Governments not Markets to Blame for Crisis

The evidence is quite clear that it is the heavy hand of government interference in the markets by successive US administrations that is to blame for the current financial crisis not free markets. In its desire to increase home ownership the Clinton administration beefed up the 1977 Community Reinvestment Act so that banks were required to meet mortgage quotas. These quotas were overseen by the Department of Justice and banks which failed to meet quotas incurred heavy fines. Another branch of government Housing and Urban Development chose to increase home ownership through the charter of a government sponsored entity, Fannie Mae (Federal National Mortgage Association).

As the government pushed for lower lending standards or demanded greater “flexibility” Fannie Mae no longer required borrowers to provide any down payment. It was only a matter of time before the housing bubble burst.

Furthermore, US local and regional governments enthusiastically follow policies of urban containment – restricting the supply of land for urban development. The unintended consequence of this intrusion in the market has resulted in an unprecedented increase in the cost of land. The worst affected areas in the US are states such as California where land supply restrictions are the most draconian.

It is these various intrusions into the mortgage, housing and land market by governments that has produced the fiscal crisis not free markets.

Getting out of this mire will not be easy but certainly more government intervention is not the answer. To quote Ronald Reagan, “government is not the solution, government is the problem”.