Politicians' requirements, not banks, ruined economy

Arlene Violet's editorial "Despite the anti-Wall Street rhetoric, Obama, R.I. Democrats fail us badly" in the Oct. 22 issue takes our government to task for failing to increase regulations and regulatory reform. Her editorial reminded me of the definition of insanity; namely, doing more of the same and expecting a different result.

The financial industry is one of the most heavily regulated industries. Yet, all these regulation have brought us nothing but misery. What makes her think that more of the same will this time not lead to even more misery? Permit me to highlight some history. It all started in 1968 when the fraudulent and meaningless concept "Red-lining" was invented by community activist organizations like ACORN. They had checked out lending practices and discovered that banks were reluctant to lend money to people who were poor, had no jobs and/or lived on welfare. These poor people tended to live not in the rich suburbs, but in neighborhoods with lots of other poor people. Duh... On a map it looked like the banks had drawn a red line around these neighborhoods; and the activist accused the banks of racism and discrimination.

Next, the activist lobbied politicians to do something about this discrimination; and Congress was only too happy to comply. The result was the Community Reinvestment Act (CRA). Jimmy Carter signed the law in 1977. From that time on banks started giving out risky (toxic) loans in order to earn a high CRA rating and keep their license to operate.

Sometimes an honest bank refused to make irresponsible loans. In that case the bank's CEO was ordered to Washington to explain why he was not handing over money to poor and needy people. Some CEOs persisted in acting responsibly. In that case lawyers from organizations like ACORN would sue the bank for discrimination. Note that one of those lawyers suing honest banks to become dishonest was Barack Obama. Yes, that Obama.

That leaves the question: Why did those toxic mortgage loans end-up destroying the whole world instead of just the irresponsible banks?

The banks understood that these toxic loans most likely would never be paid off. Therefore, they sold these loans to Fannie Mae and Freddy Mac. These Federal banks mixed good and bad mortgages so thoroughly that nobody knew what the risks were. But these securities were backed by the United States Government. So, why worry?

The purpose of CRA and of Fannie Mae and Freddy Mac was to make home ownership possible for everybody regardless of income. President Clinton in the '90s really pushed this home ownership idea to new heights by pressuring Alan Greenspan to lower the interest rate. This, in turn, drove up the demand for new houses resulting in ever increasing prices. People started buying houses with no down payment and subprime mortgage rates and selling them later. "Flipping houses" became an easy way of making money.

The housing market was turned into a giant Ponzi scheme. But like all pyramid schemes this one also blew up. Prices stopped increasing and many "house flippers" just walked away from their properties. This was easy because the "owners" had none of their own money in the house. It was all the bank's money and now banks are stuck with lots and lots of houses. Houses that the banks would never have given a mortgage for, but were forced to do because of the CRA rating.

As mentioned, banks were forced to make toxic FFF-rated loans which were magically transformed by government backed banks into AAA rated mortgage backed securities which in turn were sold as very safe investments to the American public. That is why now so many Americans, including me, have lost a lot of their retirement money in this pyramid scheme foisted on me by my government.

And now we expect to be saved by the very politicians who wrecked the economy. How? By Treasury's Timothy Geithner and Fed's Ben Bernanke dropping the interest rate in a desperate attempt to get the Ponzi scheme going again. Insanity!

Instead of asking for more regulations Arlene Violet should speak out for a return to the gold standard and a complete separation of state and economy. She should read the booklet "Capitalism: The Unknown Ideal."

Adri Kalisvaart

Lincoln