Cause and Effect: Attempt at Racial Equality Leads to Economic Meltdown

Are efforts to establish racial equality responsible for our current financial crisis?

It seems like a stretch to even attempt to link two such divergent topics, and yet, there seems to be a substantial case of cause and effect betwixt the two.

During the 1970s, there was a strong effort to increase home ownership in the United States. Especially among city populations, home ownership was rare- meaning many of these people could not afford to pay a mortgage for a house. Who were most of these house-less urbanites? They were, and still are, mostly minorities. So, naturally, the many efforts over the decades to expand home ownership for poorer city residents have affected blacks, Latinos, and other minority groups.

However, poor citizens don't own homes for an obvious reason- they are not eligible for loans (a mortgage is really just a loan to buy a house) because they have terrible credit ratings. In other words, low-income residents are financially untrustworthy, and banks usually are not willing to risk lending money to them, because they might not be able to pay it back (and, don't forget, with interest). But, since many of these poorer people are minorities- as I've already noted- community groups like ACORN (the Association of Community Organizations for Reform Now) and the NAACP (National Association for the Advancement of Colored People) cried foul: the real reason, they claimed, that these poor residents weren't allowed to get mortgages was because of racism.

And thus, a racial justice maelstrom ensued.

Congress, terrified by potential accusations of racism, raced to rectify the problem. The most recent action Congress has taken on the issue came with the mandate on mortgage companies, like Fannie Mae and Freddie Mac, to loosen their lending standards. This would provide bad-credit, low-income (and therefore probably minority) customers with loans, despite the fact they would have never qualified for them under normal, safe, lending practices. This type of mortgage is known as the now infamous subprime mortgage.

And in the short run, all was well. Since lending standards were relaxed, many more people were eligible for mortgages, leading to many more people purchasing homes, which in turn led to healthy profits for banks and higher home ownership rates across America. But it all soured fairly quickly, when, predictably, some of the people holding subprime mortgages couldn't afford to keep up with their payments. They lost their homes, and banks lost their money. This collapse in the subprime mortgage market was the match that sparked off our current financial firestorm.

So, what is my thesis? Perhaps it's a stretch, but it's totally plausible. We have a pretty clear cause and effect situation here.

Cause:

An attempt to achieve some racial equality (chiefly in home ownership) leads to banks' lending standards being forcibly slackened by the US government.

Effect:

The targets of the lending reform movement, poorer minorities, cannot pay their mortgages (which shouldn't have been a surprise). One domino knocks down the next, leading to the worst financial crisis of the century.

So then, now that we've established one of the roots of our current dilemma, what do we do about it? Well, first of all, we need real, safe solutions to poverty in this country. Secondly, we shouldn't look to the government to fix things. I've often said, and many will agree, that laissez faire economics got us into this mess, but my new thesis suggests the opposite: government interference in the market (encouraged by certain nonprofit groups and politicians) is the real culprit of our problem. More government intervention (as in, say, a $700 billion rescue plan) will hardly fix anything- and so far, it's not.

Our economy needs to start over. If only we could just turn back the clock and scream at Congress to STOP planting the seeds of financial failure. They were intending well, but, as the (paraphrased) saying goes, "the road to global economic ruin is paved with good intentions."

The options look bleak, but else are we to do, short of a trip back in time?