognized up to now, had a major role in precipitating the subprime crisis.

How has Obama responded to the lessons of the subprime crisis? He and other far-left Democrats like Nancy Pelosi and Barney Frank have pointed their fingers at President Bush, John McCain and the free market. The dodge is so transparently silly that even Saturday Night Live, no friend of conservative politics, debunked it in a recent skit about the bailout.

Obama, Pelosi and Frank blame what they characterize as a Republican rage for deregulation, but Bush and Republicans in Congress, including McCain, pressed repeatedly for closer oversight of the twin-headed financial monster called Fannie Mae and Freddie Mac. The two entities are government sponsored enterprises, with an implicit guarantee of government backup. That cozy relationship with Washington allowed them to pursue reckless investment activities knowing the government would probably rescue them if things went south.

Bush, McCain and others recognized the problem and tried to fix it. Democrats repeatedly blocked these efforts. When the problem finally exploded, the monster’s tentacles had reached so deep into the economy that even many defenders of limited government concluded the government need to step in to avert an economic meltdown.

What drove Obama and other Democrats to block reform efforts? Some point to a huge infusion of lobbying money. Fannie and Freddie contributed enormous sums to Obama and other Democrats while McCain, an influential veteran senator, was getting bread crumbs from these institutions. Clearly the skilled lobbyists at these two giant mortgage companies directed their money where they thought it would most benefit them.

There’s a less cynical explanation. Whatever influence the lobbying money might have had, it took a back seat to an ideological motivation. Obama, Pelosi, Frank and other far left Washington Democrats have long believed that giving Washington more and more power to redistribute wealth is the way to make America a better place.

The curious thing is how uninterested these politicians are in the results of their ongoing experiments in social and economic engineering. They are unfazed by the latest results in the credit markets. They are unfazed by the fact that states with the highest taxes on businesses (such as Michigan) have lost jobs and seen worker salaries decline while states with low taxes on business (such as Arizona) have been creating jobs and raising average worker salaries. They are unfazed, moreover, by the results of similar experiments abroad.

In the previous century, many European democracies experimented aggressively with centralized planning and wealth redistribution, and the results are in. Those with high taxes and heavy labor regulations generally experienced sluggish economic growth and high unemployment. Countries like Ireland and Estonia, who now have lower, flatter taxes and less regulation on their labor markets, are booming, with both workers and businesses moving ahead. Those in Washington who care about the poor, who care about workers, should take note.

UPDATE: My Tennessee blogging cousin, Bill Hobbs, has an excellent discussion of this issue at Newsbusters.

Jonathan Witt