The irony in the U.S. government suing big banks over the housing debacle…

Isn’t it a bit ironic that the U.S. government is going to sue a few of the big banks in America when the government’s policies are part of what caused the housing disaster in the first place?  Not only did the government’s policies create the bubble, but the federal reserve’s policies also helped to continually build up and add fuel to the ensuing bubble that would inevitably burst.  What’s even worse than that and maybe reaches an even higher level of irony is that the same banks that the government is now suing are the same banks it bailed out to the tune of hundreds of billions of dollars a few years ago.  Furthermore, not only are they suing the banks they bailed out, the lawsuit they’re bringing forward is going to cost the tax payers millions of dollars and the banks they’re taking to court might even use the bailout money they received over the years to cover their legal expenses.  But what’s even worse is that this step by the “critical thinkers” doesn’t address the issue of central banking and central planning by previous and present political hacks.

Now, I’m no economist nor do I have any aspiration to ever become one, but I have a general understanding of supply and demand, and economics 101 to say that in a free market economy, banks and businesses that do not make wise business decisions and who continue to spend recklessly would without a doubt go bankrupt, and not be bailed out by tax payers.  Only in America, or a country with a central bank and corrupt politicians would such a practice take place of bailing out a few elitists at the expense of ALL tax payers in the country.

Thanks to Austrian economists like Mises, Hayek, Rothbard, Hazlitt, Woods and Murphy, understanding the business cycle of booms and busts is very logical and simple to understand when you actually take the time to think about the causes and the effects.  When the government and the central bank set the stage for a bubble, with artificial prosperity and malinvestments, the only remedy for that is a bust, followed by a market correction.  And when the market is allowed to liquidate the debt, it does so in a much more timely and efficient manner than government intervention.  We might not like the outcome, but it has to happen if we want to move on and begin to prosper again.  So rather than only blaming the banks (I have no sympathy for big, corrupt banks, mind you), we should also be furious that our government and the federal reserve perpetrated such a scheme.

Here’s to hoping that the government stays out of the housing market and allows the market to correct their mistakes.

About Andrew Shemo

I'm a liberty fighter from the outskirts of Philadelphia, PA.
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6 Responses to The irony in the U.S. government suing big banks over the housing debacle…

  1. Kevin3% says:

    Good article, Andrew.
    We can summarize by saying there are scant, if any, examples of government touching and it turning out well.

    Can you say, Social Security, Medic-aid, Medic-care, HUD, etc.?
    All dismal failures.

  2. Andrew Shemo says:

    Good examples, Kevin.

    I’d also like to add the war on drugs, the war on terrorism, the war on poverty, and etc. Government intervention produces the exact opposite outcomes of what the “program” they’re trying to do is supposed to accomplish.

  3. Shep says:

    “Not only did the government’s policies create the bubble, but the federal reserve’s policies also helped to continually build up and add fuel to the ensuing bubble that would inevitably burst.”

    — Which policies are you referring to?

    As for the bailouts of the banks and financial sector, I believe there are two ways to look at the problem. (1)- Look at the cause of the problem or (2) Looking at how to fix the effects. I believe what you are doing is looking at (1) the cause of the problem. I am no fan of the Federal Reserve’s power. It is a non-government entity that some presidents have even warned against. However, criticizing the cause of the problem– giving bankers too much power– is not going to help us (2) fix the effects. Is it not true that we +Needed+ to bailout those corrupt, irresponsible banking companies, or else the Recession would have turned into a Global Depression, after a chain reaction of bank failures ruined taxpayer’s +Far Worse+ than any bailout hurt their wallet?

  4. Andrew Shemo says:

    Shep:

    Here’s a few policies that the government has had over the years:

    President Carter:
    link-
    http://en.wikipedia.org/wiki/Community_Reinvestment_Act

    President Clinton and Bush:
    link-
    http://www.businessweek.com/the_thread/hotproperty/archives/2008/02/clintons_drive.html

    Add President Clinton to the long list of people who deserve a share of the blame for the housing bubble and bust. A recently re-exposed document shows that his administration went to ridiculous lengths to increase the national homeownership rate. It promoted paper-thin downpayments and pushed for ways to get lenders to give mortgage loans to first-time buyers with shaky financing and incomes. It’s clear now that the erosion of lending standards pushed prices up by increasing demand, and later led to waves of defaults by people who never should have bought a home in the first place.

    President Bush continued the practices because they dovetailed with his Ownership Society goals, and of course Congress was strongly behind the push. But Clinton and his administration must shoulder some of the blame.

    Couple that with the fact that the federal reserve (central bank) has had artificially low interest rates (less than 1%) for many years which allows banks to borrow money for next to nothing so they’re more inclined to lend it out faster, and with less restrictions to continue to make profits as quickly as possible.

    Allowing someone to obtain a home mortgage when you know that they cannot afford it is not only a foolish business practice but it’s highly immoral. So not only did people who could not afford a house in the first place get a loan, but when the bubble popped (and they always do), they were burdened with even more debt than before buying the house and are forced to either sell their house or they’ll get foreclosed on. Unfortunately since our government bails out businesses that lend in such a manner, we’ll continually see this problem.

    And no, I do not think we should of bailed out the corrupt banking companies. Bailing out the losers doesn’t teach them a lesson. And look who is still sitting fat and pretty – it certainly ain’t the middle class, that’s for sure. Remember, I’m an anarcho-capitalist, and we advocate for a pure free market. As such, businesses would go bankrupt if they’re not turning over a profit.

    here’s also a good read:
    http://paul.house.gov/index.php?option=com_content&task=view&id=258&Itemid=60

  5. Shep says:

    You gave me some awesome links to inform me how we got into this crisis. I appreciate those.

    The article said “It’s clear now that the erosion of lending standards pushed prices up by increasing demand.”
    This practice is what lead to the Crash of 1929 Great Depression. Prior to the crash “Coolidge Prosperity” was an artificial industrial boom because it was based largely on the fact that since credit was available for the first time, people paid only 10% down on a luxury car and paid the rest in installments, or paid for a house using mortgage payments rather than all at once.

    Playing the stock market became popular, and followed the same artificial sense of ownership as cars and homes that were bought only on credit and a certain amount of money down. That stock market immorality is what lead to the crash because people bought stocks totaling $10,000, so they paid $1,000 and owed $9,000. But as more people invested in those stocks, its overall worth would increase, so if they chose to cash out and sell all the stocks in their portfolio, they would have more than enough to pay what they owed. Thus everyone kept buying and buying and so stocks kept rising and rising.

    However is it really a matter of letting those who could not afford a house in the first place get a loan? It seems we will never learn our lesson about boom and bust if we keep up the practice of lending to “first-time buyers with shaky financing and incomes.” Still, if it were not for college loans, I would be screwed, so that is a racket I think is worth keeping around (though it could of course use reform!). However if my credit history was shaky would it then be immoral for me to take out a loan? It would be a little, I think! But this whole attitude of buying luxury things on credit (not education, which I think is a good investment) that began in the early 1900s is really a bulk of the blame.

    …though I really do feel sympathy for people who want a house and mortgage since at the present moment, they cannot afford it. It’s not as important as an education, true, but at least it’s not really a “luxury” item, it’s really an understandable American dream for many families and individuals…though I suppose times change and the idea of “American dream” has to change with it, so that many people will see the American Townhouse as the new ideal…

    However it is a scary thought for me to picture a world in which the banks were not bailed out. What do you think the scenario would have looked like?

  6. since the inception of our federal government every economic depression beginning with the very first recorded in 1835 has been caused by either corporate swindles and scams, or political stupidity and improprieties due to the over pricing of stocks, or property.

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