A Failure of Socialist Measures in the U.S.

Many are touting the current financial crisis in the U.S. as a failure of capitalism. That is wrong. It is a failure of socialism. The crisis is a result of socialist tending policies implemented by our legislators.

The current $700 Billion “bailout” of the financial industry is a case in point. In 1977 the Community Reinvestment Act became law. It was intended to “encourage” financial institutions to provide credit to moderate and low-income individuals. It was meant to stop the practice of “red-lining” which is not making loans into neighborhoods that were considered poor credit risks.

The Federal National Mortgage Association (Fannie Mae) was started in 1938 as part of FDR’s New Deal. It was a government sponsored enterprise until 1968 when it was converted to a private corporation. It was designed to purchase mortgages from private financial institutions and then to re-sell them in “packages” as mortgage-backed securities. It became the vehicle for lenders to meet the requirements of the Community Reinvestment Act. As of 2008, Fannie Mae owned or guaranteed about half of the U.S.’s $12 Trillion mortgage market. The loans held by Fannie Mae as of August, 2008, amounted to approximately $700 Billion – the estimated cost of the bailout.

The size of Fannie Mae backed mortgages has increased through the years to the point that a loan for a single-family dwelling in excess of $400,000 can qualify. It is not just the need for low-income housing that was being met by their guarantees. It was part of the reason for highly inflated housing markets across the country. When that bubble burst due to high oil prices which sent a ripple through our economy, the worthless nature of their guarantees became apparent.

The public belief that Fannie Mae backed loans are guaranteed by the U.S. Treasury is incorrect. Fannie Mae was a private corporation with traded stock. Investors who purchased Fannie Mae backed mortgage securities did so in the belief that the government backed the guarantees of principal and interest on those securities. It does not – or, it didn’t until the current bailout package.

Credit-worthiness should be the primary criteria for loans -- not pseudo-guarantees. The idea that everyone should be able to purchase their home is worthy, the method for accomplishing that through government intervention in the marketplace is not. People need to learn self-reliance, not government reliance. It is time to get the government out of the marketplace.