Economic Crisis : A Commentary, Part 1

The Problem

In the latest edition of The Torch, Cedarville University provides readers with varied perspective on America’s current economic crisis. The theme mentioned on the front cover is aptly titled A Fragile Economy. Associate professor of finance, Dr, Bill Ragle, wrote the one article I want to focus on.

In Waking Up to an Economic Crisis, Prof. Ragle begins by setting the mood for his commentary. The recession is like a bad dream. The problem is it hasn’t faded away once since we began to awaken. As Prof. Ragle points out, “rousing from today’s economic debacle will be very slow in coming. We may want a quick recovery, but it isn’t going to happen.” Why? Because the current situation developed over several decades, it will not be resolved quickly or easily. He further clarifies this point claiming “[a] few multi-billion dollar bailouts and a massive redistribution of America’s wealth will not fix the problem.”

Prof. Ragle presents a number of causal factors that have led to the current economic crisis. They include the undermining of key principles of Constitutional governance in part because of the demoralizing effects of New Deal and Great Society welfarism and the enslavement of Americans to unsustainable entitlement debt. Christian morality is necessary for our form of Constitutional governance. As John Adams once said, “Our Constitution was made only for a moral and religious people. It is wholly inadequate to the government of any other.” The Protestant work ethic is antithetical to a welfare entitlement mentality. Many Americans have become totally dependent on government for nearly every part of their economic wants; the federal government has become just as irresponsible. Quoting Prof. Ragle,

“Another way to think of the fiscal irresponsibility of the federal government is to compare their costs to their revenues. The cost to run the federal government in 2008 was $3.64 trillion. Total revenues of the federal government were $2.66 trillion, a deficit of $980 billion. During that year, expenses increased 25 percent, while revenues increased 1.3 percent.”

From this point of view, it seems valid to infer that the millionaires running the federal government feel entitled to spend way beyond working American taxpayer means. The Rich lawmakers did not get to Capitol Hill to change the economic status quo.

Prof. Ragle considers the Community Reinvestment Act as the camel that broke the irresponsible straw man’s back. By straw man, I mean national and international corporations like Fannie Mae, GM, Washington Mutual Bank, and Bear Stearns. Fannie and Freddie, Lehman Brothers, and now GM are like Bonnie’s and Clyde’s dressed in pin stripped suits. Unlike the pair of bank robbing legends, our modern institutional version were created and sanctioned by Congress. Their existence and actions violate the supreme law of the land, they rip off taxpayers, and any repayment to the federal government will be through inflation, which means by ripping off taxpaying consumers. Anyway, Prof. Ragle explains why the Community Reinvestment Act (1995) was the culprit crashing the economy.

“As the U.S. economy began to unravel in the spring of 2008, one of the main culprits was default on subprime mortgages. These loans were to individuals unable to repay them, yet the government forced financial institutions to provide them to citizens anyway. The name of the offending legislation was the Community Reinvestment Act (CRA). The CRA, as revised in 1995, stipulated that down payments, credit history, and proof of income was no longer required as qualifying criteria for mortgage loans. Banks that did not actively solicit these subprime loans were punished…. Lending to [these] unqualified borrowers … resulted in artificial demand for residential real estate, which in turn caused housing pricing to increase 120 percent. Borrowers stuck in interest-only adjustable rate loans or negative amortization loans were further unable to make payments, and many had no recourse other than foreclosure. The national home foreclosure rate in the spring of 2008 spiked to between 200,000 and 250.000 per month, a 300 percent increase from pre-crisis level of 2005.”

Financial institutions holding large amounts of subprime loans incurred massive losses, and consequently they collapsed overnight.

In 1995, Democrat Bill Clinton was president not George W. Bush. According to Family Security Matters, it was Clinton who mandated bank lending to unqualified buyers. Clinton signed the Gramm-Leach-Bliley Act (1999) that deregulated New Deal regulations into law. Democrats who voted for the Act included Harry Reid and Joe Biden. The left has little grounds to blame Bush. In 2003, GW Bush tried to get Congress to amend Fannie Mae and Freddie rule to prevent unqualified borrowers from obtaining mortgages.

Yet, in 2007, a Democrat-led Congress did refuse to bailout the big three automakers while GW Bush insisted on giving the automakers $17 billion claiming to allow the automakers to enter bankruptcy would be too big a blow to the economy. This sent a bad message to other corporations and municipalities, according to Prof. Ragle. The message was “if you get into trouble Congress will bail you out.” Americans have since discovered Congress agrees that banks, automakers, commercial real estate developers, newspapers, states and municipalities alike think they too are entitled to taxpayer dollars.

Sources: The Torch, (Spring/Summer 2009), pp4-8.

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