Lessons Unlearned

Investor’s Business Daily | Sep. 14, 2009

A year after Lehman Bros. went bankrupt, Washington plans sweeping new reforms of the financial markets. Based on what’s been revealed so far, our leaders have learned nothing from that crisis.

Today, once again, we’re hearing that unbridled greed and reckless pursuit of profit lie behind all our ills, that Wall Street is “choosing to ignore” the lessons from the meltdown and that new rules are needed to bring the miscreants to heel. But this is exactly backward.

Yes, Wall Street made mistakes — real doozies, as it turned out. And Lehman wasn’t alone in taking risks it shouldn’t have. But calls to “reregulate” the financial markets, as made Monday by the White House, are wrongheaded. Bad government, not Wall Street,caused the crisis — not a popular sentiment, but true nevertheless.

The crisis had its roots in innocent-sounding changes made to the Community Redevelopment Act during the Clinton administration. Those changes not only encouraged banks to lend to credit-unworthy customers, they basically forced them to do so. Those that didn’t meet CRA standards could be denied the right to expand their lending — or even to merge with another company.

The CRA used Fannie Mae and Freddie Mac, two government-sponsored enterprises that funded the Democrats’ massive homeownership scheme, to boost homeownership among the poor.

Banks would be able to make loans to questionable borrowers, repackage the loans in bundles and resell them to Fannie and Freddie and investors around the globe. Fannie and Freddie got the green light to raise virtually unlimited amounts of money to buy up the iffy mortgages from the banks.

Any bank that didn’t take part could find itself in big trouble.

As we wrote about this time last year: “With all the old rules out the window, Fannie and Freddie . . . eventually controlled 90% of the secondary market for mortgages. Their total portfolio of loans topped $5.4 trillion — half of all U.S. mortgage lending. They borrowed $1.5 trillion from U.S. capital markets with — wink, wink — an ‘implicit’ government guarantee of the debts.”

The Fannie-Freddie explosion in mortgage lending intensified when the Fed cut interest rates to a then-record-low 1% after 9/11, fearing an economic meltdown. By 2007, subprime mortgage lending hit $1 trillion — up 2,757% from 1994.

From 2000 to 2008, Republicans in Congress tried repeatedly to rein in Fannie and Freddie. But Democrats — led by Rep. Barney Frank and Sen. Chris Dodd — spurned effective reforms. Instead, we got crisis. And unbelievably, the system is still in place today.

Despite the enormity of it all, this tragedy is now ignored. Instead, a White House plan unveiled in June proposes sweeping new financial rules that pretend Wall Street “greed” is at the heart of our problems — not government incompetence.

Unfortunately, the “reregulation” amounts to little more than a war on entrepreneurs and businesses. As the Competitive Enterprise Institute noted, these rules “would shower mounds of red tape around job-creating venture capital firms, discount brokerages and the small investors who use them.”

With nearly 7 million jobs lost during this recession, these new restrictions could prove disastrous by making it hard for small businesses to raise capital and restart hiring. And once again, government meddling will cost us output, jobs and income.

Isn’t it time we learned from the failed $787 billion bailout, $700 billion in TARP spending and at least $800 billion in new money created by the Fed?

Government meddling, as well-intentioned as it may be, rarely works. That’s the lesson that should have been relearned from the financial debacle of a year ago. Instead, it’s yet another lesson that’s gone unlearned.

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