Bankrupt “exploiters”

Thomas Sowell's picture

In one of those front-page editorials disguised as “news” stories, the New York Times blames “the lucrative lending practices” of banks and other financial institutions for helping create the current financial crisis of millions of borrowers and of the financial system in general.

It must take either a willful determination to believe whatever they want to believe or a cynical desire to propagandize their readers for the New York Times to call “lucrative” the lending practices that have caused many lenders to lose millions of dollars, some to lose billions and some to go bankrupt themselves.

Blaming the lenders is the party line of Congressional Democrats as well. What we need is more government regulation of lenders, they say, to protect the innocent borrowers from “predatory” lending practices.

Before going further down that road, it may be useful to look back at what got us into this mess in the first place.

It was not that many years ago when there was moral outrage ringing throughout the media because lenders were reluctant to lend in certain neighborhoods and because banks did not approve mortgage loan applications from blacks as often as they approved mortgage loan applications from whites.

All this was an opening salvo in a campaign to get Congress to pass laws forcing lenders to lend to people they would not otherwise lend to and in places where they would not otherwise put their money.

The practice of not lending in some neighborhoods was demonized as “redlining” and the fact that minority applicants were approved for mortgages only 72 percent of the time, while whites were approved 89 percent, was called “overwhelming” evidence of discrimination by the Washington Post.

Some people are more easily overwhelmed than others, especially when they find statistics that seem to fit their preconceptions. But if we do what politicians and the media seldom bother to do — stop and think — an entirely different picture emerges.

In our own personal lives, common sense leads us to avoid some neighborhoods. If you want to call that “redlining,” so be it. But places where it is dangerous to go are often also places where it is dangerous to send your money.

As for racial differences in mortgage loan application approval rates, that does not tell you much if you are comparing apples and oranges. Income, credit history and net worth are just some of the things that are very different from one group to another.

More important, in the same ways that blacks differ from whites, whites differ from Asian-Americans. The fact that whites are turned down for conventional mortgage loans, and resort to subprime loans, more often than Asian-Americans do is seldom reported in “news” stories about lending practices, even though such data are readily available.

Shocking as it may be to some, lenders are in the business of making money, and they don’t much care whose money it is, so long as they get paid.

Politicians, on the other hand, are in the business of getting votes, and they don’t much care whose votes it is — or what they have to say or do in order to get those votes.

It was government intervention in the financial markets, which is now supposed to save the situation, that created the problem in the first place.

Laws and regulations pressured lending institutions to lend to people that they were not lending to, given the economic realities. The Community Reinvestment Act forced them to lend in places where they did not want to send their money, and where neither they nor the politicians wanted to walk.

Now that this whole situation has blown up in everybody’s face, the government intervention that brought on this disaster in is supposed to save the day.

Politics is largely the process of taking credit and putting the blame on others — regardless of what the facts may be. Politicians get away with this to the extent that we gullibly accept their words and look to them as political messiahs.


login to post comments | Thomas Sowell's blog

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Submitted by PTC Avenger on Thu, 07/24/2008 - 9:41pm.

Most people don't realize just how much of a HUGE mess we're in. The blame does lie with the lenders, as just about anyone could get a loan for a house they couldn't afford (Google Angelo Mozilo). It also lies with the National Assoc. of Realtors, who'd upsell people into more expensive homes with the promise that its value would continue to appreciate forever. It also lies with gamblers/spectators who viewed homes as lottery tickets instead of places to live. It lies with the American people who were so enamored with material goods all bought with "bubble credit." It lies with MTV poisoning people into thinking that if they don't live in a huge mansion and drive swanky cars they are failures. There are many parties at fault in this equation, and Mr. Sowell is wrong to assert that the lenders are not one of the responsible parties.

When this debacle first came to light the economic loyalists said it would be contained to sub-prime. Boy, were they wrong. Wait until Alt-A mortages take the hits.

Things are very bad and they are going to get even worse. Bear Stearns went under. Taxpayer funded bailout of people who made bad financial decisions is soon to be signed. Taxpayer funded bailout of Freddie and Fannie soon to be signed (essentially giving the Fed a blank check). IndyMac went under. People lined up around the block to get their cash. Red ink across the board (look at Wachovia's recent announcements). Inflation's rearing its ugly head. The dollar's in the toilet and it's about to be flushed. All this, and two weeks ago I heard more "Hey, did you hear that the new iPhone has problems?" than I heard "Hey, did you hear that we just had the second biggest bank collapse in US history?" AMERICA IS IN DENIAL.

