GOOD INTENTIONS, BAD IDEAS

Ask me how we got into such bad economic condition and I'll tell you. It was the toxic combination of good intentions and bad ideas. The two most devastating hits on our economy in 2008 were the failure of Fannie Mae/Freddy Mac and the high cost of energy. First the banking failure.

In 1993 I worked for a small bank in North Palm Beach. Although the lending guidelines were the same for all borrowers it was bank policy to take a second look at any application from an African-American before issuing a denial. If there was any way the loan could be made, despite the borrower or the property not meeting the required guidelines the loan would be approved. It was explained to me by bank management that since a percentage of the banks depositors were African-American a similar number needed to receive loans by law. The law was the Community Reinvestment Act (CRA) passed during the Carter administration then aggressively in forced during the Clinton years. That small bank did not survive the 1990's.

Another feature of the CRA made the bank practice called "red lining" illegal. Bank lending guidelines included not lending in areas or neighborhoods in decline. The unavailability of investment in an undesirable area would hasten the decline and people would move out as property values continued to decline. Eventually the values would be low enough to make it profitable for an investor to buy the area, raze it and build something new and valuable. By outlawing this practice the CRA put dying neighborhoods on life support drawing our their decline and delaying or forever preventing their revitalization.

When I began my career in mortgage lending the maximum loan Fannie Mae would approve was under $100,000. To qualify the borrower's monthly mortgage payment could not exceed 28% of their gross monthly income. The borrowers total monthly indebtedness could not exceed 36% of their gross monthly income. Every loan approved was signed by the underwriter who made the decision and if the loan defaulted the underwriter was sure to hear about it.

By the time the wheels came off the Fannie Mae/Freddy Mac express the maximum loan was over $400,000 and lenders were using "desktop underwriting". This ingenious device was a computer program that made the loan decision for the underwriter. Suddenly it was possible to get an approval on a loan where the total housing expense was 50% or more of the borrowers gross monthly income. If a loan was somehow declined by desktop underwriting the loan broker could tweak it and re-submit as many times as needed to get an approval. Even more detrimental than the higher loan amounts and higher ratios was the absence of any accountability for the loan decision.

If Fannie Mae/Freddy Mac had stuck to "low income housing" perhaps the banks could have survived the required by law bad loan decisions. Unfortunately as property values continued to rise they implemented "Alt-A" mortgage lending funding the Sub Prime mortgage market. The cost of the American Dream home went from $100,000 to $500,000 and in some areas to $1,000,000. Lenders became creative and offered loans that required no income verification, no significant down payment and adjustable interest rates. All to make it easier to buy the ever more expensive homes or to refinance the one you already owned.

Why would Fannie Mae/Freddy Mac want to finance million dollar homes? Perhaps to reap the larger profits generated by the larger loans. Congress had direct oversight of Fannie Mae/Freddy Mac and congressman Barney Frank, the one individual most responsible for the government failure to reign in Fannie Mae/Freddy Mac feels free to blame the banks who lent using Fannie Mae/Freddy Mac guidelines. Franklin Raines, the head of Fannie Mae/Freddy Mac had to resign in 2004 when it was discovered that Fannie Mae/Freddy Mac was under capitalized and that he had "cooked the books" to generate maximum bonus payout to himself and his staff. Raines received over 45 million in compensation during his tenure at Fannie Mae/Freddy Mac. His malfeasance was never punished and he was defended by Democrats who deflected any criticism of Raines by claiming it was "a racist attack". Lucky for Mr Raines he had the "get out of jail free card" of being an African-American.

There are at least a half dozen more government regulations which exacerbated the problem. Those issues are just too intricate and boring for me to address here.

More and more bad loans were made and the "housing bubble" got bigger and bigger every month. Property values skyrocketed and some borrowers refinanced annually reaping and spending their equity over and over again. Average Americans became real estate speculators and bought properties they had no intention of occupying, sometimes flipping a property before it was fully constructed. Any attempt to reign in Mae/Freddy Mac was opposed by Democrats and anyone daring to demand reform was called a racist.

Then there is our problem with energy which can be summed up in two words, Enviro Mentals!The price of oil topped $100 a barrel and $4 a gallon gasoline was more than our economy could bear. Although the United States has vast resources of oil and natural gas most have been put "off limits". Nuclear power plants which have been providing most of the energy needs for France and Canada are also not allowed. Liberals gush on about solar and wind power but will even oppose those methods if it might interfere with their yachting or spoil their view. We are the "Saudi Arabia" of coal but expanding the availability of cheap electricity from coal powered plants is, you guessed it, not allowed. Despite global cooling for the past decade and no convincing argument that the warming from 1978 to 1998 was caused by human activity the "Enviro Mentals" reject every workable method of energy production proposed including "Greenhouse Gas" free nuclear power.

And that is the one-two punch that brought the American economy to it's knees. Not corporate greed, not unbridled capitalism but bad government regulation and bad environmental policy. All with the best intentions of course.