Liberal housing policy chickens coming home to roost

Let's get one thing straight. The government and its misguided housing policies caused our current financial mess. And, as a result, the government should help fix it.

That said, exactly "what" should have been fixed, "how" and for "how much" are the right places to focus our attention. But that doesn't mean we shouldn't make sure everyone knows exactly how we got in this mess.

The origins lie in the Clinton Administration's misguided attempt to raise the percentage of homeowners in America by forcing banks to give loans to people with, shall we say, less than stellar credit, (those "sub-prime" mortgages you keep hearing about).

So how did they do this? With two government (read: taxpayer) sponsored companies called Fannie Mae and Freddie Mac. As the Clinton Administration leaned on banks to loosen credit restrictions, (even having Janet Reno threaten lawsuits), Congress forced Fannie and Freddie to buy the sketchy loans as soon as the banks and mortgage companies wrote the loans. So the lenders made the loans (hey, why turn down a commission?), and everyone made bonus at the end of the year.

So what went wrong? More bad loans meant more houses being built, which meant more houses being sold and inflating property values - including those houses owned by people with shoddy credit.

All fine and dandy until economic nature takes its course and the people who ordinarily shouldn't have gotten loans did what most people who shouldn't get loans tend to do, failed to pay. Suddenly, the system is partially resting on a foundation of "bad paper", (now there's a euphemism) - so as soon as the housing market cooled down (hey, they can't loan everybody money!) and property values started to decline, no one really knew (or knows) what all that "bad paper" representing all those sub-prime mortgages on over-inflated property was really worth.

As a result, banks began to tighten up on their credit in order to maintain their cash reserves, so they've got your money if you show up to close your account. Not good in an economy that has come to be built on credit.

It's an easy money phenomenon that's spread all through our economy for over a decade. The 1980's, (which the media loved to refer to as "the decade of greed", simply because the economy was good and Ronald Reagan was President), have nothing on the recent years of "bad credit, no credit, no problem". (Remember those 110% mortgages and stated income loans?).

So where should we go from here? First, we shouldn't abandon our principles and pass the most expensive bill in history without hearings and, in effect, nationalize failure. Seems to me that forgetting our principles, (remember thrift?), got us into this mess in the first place. Instead, we really needed a solution that focuses on free-market principles and reforms the policies and agencies, such as Fannie and Freddie, that caused the problem to begin with.

Just one month from Election Day, it's difficult to imagine that a more high-profile and defining moment will present itself between now and November 4^th. And the public, especially the half that actually pays taxes, were overwhelmingly against this bailout.

In fact, one thing that was under-reported in all the hand-wringing surrounding the House's initial rejection of the bailout was that the American public got exactly what they wanted. So, on the rare occasion that government works the way it's supposed to, the media and the markets get upset. Go figure.

This provided a great political opportunity for Republicans.

They should have stood shoulder to shoulder along with John McCain and announced their own counter-proposal. One that relied on more free-market style solutions, such as insurance, tax credits, regulatory changes and bridge loans - not a bailout. This was a big missed opportunity.

How insane is it to dole out hundreds of billions of dollars in a bailout and leave the cause of the problem in place - not to mention waste the momentum that can be used to force reform? As soon as the check clears, there will be zero will among Democrats to do any real reform.

The point of all this is that the chickens, as Obama's pastor would say, are coming home to roost. In this case, liberal housing policy chickens.