Whenever something important (or even not so important) in aerospace fails, a failure committee is put together to figure out what the hell happened. The magic phrase is “root cause…” the basic source of the problem, from which the train of failure that led to the disaster flowed. Of course, some systems are so complex or politically driven that the root cause is often in dispute. For example, the Challenger disaster: some claim that the root cause was design decisions made during the development of the RSRM’s; other claim that the root cause was the political choice of SRMs rather than a flyback liquid booster. Others point out that the root cause was managerial dumbassery… the decision to launch when it was too cold.
More recently, the US economy tanked. While the economy had a number of flaws, it’s generally accepted that the trigger that got the ball rolling was the collapse of the housing market. And the collpase of the housing market was driven in large part by the over-issuance of “subprime” mortgages. Basically. subprime mortgages are mortgages given to people who’s fiscal situation is so poor that they would not normally qualify for a mortgage. Subprime mortgages are mortgages that mortgages lenders pretty much seemed to assume would not get paid off. And knowing this in advance, these mortgage lenders – bankers and such – maneuvered the system so that the inevitable defaults would get dumped onto the taxpayers.
Obviously, these morgage lenders were scumbags.
Right?
Well… the question needs to be asked, why were so many subprime mortgages issued in the first place? Mortgages that are assumed in advance to probably go into default are exactly the *opposite* of what a mortgage lender would be expected to do… it’s bad business. So, why did they issue these mortgages?
Here, maybe this Los Angeles Times article from 1993 might shed some light:
Minorities’ Home Ownership Booms Under Clinton but Still Lags Whites’
Main relevant points:
1) Clinton administration enforcement of the Community Reinvestment Act which required banks to increase lending to communities that do not economically qualify for conventional mortgages
2) New efforts by Fannie Mae and Freddie Mac to buy mortgages from lenders and bundle them into securities, including incentives to the lenders
3) 42% of Fannie and Freddie portfolios were by law required to be loans for low- and moderate-income borrowers – in other words, people who could not qualify for regular mortgages.
If you mandate that banks hand out loans to people that banks *know* are bad risks, you can’t blame the banks for doing what they can to unload those loans when the chance arrives.
Near the end of the article is this creepy bit of foreshadowing:
Barry Zigas, who heads Fannie Mae’s low-income efforts, is undoubtedly correct when he argues, “There is obviously a limit beyond which [we] can’t push [the banks] to produce.” But with the housing market still sizzling, minority unemployment down and Fannie Mae enjoying record profits (over $3.4 billion last year), it doesn’t appear that the limit has been reached.
That limit got reached. And it damn near destroyed the economy.
So is the Community Reinvestment Act and related bits of FedGuv dogooderism the root cause of the economic crisis? Perhaps. Of course, the CRA did not spring out of a hole in the ground; it followed along in the train of such social engineering projects as the Great Society and the New Deal. The root cause, I would suggest, goes all the way back to the first politician who convinced government to force businesses to do unbusinesslike things “for the public good.”
