Lies & Truth About the Financial Crisis

The Junior Senator from Colorado (Senator Michael Bennet) replied to an email I sent to him. His response included the following lie about the cause of the financial crisis:

"It is important to remember that the seeds of the current economic turmoil were planted during the past eight years, when unregulated markets allowed financial institutions to swell and the housing market to balloon to unrealistic proportions."

By the way, any Colorado residents reading this: Please remember in 2010 what type of person Senator Bennet is. By promulgating lies and denying the truth, he is unfit to be elected to this office. (Senator Bennet was appointed to fill the remaining term of Secretary of the Interior Salazar.)

If the Senator is wrong about the cause of the financial crisis, then what is the truth?

First, and foremost, the cause of the financial crisis is the Federal Reserve. Allan Greenspan oversaw a massive inflation of the money supply by keeping interest rates below the rate of inflation for several years. Interest is the cost of "renting" money. If the interest rate is less than the rate of inflation, then borrowers effectively pay back in dollars that are cheaper than the dollars they borrowed.

But, that's not the only way in which Senator Bennet has lied. His assertion that the crisis was caused by "unregulated markets" is false The housing (and financial) industries in the United States are heavily regulated. A review of the agencies and laws that regulate just the housing industry clearly demonstrates that there is no free market in housing:

• The tax deductibility of mortgage interests and exemption of real estate capital gains encourages home ownership. (Let me be clear: I’m not advocating higher taxes. Quite the opposite, taxes should be lowered to stimulate the economy. If we are to have an income tax, then that tax should be devoid of incentives and penalties that influence behavior based on someone’s definition of what is in my best interest.)
• The Community Reinvestment Act forces banks to lower underwriting standards for home loans to high-risk borrowers.
• The government created Freddie Mac, Fannie Mae and Ginnie Mae GSEs and implicitly guaranteed their debt. That guarantee allowed the GSEs to steal market share from private mortgage companies through an unfair cost advantage. Congress then passed laws requiring these GSEs to purchase more mortgages from high-risk borrowers as part of the government’s intervention to encourage home ownership. GSEs are NOT private, unregulated entities. Of course, Congress then made clear that the guarantee was not implicit when Freddie Mac and Fannie Mae were nationalized.
• Other regulatory agencies and laws that interfere with the housing market include: Department of Housing and Urban Development, Federal Housing Finance Board, Federal Housing Administration, Federal Home Loan Bank, Office of Federal Housing Enterprise Oversight, Fair Housing Act, Equal Credit Opportunity Act, Community Reinvestment Act (previously mentioned), Home Mortgage Disclosure Act, National Affordable Housing Act, Community Development and Regulatory Improvement Act, Home Ownership and Equity Protection Act and American Dream Down Payment Act.

The evidence is clear: The free market is not to blame because there was no free market. The government created the crisis. Politicians don't want you to know they are responsible because the cure for the problem is to reduce their power to take your property and run your business for their purposes.

Free America Again!