We’ve all heard of the credit crunch and seen the nationalisation of Northern Rock and Bradford and Bingley but how did all this happen, what started it?
A couple of years ago people in America started to default on their mortgages and the housing market went down.
So why did a large number of people default on their mortgages? After all, the american economy wasn’t in recession and the jobless figures were still quite low. The answer is of course that the banks and other mortgage lenders had given people mortgages who should not have been given them. These mortgages were then packaged up with other mortgages and sold to other institutions which allowed the mortgage lenders to offer yet more mortgages to people with bad credit ratings.
So why did the banks give out mortgages to people with bad credit ratings who simply wouldn’t be able to pay it back? Because that’s just stupid isn’t it, so why were banks so stupid?
The reason is an american law called the Community Reinvestment Act (CRA):
“The CRA forces banks to make loans in poor communities, loans that banks may otherwise reject as financially unsound. Under the CRA, banks must convince a set of bureaucracies that they are not engaging in discrimination, a charge that the act encourages any CRA-recognized community group to bring forward. Otherwise, any merger or expansion the banks attempt will likely be denied. But what counts as discrimination?
According to one enforcement agency, “discrimination exists when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants.” Note that these “arbitrary or outdated criteria” include most of the essentials of responsible lending: income level, income verification, credit history and savings history–the very factors lenders are now being criticized for ignoring.”
Given this, isn’t it a bit much that many politicians now blame the banking sector’s problems on unregulated, free markets? So when Gordon “the moron” Brown, Diane Abbot, Vince Cable or any other politician moans it means they are stupid idiots who knowingly and deliberately don’t understand the situation.
The CRA is an american invention, lets find something closer to home which the UK politicians can be blamed for.
A friend of mine rents out houses, some of these are Homes of Multiple Occupancy (HMO’s). The idiot politicians thought that the tenants in HMO’s where paying too much for bad accommodation so they made a law that HMO’s had to be licenced. To get this license costs my friend money, he therefore put up the rent by double the cost safe in the knowledge that the onerous license costs and conditions would help prevent other landlords offering rental accommodation. The law is helping him get a monopoly with regard to rental properties, the idiot interfering politicians with their £60 grand a year jobs, £180 grand a year expenses and gold plated pensions, sleep soundly at night safe in the knowledge that they can boast about helping the disadvantaged so as to get the stupid to vote for them again.
But what about the tenants? Their rent has gone up and they can’t move to anywhere cheaper as less landlords are renting out HMO’s. Tough shit.
Government regulation is not the solution, it is the problem.
I really had no idea about the point you have made in respect of the Community Reinvestment Act, this demonstrates precisely why too much government regulation kills enterprise. The current Labour administration has, if I understand it correctly, presided over some 7,000 new acts or amendments, this level of state interference has not only eroded our civil liberties, but made us one of the most controlled nations in the world. I think I now understand where they dot their ideas from, no wonder New Labour spent so much time in the States before winning their first election.