We're still a long, long way from bottom.

AF A-10's picture
Submitted by AF A-10 on Fri, 07/25/2008 - 8:21am.

"There are many parties at fault in this equation, and Mr. Sowell is wrong to assert that the lenders are not one of the responsible parties."

Much like politics, the blame can and should be spread around "liberally."

Kevin "Hack" King

JAFO 72's picture
Submitted by JAFO 72 on Fri, 07/25/2008 - 8:38am.

It does take personal responsibility and accountability on the part of the borrower.

The lenders on the other hand, such as WaMu, have been extremely unscrupulous by raising interest rates well above 30% without telling their borrowers in advance of a rate hike.
My wife and I had a credit card with them up until last month. Out of the blue, they decided to decrease our available credit limit to below our available balance. This increased our percentage rate from 7.5% to 33%!!! And, since we were now "over our limit" they hit us with an additional $45 dollar charge. Needless to say, we have subsequently paid off and closed that account. I have also written the BBB on this matter.

That is the kind of creditor regulation, or policing, that I can get behind.

“Every time you vote Democrat God kills a kitten.”

NUK_1's picture
Submitted by NUK_1 on Fri, 07/25/2008 - 5:52am.

There is a lot of blame to go around and what is happening right now is just the beginning. With so many financial institutions heavily invested and in debt to each other, derivatives, bundling of the same type of awfule loans, etc. even big moves by the Feds aren't going to stem the shockwaves for very long. Bailing out private, shareholder-owned companies like Freddie and Fannie also raises a whole set of questions and concerns, especially in the area of "moral hazard" whereby banks aren't afraid to take the ridiculous risks they did because they know the taxpayers will cover the losses.

While Sowell has a point, it's far from telling the whole story. The Alt-A "liar's loan" market isn't a government creation and no legislation enacted years ago ever encouraged lenders to be completely irresponsible and stupid enough to give large loans to people with no verifiable income. NONE. And those loans are going to start crumbling in the next wave.

I expect a second stimulus package gets attention because Americans are already to the max in debt so the economy overall can't be improved by big spending by consumers, the usual "cure" for glum economic times in America. Get those citizens to spend more money! They don't have it to spend anymore. All the 2K+ big screen TV's, Hummers,$400 cell phones, etc. have been purchased and Americans are trying to figure out how to pay for them now that conditions like $4/gal gas have emerged and credit is getting finally tighter. A stimulus package sounds real nice, but it sort of is another bailout and doesn't address the fundamental problems of way too much debt of the government and the citizens.

Our country has been fueled by debt for quite a while, but the bills are coming due now. It ain't pretty.

Submitted by Bonkers on Thu, 07/24/2008 - 5:27pm.

Sowell is crazy.

Take the time to read his long article above.
He blames the law about who got home loans before a certain law, and who got them after!

Loans were made by shysters to people who had no job and no promise of one!

Any thing written on a loan application was taken as fact such as earnings, etc., without ANY checking---totally against banking rules!

Very, extremely low interest rates were quoted (variable) with the promise that they could go up soon but probably wouldn't, and if they did it would only be 2-3 points.

No down payment was required. No closing costs were required. No home insurance was required. No tax deductions were required.
When the tax and insurance bills came due (up to 5-6 thousand dollars each year, they sometimes took advantage of them again with another loan!

Let me tell you something: if you make $20-30 thousand a year and someone offers to give you a house for nothing with payments low--at least for now---you take it!

Also, some of the elite bought $4-500,000 plus homes the same way
with 3-4,000 dollar monthly payments and huge tax and insurance payments at year end.

These same rascals even loaned them second mortgage loans on balooned value appraisals by bought off appraisers!

It goes on and on!

The guy is making money in conservative newspapers is all I can say!

Submitted by Spyglass on Thu, 07/24/2008 - 9:04pm.

Only about half of what you right is even close to the truth.

