Despite the abundance of 24-hour news networks and non-stop proliferation of online media, it has been difficult to get any useful insight into the financial problems facing the United States.  I’m hesitant to use the word crisis because it only serves to hamper consumer and investor confidence.  Sensationalists in the mainstream media have no compunctions about using the word crisis.  It is plastered all over the TV.  Neal Cavuto is a notable exception.  I’m not an economist nor am I a financial expert, but I am an analyst by trade and there are certain immutable principles effective analysts work off of-one of which is the problem is not always as it appears.  For example, the root causes of systemic problems are often buried underneath the symptoms. 

One of the root causes of the current financial predicament is the Community Reinvestment Act (CRA).  The Editors at the National Review explain:

Much more problematic than Gramm-Leach-Bliley is the Community Reinvestment Act, a bit of legislative arm-twisting much beloved by Sen. Obama and his fellow Democrats. One of the reasons so many bad mortgage loans were made in the first place is that Barack Obama’s celebrated community organizers make their careers out of forcing banks to do so.  ACORN, for which Obama worked, is one of many left-wing organizations that spent decades pressuring banks and bank regulators to do more to make mortgages available to people without much in the way of income, assets, or credit. These campaigns often were couched in racially inflammatory terms.  The result was the Community Reinvestment Act.  The CRA empowers the FDIC and other banking regulators to punish those banks which do not lend to the poor and minorities at the level that Obama’s fellow community organizers would like. Among other things, mergers and acquisitions can be blocked if CRA inquisitors are not satisfied that their demands – which are political demands – have been met.  There is a name for loans made to people who do not have the credit, assets, income, or down payment to qualify for a normal mortgage: subprime.

It was government intervention that compelled banks to offer high-risk mortgages or pay a penalty.  So as the Editors rightly note, banks assumed the risk of giving mortgages to folks with no down payment, poor credit and a disproportionately low income relative to their mortgage commitments.    

And as for Fannie and Freddie:

It was politics, too, that created Fannie Mae and Freddie Mac, enabled them to dominate the mortgage market, and implicitly took upon American taxpayers the risks of those business while the rewards were enjoyed, to the tune of hundreds of millions of dollars, by largely Democratic political opportunists, who then gave generously to Democrats, the top recipients of their largesse being: Chris Dodd, Hillary Rodham Clinton, John Kerry, and Barack Obama. And it was politics that unwisely nationalized Fannie and Freddie without resolving the underlying moral hazard – private profit, public risk – that makes those institutions problematic. From this Senator Obama takes away the lesson that there has been a failure of the market, and that what is needed is more politics. In this analysis Obama is as wrong as it is possible to be.

The knee-jerk reaction to this problem has been to champion increased government regulation.  “Deregulation” is used by many on the left side of the aisle as a pejorative.  Sen. Obama has been blasting Sen. McCain because of former Sen. Phil Gramm’s career as a deregulator and his role as an adviser to the McCain campaign.  Sen. Obama generally believes that deregulation is a bad thing.  Unfortunately, he couldn’t be more wrong.  Take, for example, the Gramm-Leach-Bliley Act.  As the Editors note: 

The Gramm-Leach-Bliley Act of 1999 passed the Senate with 90 votes (8 against, 1 absence: John McCain, who supported the legislation) and was signed into law by Bill Clinton.  It had little to do with the issues at play in the current crisis: lending standards and the amount of debt banks can take on relative to their equity.  The upshot of the Gramm legislation is that it allows financial services companies to diversify their lines of business: Commercial banks can engage in investment banking, banks can offer brokerage services, and you can have an IRA at the same place you have your checking account.

The Congress and Bush administration should refrain from introducing new blanket regulations into private markets.  The CRA is a prime example of the tremendous costs of government intervention.  During times of crisis, the reflexive response is to grow the size of government.  But this is not a real solution.  The core problems must be diagnosed and dealt with.