Financial Flim Flam - We've learned nothing from the Wall Street debacle

Chuck Colson is right. Our leaders have apparently learned nothing from the financial crisis, and consequently the financial reform bill pending in the Senate fails to address the real problems, foremost of which is America's abandonment of the biblical principles that restrain reckless behavior.

Read Colson's commentary or download the audio here.

Financial crisis hitting poor and minorities hardest; indictment of liberal government policies and worldview.

The current recession brought on in part by the housing bubble has hit the poor and minorities much harder than the middle class and wealthy. That's the point made by Peter Schweizer author of the new book, "Architects of Ruin." He describes the thesis of his book for the Powerline blog.

For all the ink that has been spilled about the mortgage crisis in America, there remains a secret that almost all the major media has ignored: for all the talk of unsold condos in South Florida and McMansions sitting empty in California, the epicenter of this crisis is really in urban and minority neighborhoods....

Studies show that those hardest hit by the financial crisis are poor and minority neighborhoods. A massive study by the Boston Federal Reserve Bank looked and hundreds of thousands of mortgages and foreclosures and discovered that "in the current housing crisis foreclosures are highly concentrated in minority neighborhoods." The study notes that this is a unique phenomenon, "even relative to past foreclosure booms." The study found that those in poor and minority neighborhoods were seven times more likely to lose their homes to foreclosure that then general population.

What's the reason this housing crisis has hit minorities and poor the hardest?

This reality gives us evidence to find out who got us into this mess in the first place: housing activities and government officials who pushed for and got an aggressive affirmative-action lending program for home mortgages.

The idea sounds appealing enough: encourage homeownership in order to reduce crime, unemployment, and broken families. But activities pushed their agenda by demanding that lending institutions loosen their lending standards and look the other way when lending to people with bad credit. Activist groups such as ACORN, the Congressional Black Caucus, and the Service Employees International Union pushed banks to use "less traditional income sources such as food stamps, unemployment, part-time jobs, non-court ordered child support and foster care payments" while considering a mortgage application.

Liberal activists also pushed banks to agree "to lower down payment and closing costs" for lenders. What this meant is that the borrower would have little or no money in the game--no incentive to hang on if times got tough. The activists also pushed banks to allow people to take out larger loans on lower incomes, upending the traditional notion that people should only be allowed to have a mortgage payment account for, say, 28% of their income. Activists argued that this was all necessary in the name of social justice.

Subprime lenders such as Countrywide were all too happy to go along because it allowed them to sign even more loans that they could eventually sell to Fannie Mae and Freddie Mac. Countrywide provided, in their own words, "zero- and low-down payment loans and underwriting guidelines that recognize diversity and cultural differences in the way minorities and immigrants may view and conduct their personal financial situations." Defaults and credit histories were now "cultural differences."

Angelo Mozilo, the CEO of Countrywide, proposed "elimination of down payment requirements for low-income and minority borrowers" to close the gap in home ownership. He wanted to look at "alternative payment histories" on loans and "properly factor in cultural differences on credit, income and spending habits." From a business proposition this made perfect sense. Countrywide was selling most of its mortgages to Fannie Mae anyway, so they wouldn't have to remain on the books. In any given year 30% of the mortgages that Fannie Mae was buying were from Countrywide.

But now that the mortgage bubble has burst, who are the activists blaming? If they once accused banks of making too few loans to minorities, now they claim they are making too many. They claim the financial crisis is a result of unscrupulous lenders giving high-interest or adjustable rate mortgages to poor applicants who didn't know what they were signing. When the rates adjusted, bam, they lost their homes. But the problem is there is little evidence to prove this. Indeed, the problem seems particularly focused on the black community.

The Boston Federal Reserve found in a study of subprime lending that blacks suffered foreclosure rates three times those of whites and Hispanics, and Hispanics twice that of whites, even when they had the same kinds of loans. Blacks tended to put less money down, had lower incomes, and had taken on more debt. They were given the loans because of the flexible underwriting rules activities and their allies in Washington had been pushing for three decades.

The Boston Fed study also found that when it came to adjustable-rate mortgages, the majority of people who lost their homes were foreclosed on before the rate was even adjusted. So it wasn't bad loans. The problem was an affirmative action lending problem that encouraged people to take out loans that they should not have.

There is also no evidence of racism in lending. A study by the New York Federal Reserve Bank looked at more than 75,000 adjustable-rate mortgages and found that minorities did not pay higher interest rates than whites. Indeed, the study concluded that "minority borrowers appear to pay slightly lower rates, as do those borrowers in zip codes with a larger percentage of black or Hispanic residents."

The real culprits here are the social activists and their allies in Washington who pushed an activist agenda. They helped to propel us into the mortgage crisis we face today.

This is a good illustration of the abuse of government power and a faulty view of human nature held by liberal politicians and activists. They thought they could use the levers of government power to create a more equitable society by government fiat rather than recognizing the importance of character and responsible conduct, e.g. living within one's means, not buying what you can't afford and so forth. The result? The ones liberals intended to help were the ones actually hurt the most.

I fear they are attempting to apply the same mindset to the health care problem. Their good intentions are misguided and will actually harm, in the long run, those they intend to help.

