How the Federal Government Created the Housing Bubble and Crisis

Some people are still in dark about how the government caused and/or contributed to the economic problems that began crashing down around us in 2008. Well, Investor’s Business Daily has a helpful article up on their website that explains how things got started in the housing sector.

Rewind to 1994. That year, the federal government declared war on an enemy — the racist lender — who officials claimed was to blame for differences in homeownership rate, and launched what would prove the costliest social crusade in U.S. history.

At President Clinton’s direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties.


For the first time, Washington’s bank regulators put racial lending at the top of their checklist. Banks that failed to throw open their lending windows to credit-poor minorities were denied expansion plans by the Fed in an era of frenzied financial mergers and acquisitions. HUD threatened to deny them access to Fannie Mae and Freddie Mac, which it controlled. And the Justice Department sued them for lending discrimination and branded them as racists in the press.

“HUD is authorized to direct Fannie Mae and Freddie Mac to undertake various remedial actions, including suspension, probation, reprimand or settlement, against lenders found to have engaged in discriminatory lending practices,” the official policy statement warned.

The regulatory missive, which had the effect of law, advised lenders to bend “customary” underwriting standards for minority homebuyers with poor credit.

“Applying different lending standards to applicants who are members of a protected class is permissible,” it said. “In addition, providing different treatment to applicants to address past discrimination would be permissible.”

To that end, lenders were directed to “make changes in marketing strategy or loan products to better serve minority segments of the market.” They were also advised to “change commission structures” to encourage brokers and loan officers to “lend in minority and low-income neighborhoods” — a practice Countrywide Financial, the poster boy of the subprime scandal, perfected. The government now condemns the practice it once encouraged as “predatory.”

FDIC warned banks that even unintentional discrimination was against the law, and that they should be proactive in making “multicultural” loans. “An ounce of prevention is worth a pound of cure,” the agency said in a separate advisory.

In other words, the government created the very problem it is now condemning, exactly as those of who have a modicum of sense have been saying all along. Go read the whole article. See what the federal government “protecting” people looks like. This sort of short-sighted thinking is exactly why we should never allow the government to control the health care industry, or any other part of the economy.

People wonder why I, and other libertarians, are distrustful of government plans to protect/help people. This story is one of many reasons. The failures of government to actually protect people and to help people are all around us. Yet we still have people protesting that only government can save us all from the “evils” of capitalism. At some point, I have to credit the continued denial of government responsibility for problem after problem to a willful ignorance. I know that in school we get taught that FDR’s New Deal saved the country and similar nonsense. However, after watching the government ruin the housing market, give multiple favors to big corporations, create regulations that screw middle-class folks, send FEMA to New Orleans to stop people from Wal-Mart and other businesses providing aid to other people in need, et cetera, I have a difficult time believing that people who continue to insist on big government solutions are not simply closing their eyes to what they choose not to see.

We are not talking about something esoteric or hidden from view. The problems that have been either propped up by government or caused by government are many and clearly visible to any one willing to look. Yet, still people insist only government can protect us from the supposed evils of corporations and the wealthy. The more we allow corporations and the wealthy to partner with government, the more “evil” you’re going to get from corporations and the wealthy. But in the end we will still have only ourselves to blame.

And I’m directing that last part at you, Occupiers. You’re protesting the wrong thing.

2 Responses to “How the Federal Government Created the Housing Bubble and Crisis”

  1. missysubmits Says:

    It goes back further than that. It was the FOMC’s decision to target such an artificially low discount rate in order to fight the predicted coming small recession following 911 that started this domino effect. Add in all that you mentioned above and all of a sudden we have a housing bubble. What did this meddling in the end do? Put off the bitter pill. The result? A much more bitter pill we now know as “The Great Recession”.

    This is happening all over again, but now it is unfolding in Europe and the toxic derivatives known as Grecian debt bonds. Worthless. A deck of cards susceptible to a strong enough gust of wind. And how are the major players who created this mess protecting themselves? The same way they did with the sub-prime mortgage industry. By hedging their bets against it, in essence willing it to fail once failure starts appearing on the distant horizon. It is private industry that in the end will have to pick up the pieces of the failing markets. Governments spend money, they do not make it. If it is private industry that will bear the responsibility of it, then it will be you and me and the next generation who will be left to pay for these ridiculous wagers. It must be fun gambling when it is not your money. I don’t know what the solution is to the current problems in the Euro zone as the hole keeps getting deeper and deeper. But I have lost sleep over it. It sincerely worries me.

    • The solution in Europe is the same as here. Stop trying to control everything. The governments in Europe have to learn they cannot continue to spend as they have. They are all trying to figure out how to keep spending as if their spending practices were not a major contributing factor to their situation. Until they learn some fiscal responsibility, their situation will only get worse.

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