Housing crunch

Hi

The past few days I have tried to describe how capitalism started and how it works. Today I will try to point out an example of how government intervention can cause problems. I will use the current housing/bankruptcy crisis as an illustration.

Back when Jimmy Carter was president he started a program intended to get poor people into homes. The theory was that these people needed a little help to achieve what other Americans had done, and the government would be the one to supply the gentle push.

It was supposed to work this way - people would buy a home, usually more expensive than they could afford. The intent that with higher inflation causing prices to rise if the buyer could not afford to keep the house, then, he could sell it and pay off the mortgage and pocket the balance caused by the inflated property value. This scheme was based on a continuous inflation and rise in home value.

When Reagan replaced Carter as president he stopped this practice. In 1998 under Clinton the practice was again reinstated. The architects were HUD secretary Cisnesros and then Cuomo. The practice flourished under this leadership and there was formed a set of federal chartered agencies, Fannie Mae and Freddie Mac. The object or mission of these chartered agencies was to push banks to lend money and write mortgages merely to achieve a well intended but foolish policy called "Sub prime lending". The fact that there was no real security to support the mortgage loans was made a secondary issue. Bush then was elected president and replaced Clinton. Bush did not stop the practice in any way, although he did try to warn congress of the problem in the sub prime lending area but it fell on deaf ears.

During the presidency of Bush we had 9/11 and then the bubble broke. Banks holding this virtually worthless paper as security could not survive, now the banks failed. This failure is due in a large part to the fact that so many borrowers could not pay the mortgage and this acted like a domino theory which caused the banks to run out of capital. Now we have a double whammy, increased incidence of mortgage failures coupled with inability of banks to function. As they say, "The s*** hit the fan". The economy could not handle this problem. Ripples were sent through all kinds of places, the value of stocks fell, people lost equity in their retirement plans, colleges lost value in their endowment funds, cities lost revenue and every body came running to the government with extended hands. "Where's mine?" Guess what, there is no free lunch.

This serves as an example of how socialism is a failed idea. The concept does not work in the real world.

More in my next writing. Stay tuned.

Pray for our servicemen and women.
GOD Bless