Liberal columnist says throwing money at our financial crisis isn't the answer to our problem.

Michael Kinsley, liberal columnist for the Washington Post, hit the nail on the head when he questioned the focus on more spending and more debt as the answer to our current financial and economic problems.

In his recent article, he says:

It sounds too good to be true, but it is true. By now we all know about the "paradox of thrift": If everyone stops spending because times are bad, times get even worse. An economist writing in the New York Times the other day addressed the wonderfully inverted problem of people who feel guilty about not spending enough. His advice: Don't feel guilty about saving money, because it's the government's job, not yours, to make sure that we spend enough. But what if you don't feel guilty about reckless borrowing and spending? What if you actually enjoy it? This has been a more common attitude in recent years. Is it still okay? Or does the medicine have to taste bad to be any good?

And can we rely on the government to spend enough? This also seems like a wonderfully upside-down problem. The answer is, apparently not. We're going to need a second stimulus package, probably a third chapter of the bank bailout, more for the auto industry and others. It's all going to cost at least two or three trillion. If it works, it will be money well spent. If it doesn't work, that means we should have spent more.

Trouble is, money well spent is still money spent. The reasons that made it a bad idea to run up all that debt haven't disappeared just because something even worse came along. Almost no one in Washington is talking about this. Since 1981, Republicans have run up massive deficits and Democrats have discovered fiscal responsibility. Now they're all having too much fun reverting to type. Republicans reject the Keynesian premise that the money is being well spent because it is being spent. Too zen for them, or something. For some Democrats, meanwhile, the very fact that a program is costly has magically become an argument in its favor.

But even if the stimulus is a magnificent success, the money still has to be paid back. The plan of record apparently is that we keep borrowing, spending and stimulating, faster and faster, until suddenly, on some signal from heaven or Timothy Geithner, we all stop spending and start saving in recordbreaking amounts. Oh sure, that will work.

There is another way. If it's not the actual, secret plan, it will be an overwhelming temptation: Don't pay the money back. So far, even as one piggy bank after another astounds us with its emptiness, there have been only the faintest whispers about the possibility of an actual default by the U.S. government. Somewhat louder whispers can be heard, though, about the gradual default known as inflation. Just three or four years of currency erosion at, say, 10 percent a year would slice the real value of our debt -- public and private, U.S. bonds and jumbo mortgages -- in half.

Anyone who regards the prospect of double-digit inflation with insouciance is either too young to have lived through it the last time (the late 1970s) or too old to remember. Among other problems, inflation works only as a surprise or betrayal. It can never be part of any public, official plan. Plan for 10 percent inflation, and you'll get 20. Plan for 20 and you'll need a wheelbarrow to pay for your morning Starbucks. But if that's not the plan, what is?

In summary, he's saying we're trying to spend our way out of a problem which resulted from irresponsible spending. It sounds like the way to made a bad situation worse. It's not a question of government doing something or nothing, but government doing the right thing.

Educated fools

FOXNews reports that for the CEOs of the nation's biggest banks and corporations, it's not all in the Ivy League pedigree (Cream of the Crop Gone Sour: America's Troubled CEOs, February 17, 2009).

Duh!

I thought it was interesting that the words, "character," "morality," "ethics," and "greed" appeared nowhere in the article. That's what's wrong. Our most distinguished universities are producing educated fools with lots of knowledge but devoid of a moral framework by which to lead.

"The fool says in his heart, 'There is no God.' They are corrupt, they do abominable deeds, there is none who does good." (Psalm 14:1)

Congratulations President-elect Obama. You will be in my prayers as you lead our nation over the next four years.

With the election of Barak Obama as president we certainly do enter a new chapter in our nation's political life. People concerned about war and the financial crisis facing our nation said they want to give the "other guys" a chance to address these problems.

As people know, who have read my blog posts, I strenuously disagree with many of Mr. Obama's positions and his underlying worldview on the role of government and the importance of protecting the sanctity of life and marriage. And I'll no doubt continue to voice these views in the future. However, Mr. Obama will shortly become our next president. I pledge to keep him in my prayers and will pray that he has the wisdom to navigate the upcoming challenges internationally, particularly the struggle against terrorism, and restoring sanity and order to our nation's financial health. I strongly desire to see him succeed in these endeavors.

His election as the first African American man as president is also a milestone which I believe will have ramifications far beyond his presidency. Hopefully, it will help heal the racial divisions which continue to exist in our nation. His presidency no doubt will serve as hope and an example for a new generation of African American youths. Youths too often devastated by lack of hope and the devastations resulting from fatherlessness and broken homes. His presence in the office of president may well do more good than any legislation he initiates.

May God bless you and your family, Mr. Obama.

Markets, Morality, Greed and Financial Crisis

I suspect for most people the bailout, declining stock market, warnings of financial crisis and deep recession leave one confused as to exactly what's happening in our economy. And as a result there are calls for government to step in and restore order. Markets aren't working; capitalism is the problem is what one hears.

