It Is Dangerous to Be Right When the Government Is Wrong - Andrew P. Napolitano [29]
The Community Reinvestment Act made it legal for the government to twist the arms of private banks to make loans to “less-than-creditworthy borrowers,” thereby forcing private banks to associate with clients not of their choosing, but rather of the government’s choosing. To hold control over these lenders, Congress empowered a number of regulatory agencies to punish those banks that were not meeting the credit needs of “low-income, minority, and distressed neighborhoods.” The government’s threat to these lenders was real. Agencies like the Federal Reserve, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation could examine banking institutions for CRA compliance (or non-compliance) and take this information into consideration when approving applications for new bank branches or for mergers or acquisitions. Banks were bullied into loosening their standards and, as a result, made questionable loans to those who could not afford them.
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Generally, banks make loans based on the personal variables of the borrowers, such as the size of the mortgage payment relative to income, credit history, and income verification, for example. But in the wake of the Community Reinvestment Act, the federal government informed banks that participation in “credit-counseling” programs was sufficient as proof of a low-income applicant’s ability to make mortgage payments. “Banks and lenders, forget about those other ‘silly’ factors—you know, like, the numbers. Trust us. We are the government.”
A credit-counseling program? Seriously? What kind of proof is that!? Per the government’s extortion, banks were forced to make loans based on nonexistent credit standards. The quality of loans being handed out by private banks (because the government mandated it) was like candy at Halloween.
Michael Lewis, in his book The Big Short, recounts the plight of an immigrant strawberry picker with an annual income of $14,000 who was given a loan for a $700,000 home. In what kind of world is this loan reasonable? The CRA was one of the many ways the government attempted to provide affordable housing to low-income people. Interestingly enough, after this government scheme caused the real estate bubble that wrecked the economy in September 2008, the solution it proposed was to prop up housing prices to extreme heights that were artificially bid up by speculators; in other words, the program designed to provide more affordable housing kicked many homeowners out of their houses, wrecked the economy, and attempted to solve the wreckage by keeping housing prices higher or at more unaffordable levels for poor people. The irony of government actions never ceases to amaze me.
Through the passage of the Community Reinvestment Act of 1977, the government chose to ignore a little fact: Businesses have the right to contract freely with individuals or companies with whom they freely choose to contract. That is their fundamental right.
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Recklessness with Contract Rights
Today, with the Chrysler bailout, we see the current establishment’s complete recklessness when it comes to the contract rights of Chrysler’s bondholders. The bondholders are secured creditors, which means by law they hold a higher ranking than shareholders or unsecured creditors in a reorganization or bankruptcy. Outrageously, though, the government—which has inserted itself into this private bankruptcy by virtue of its massive loans to Chrysler—completely ignored this ancient and uniformly applied rule and instead intimidated a federal bankruptcy court to award ownership shares to the United Auto Workers, and only what was left to the bondholders.
When the bondholders tried to get a larger stake in Chrysler, President Obama publicly referred to them as “vultures,” and they eventually backed down. Since when are you a “vulture” just because you ask that the contract you signed