It Seemed Like a Good Idea at the Time

Let’s subsidize huge loans to millions of people with bad credit! What could possibly go wrong?

Check out this amazing New York Times article from 1999 explaining the roots of the mess we find ourselves in today:

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

Even back then, and even to a New York Times reporter, there were indications that somebody at Fannie Mae didn’t quite think this thing through:

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

The whole article is worth a read.

And how are we going to fix this problem created by the government giving money to insolvent homebuyers? Why, by turning to the government to give more money to insolvent banks. What could possibly go wrong?

It all reminds me of the Homer Simpson line: “Ah, beer. The cause of — and solution to — all of life’s problems.” Substitute “government” for “beer,” and you have the guiding principle of our political leaders and their cheerleaders in the MSM.

Hat tip: Lew Rockwell

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