December 27, 2007
The Original Subprime Crisis
WHILE critics of today’s mortgage crisis call for government intervention to suppress subprime lending, few are aware that government intervention created subprime mortgages in the first place.
The National Housing Act of 1968, part of President Lyndon Johnson’s Great Society, provided government-subsidized loans to expand home ownership for poor Americans. Liberal policymakers hoped that these loans, called Section 235 loans, would enable poor Americans — urban blacks in particular — to buy their own homes.
So it was that Henry Paulson came up with an idea… the ‘teaser freezer‘ plan. The ARM teaser freezer is being sold to the public as a way to protect homeowners. But it has another purpose, says a reporter from the San Francisco Gate, to help save the banks from their own bad judgment.
I like the word decadent. All shimmering with purple and gold. It throws out the brilliance of flames and the gleam of precious stones. It is made up of carnal spirit and unhappy flesh and of all the violent splendors of the Lower Empire: it conjures up the paint of courtesans, the sports of the circus, the breath of the tamers of animals, the bounding of wild beasts, the collapse among the flames of races exhausted by the power of feeling, to the invading sound of enemy trumpets. —Paul Verlaine, circa 1886
Private companies that lend their own money are generally very careful with their loan underwriting, and they know how to collect the money they lend. Most reputable finance companies use simple accounting procedures and have adequate loan reserves, and conservative financial leverage. These firms generally understand derivatives and don’t rely on them to manufacture profits. They’re not sharks.
