Monday, April 18, 2011

Three Words You Never Hear in a Barack Obama Speech

“Community Reinvestment Act.” Those are the words, and that is the law, that helped trigger the banking crisis. The law, which was passed in the 1970s and expanded in 1999, was built on this false premise: Owning a home is a good thing, therefore government should help more people own homes. Therefore, the Community Reinvestment Act was set up by President Carter and expanded under President Clinton, forcing banks to make risky loans to poor people. In September, 1999, President Clinton set a goal for Fannie Mae and Freddie Mac to have one-half of their portfolios consist of loans to high risk borrowers. With so many bad loans, when the housing market collapsed in 2008, Fannie Mae and Freddie Mac went bankrupt and dragged much of the economy down with them.
John Allison, former CEO of BB&T Corporation, has observed that “Freddie Mac and Fannie Mae would never have existed in the free market. They existed because their debts were guaranteed by the U. S. Government. Even before they went broke, they were leveraged 1000 to 1. That means they had $1000 of debt for every dollar in equity.” So much for the wisdom of government-sponsored enterprises.
What is the lesson we should be learning? That government action may not be the solution to economic problems. Therefore, since government action triggered the current recession, we should rely on lower tax rates and more free markets to get us out. Let’s cut the corporate tax, cut the capital gains tax, and watch the recovery.

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