Posted by
The Patriot on Thursday, October 02, 2008 6:00:34 PM
There was a saying from my Army days: “It’s just a band-aid on a sucking chest wound.” For those unfamiliar with sucking chest wounds…they’re bad. The chest wall is breached to the point that the body sucks air in through the wound, which doesn’t allow enough vital oxygen to enter the system. The opening must be sealed to return the body to normal breathing and allow the victim any chance or survival. Needless to say, a simple band-aid will not suffice in this case.
The economy has suffered a sucking chest wound. Congress is attempting to use a $700 billion band-aid to staunch the bleeding. Unfortunately, without taking action to actually seal the wound, our economy is in serious trouble. More drastic steps are required than simply dressing up this gash and calling it fixed.
I’m not an economist, but I did stay at a Holiday Inn Express last night. (Sorry, but I couldn’t resist.) Seriously, I have done a smidge of reading on basic economic principles, which is probably more than the average voter. Still, even without that, it seems simple to me that if the elements that created this mess remain in place, we can pour money into it all day long. The sucking chest wound is still not repaired.
What’s the sucking chest wound? In my estimation, it is the Community Reinvestment Act. First enacted under Carter in 1977, and strengthened under Clinton, this law uses government influence to leverage lending institutions to grant loans to people who are otherwise unqualified. On paper, it aims to ensure that lenders serve their communities equitably, by making loans available not just to people who can actually afford them, but to low-income applicants as well. In practice, what has happened is that lenders approved loans to people who could not actually afford them. They did this because of the legal pressures of the CRA and the implicit assurance that the now-infamous Fannie Mae and Freddie Mac would either purchase or guarantee these shaky loans.
Housing prices fell, and many mortgagees found themselves upside-down on loans, owing more that their house was worth. As loan defaults rose, lenders, Fannie Mae, and Freddie Mac started running out of money. Armageddon. Free from the influence of the CRA, Freddie, and Fannie, many of these shaky loans would have never gotten off of the approval officer’s desk. But the all-knowing government inserted itself and fixed that for us, right?
And now they’re going to fix it again, with a $700 billion band-aid. But the sucking chest wound remains. Phase out Fannie Mae and Freddie Mac, and repeal the CRA. Get government influence out of the decision-making process of private lending institutions, and let them succeed or fail based on the quality of their own business decisions. Patch them up for the short term if we must, but seal the sucking chest wound.