I think the problem is fundamentally a moral one and ultimately has to be addressed at that level. The mentality that we can have it all immediately. Taking out housing loans one can't afford and the willingness of lenders to make such loans. The expectation that government should bail people and companies out from facing bad decisions. Incredibly low savings rates. All of these things point to bad moral decisions.

This is pointed out in a column by Dr. Samuel Gregg, Research Director of the Acton Institute.
Acton Institute explores the interface between religion and capitalism/free market system.

"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice."

Adam Smith had it basically right when he described the essential pre-conditions for widespread economic prosperity. But if the current financial upheaval teaches us anything, it should be how much market capitalism depends upon most people developing and adhering to some rather uncontroversial moral virtues.

Smith himself always understood this. That's why his Wealth of Nations of 1776 should always be read in light of his 1759 treatise, The Theory of Moral Sentiments.

Of course, numerous economic factors underlie the financial meltdown. These include loose monetary policy, massive bank overleveraging, and the subprime-mortgage implosion, not to mention the social-engineering programs pursued by the government-sponsored, New Deal-esque behemoths Fannie Mae and Freddie Mac.

No matter that free markets have raised literally hundreds of millions of Indians and Chinese out of poverty in recent decades. Instead, continental Europeans such as Germany's finance minister, Peer Steinbrueck, loudly proclaim that "Anglo-Saxon capitalism" is "finished", while blithely ignoring the fact that many of the EU's dirigiste economies are presently lurching toward, or are already in, recession.

A little discussed fact, however, is that the financial crisis has also been driven by widespread moral lapses that have manifested themselves just as much on "Main Street" as on Wall Street. One example is the subprime-mortgage fiasco. We now know that thousands of Main Street borrowers lied about their income, assets, and liabilities when applying for subprime loans. Likewise, many lenders failed to do even the most rudimentary checks on borrowers' credit history.

Recklessness also features among the sins underlying our present financial turmoil. On Main Street, thousands of investors mortgaged themselves to the hilt on the highly-imprudent assumption that house-prices could only continue to soar. Meanwhile on Wall Street, investment banks overleveraged themselves, sometimes at ratios of 30-to-1.

Then there is the rampant materialism that has apparently permeated Main Street and Wall Street to equal degrees. The thrifty, even parsimonious Adam Smith would have been appalled by the "I-want-it-all-now" mentality that has helped the personal savings-rate in America to hover around 0 percent since 2005 - the lowest rate since the Depression years of 1932 and 1933.

It's arguable that the same mindset encouraged many on Wall Street, anxious to enhance their bonus prospects, to sell securities they knew were based on collapsing subprime foundations to Main Street buyers blinded by the prospects of quick profits. Such actions aren't illegal. No-one, however, seems in a rush to ethically defend them.

None of these moral failures amount in themselves to conclusive arguments for re-regulation. They are, however, fuelling populist demands for a return to failed interventionist policies of the past. So far, most free-marketers have tried to stem re-regulation pressures by reminding everyone of the powerful economic arguments against such policies. But relatively few - if any - have engaged the financial meltdown's moral dimension.

One explanation for this silence could be that some market-advocates have embraced, consciously or otherwise, the soft relativism so prevalent in Western societies but which renders coherent moral analysis impossible. It may also be that many free-marketers have long been incapable of articulating more-than-utilitarian arguments for markets in particular and liberty in general.

Make no mistake: The modern case for the market - so painstakingly developed against interventionists of all stripes since Smith's time - has been set back years by the disarray on financial markets. The very same calamity, however, should remind us that if we're going to loosen the political bonds imposed on economic liberty by assorted New Dealers and Keynesians since the 1930s, then society's moral bonds require constant renewal and strengthening.

In short, we're learning the hard way that virtues like prudence, temperance, thrift, promise-keeping, honesty, and humility - not to mention a willingness not to do to others what we wouldn't want them to do to us - can't be optional-extras in communities that value economic freedom. If markets are going to work and appropriate limits on government power maintained, then society requires substantial reserves of moral capital.

At the end of his life, Adam Smith added an entirely new section entitled, "Of the Character of Virtue", to the sixth and final edition of his Theory of Moral Sentiments. His reasons for doing so are much debated. But perhaps Smith decided that as he glimpsed a world in which the spread of free markets was already beginning to diminish poverty, he needed to re-emphasize the importance of sound moral habits for societies that aspired to be both commercial and civilized.

It's advice worth heeding today.

Gregg points out that Adam Smith, the father of modern capitalism saw an essential link between prosperity, capitalism and morality. Capitalism was the economic system which created prosperity but required moral activity by its participants. When things go wrong capitalism, the system is blamed and calls are made for intervention by the government. This usually makes the situation worse and creates long term problems like declining economic growth and prosperity for everybody.

Inappropriate government actions usually shield those from the consequences of their bad decisions, whether individuals or companies. And gives the wrong incentives for actions. Fannie Mae and Freddie Mac, government created institutions, encouraged the making of bad housing loans to people who couldn't afford them.

What ultimately has to happen is for people to realize they must live within their means. Government has an important role to play in promoting justice but it needs to do so in the context of its area of competence. I don't sense that's the tack being taken. Efforts are being made to stave off the consequences of greed and wanting it all now. This means more trouble down the road.