For those of you who may not have heard of predatory lenders until now, I can tell you that they’re particularly shady individuals, usually recognizable by their professional attire and reams of paperwork under their arms. They are often found in office complexes during regular business hours, but the real threat comes when they prowl the city streets searching for unsuspecting victims. When they find their target (known as “borrowers”), they leap out, shove the helpless person into the back of a blacked-out conversion van, and then force them to accept low-interest loans! It’s a crime that may go unreported for months or even years, only after the victim of this crime finally realizes he can no longer make the payments he agreed to under obvious duress. But the truly sad part of the whole ordeal is that some victims don’t even know they’ve been victimized! They delude themselves into believing that nothing is wrong, paying their mortgages month after month according to the heinous terms imposed upon them against their will, and they never even consider turning to the government for the help they so desperately need!
I feel very strongly about this issue because, you see, I was almost the victim of a predatory lender myself. A few years ago, having just moved to Texas, I was walking around my apartment complex, minding my own business, when all of a sudden a man in a suit and tie came out of nowhere and pushed me into his Ford Taurus. He then drove me to a well-furnished office where he served me coffee and tried to force me to take out an interest-only loan, adjustable after three years to prime plus SEVEN PERCENT! Fortunately, I’ve had some martial arts training and was able to fight back, managing to escape his hellish corner office with only minor injuries and a thirty-year fixed mortgage at 5.75%. I was lucky, but millions of other people in this country have not been so fortunate, and that is why I’m speaking out today. Someone has to fight for those who cannot fight for themselves!
So please take some time to discuss this problem with your friends and loved ones. Be aware of your surroundings at all times, and keep your eyes open for suspicious looking individuals who attempt to lend you money. If we can save just one person from the predatory lenders who plague our nation, it will all be worth it.
I wish the farcical tale I just described was simply a bad April Fool’s Day joke, but apparently this is what we’re supposed to believe is the cause of the current subprime mortgage crisis. John McCain summed up the problem in his recent speech to the Hispanic Small Business Council in Orange County, California,
“A bubble occurs when prices are driven up too quickly, speculators move
into markets, and these players begin to suspend the normal rules of risk and
assume that prices can only move up – but never down. We’ve seen this kind of bubble before – in the late 1990s, we had the technology bubble, when money poured into technology stocks and people assumed that those stock values would rise indefinitely. Between 2001 and 2006, housing prices rose by nearly 15 percent every year. The normal market forces of people buying and selling their homes were overwhelmed by rampant speculation. Our system of market checks and balances did not correct this until the bubble burst.
A sustained period of rising home prices made many home lenders complacent, giving them a false sense of security and causing them to lower their lending standards. They stopped asking basic questions of their borrowers like, ‘Can you afford this home? Can you put a reasonable amount of money down?’ Lenders ended up violating the basic rule of banking: don’t lend people money who can’t pay it back.”
Well, at least he avoided using the term “economic royalists.” Nevertheless, his explanation betrays a profound misunderstanding of the problem, and a deep mistrust of capitalism. This seems to be a recurring theme with Senator McCain, and one that should trouble anyone who still believes that Republicans are staunch defenders of the free market.
Not that there are too many people in the public sphere who are doing any better at grappling with this problem. The media’s analysis of Secretary Paulson’s recommendation to greatly expand the scope of the Fed’s powers is limited to the question of whether the new regulations will “go far enough.” Secretary Paulson and Fed Chairman Bernanke are busy doing everything in their power to convince us that these bubbles just happen, like the weather, with no discernable cause.
I heard an analogy (from Stefan Molyneux, I believe) that sums up the confusion pretty well. If you see a single fish floating belly-up in the water, you probably won’t give it much thought. But if you see all the fish go belly-up in a lake, you instantly think that there must be something in the water. Even though individual fish die every day, fish as a species are pretty good at surviving, so we immediately look for an environmental explanation when the entire group suddenly dies.
Yet for some reason no one in the media or the government can apply this simple principle to the realm of economics. No one wants to ask the fundamental question, “Why?” Why would millions of mortgage lenders and borrowers across the country all get stupid in unison? And why would that stupidity be limited to the geographic boundaries of the United States? Sure, from time to time individuals make poor decisions, and even major corporations sometimes make bad choices and go bankrupt. But generally speaking, people are pretty good at forecasting and managing their businesses – it’s kind of what they do for eight to ten hours a day, after all. But when entire schools of mortgage lenders and financial institutions go belly-up at the same time, no one looks for the obvious answer – that there must be something in the water.
That something is the inflationary policy of the Fed, which has been increasing the money supply ever since its inception in 1913. When the money supply increases at a vastly greater rate than productivity, as it has over the past several decades, the newly created money has to find a home somewhere. Most recently it landed in the real estate sector. The real estate bubble was not driven primarily by solid fundamentals in the sector, but rather by artificially low interest rates. Those interest rates were determined not by natural market forces, but by the Fed’s manipulation of the overnight rate and the money supply. When interest rates are pushed below their natural levels, they make investment projects look more favorable than they really are. Money flows into these malinvestments, and bubbles are created. But once reality reasserts itself, as it must, the bubble pops and people lose money and property.
And then what happens? Do we get people screaming at the politicians to stop their manipulation of the market? No. We just hear endless demands for more regulation and government interference of the kind that caused the problem in the first place. The media sit on the sidelines and cheer the “Nordic-style nationalization” of the financial markets, which they hail as the most sweeping regulatory changes since the Great Depression. Talk about damning with faint praise! As Jim Powell and others have shown, the Great Depression would have been nothing but a brief slump had FDR not used the stock market crash as an excuse to remake the US economy in Mussolini’s image.
The politicians, of course, are more than happy to use the hysteria generated by the crisis their own policies caused as an excuse to expand their power further, and to obliterate any traces of economic freedom that may still remain in this country.
How many more Fed-induced crises will we have to endure before we recognize that the real problem lies in centrally-planned manipulation of interest rates and the money supply? How many more industries will have to go belly-up, and how much wealth and productivity will be destroyed in the process? How long before we stop pouring more poison in the water?
