Last night I had the opportunity to speak to an old economics professor of mine at an economic forum held by the local community college, probably by far the best teacher I’ve ever had. Always kept you on your toes by asking random questions to make sure you where paying attention. He has been teaching for 44 years and is well known throughout the community and is often looked upon for economic advice. After the forum was over I went up to him and asked him if he believed the Federal Reserve should take any blame in the housing bubble and his reply was some, but not a whole lot, instead he placed the majority of the blame on the banks for lending the money.
I wasn’t all that surprised by his answer, after all he was a big supporter of Alan Greenspan. The very person I feel bears the most responsibility for the recession we currently find ourselves entrenched in. Unfortunately I didn’t have as much time with him as I’ve would’ve liked, so I wasn’t able to ask more questions. But it boggles my mind to see how anybody as educated and smart as himself could basically void the Fed of any responsibility, when it fact they’re the real culprit. We all know it starts with the Federal Reserve lending money to the banks at pre-determined interest rates and then the banks turn around and lend the money out to the general public in the form of home loans, business loans, car loans etc. Hence the reason that banking can be pretty darn profitable, due to the fact banks have the ability to leverage their capital through reserve banking at relatively high margins.
I not saying the banks aren’t to blame, I’m just simply stating none of this would have been possible if the Fed hadn’t kept interest rates so low. Despite the fact that demand for credit was strong and readily available to anyone that had a pulse. It would seem to me that the Fed would have been wise to raise rates in order to try to circumvent the situation we currently find ourselves in; but instead the Fed kept rates artificially low in order to keep the economy chugging along regardless of the long term consequences.
Another form of government intervention that was almost just as disastrous was that of being in the mortgage business. As far as I’m concerned the federal government has no business being in the housing business in any capacity and definitely not in the business of insuring loans, it creates an unsustainable moral hazard. It is sort like someone approaching you and handing you a wad of cash and saying to you; look go take this money go to the casino lay it all down, roll the dice and see what happens, by the way at the end of the day your not responsible to pay back the money and you get to keep all your winnings, there’s no downside. Who in their right mind wouldn’t take the money and risk it all, they’ve got nothing to lose.
Now you might be saying hold on there are many banks that got slaughtered because of issuing bad home loans, that’s most certainly true assuming you were a smaller community bank with no political connections. Look at the number of big banks that got bailed out compared to the smaller community banks. Instead all that happened was that the bigger banks bought out smaller troubled banks, along with shoring up their own finances instead of lending it out; as was the governments stated objective.