Main Stream's picture
Submitted by Main Stream on Thu, 07/24/2008 - 10:47pm.

Bonkers makes much more sense, in this case, than Sowell does.

I ran into this almost on a monthly basis as an agent during the decline of the subprime lending wave. I remember one client in particular who had 2 bankruptcies in her past and I was almost certain she would NOT be able to qualify for a loan. But lo and behold, some subprime lender approved her, at a 10% interest rate of course, because she was a "high risk" buyer. I urged my client to shop around for a lower interest rate or even wait a year or two, pull her credit score back up, and then try to purchase a home.

She didn't listen to my advice, purchased the home and is close to defaulting now. This particular subprime lender is out of business because they made too many risky loans to risky buyers. These jackals would approve anyone with a heartbeat and there definitely needs to be more regulation to prevent this from happening.

I'm all for the free market, however, the free market can be full of crooks and if there isn't adequate oversight in a particular industry, then this is what will happen.

JAFO 72's picture
Submitted by JAFO 72 on Fri, 07/25/2008 - 8:16am.

Is it the lenders that need to be regulated? Yes, but the other half of the problem are the morons that can't control their "gotta have it now" spending. Two bk's and now in default? That is...well... a moron.

My wife was a loan officer for a while, and I would hear about this constantly. People with 500 credit scores would try to buy a $400,000 home, with $0 down, and on $40K a year income. If the loan didn't go through, the lender would be accused of discrimination.

I guess stupid is as stupid does.

“Every time you vote Democrat God kills a kitten.”

AF A-10's picture
Submitted by AF A-10 on Fri, 07/25/2008 - 8:25am.

I agree whole-heartedly with this:

"Is it the lenders that need to be regulated? Yes, but the other half of the problem are the morons that can't control their "gotta have it now" spending."

Every time I see a brand new enlisted troop with a new car, rims, and a stereo, or a minimum wage earner all rimmed up on Dubs, I wonder what in the world are they thinking? I've seen so many people start there careers saddled in debt, and years later they wonder why they can't get ahead? Well, the answer may be parked in front of your apartment or barracks.

Kevin "Hack" King

JAFO 72's picture
Submitted by JAFO 72 on Fri, 07/25/2008 - 8:45am.

We finally agree on something. It looks like it is going to be a great day.

“Every time you vote Democrat God kills a kitten.”

Submitted by Bonkers on Fri, 07/25/2008 - 7:01am.

There are tens of thousands of real estate agent, brokers, etc., out there who participated in this fiasco.
They were all assured that what they were doing was morally correct, thereby getting the top brokers very wealthy, along with the lending stockholders until the bubble burst.
Another form of Ponzi scheme.

Washington DC with their 8 trillion debt to the Orient mostly, is another Ponzi which will ultimately burst!

This stuff is what happens when people want to make a living and there are no decent jobs except Ponzi!

Submitted by Bonkers on Fri, 07/25/2008 - 6:42am.

Mind telling me how we can have a "free" market and at the same time adequate oversight?

Main Stream's picture
Submitted by Main Stream on Fri, 07/25/2008 - 12:37pm.

"Mind telling me how we can have a "free" market and at the same time adequate oversight?"

here's a few examples:


Submitted by Bonkers on Fri, 07/25/2008 - 2:03pm.

Yes. So we do not have a free market do we?

It is just something to say when NEW interference comes along!

mudcat's picture
Submitted by mudcat on Thu, 07/24/2008 - 6:32pm.

He is correct on every point - especially about the root of the problem which was our federal government overreacting to the redlining practices because they were considered rascist.

The easy credit and easy loan program was abused by all. No question about it. Now, hard question. Who allowed it? And who caused it? Any answers out there? Get back to me. I'll respond.

The next wave of foreclosures will be in Kedron Hills and Tyrone. The $600k houses will be sold for $499k and the value of the other houses in the same area will be reduced by a minimum of $50k. If you don't want to lose that much money, stay in your house, maintain it and for God's sake - do not, do not, do not take out a home equity loan to buy a Hummer (car or other). Then you may be ok in 5 years. Please don't add to the problem.

Am I right or what?

Submitted by The Shadow on Fri, 07/25/2008 - 9:01pm.

There is a lot of truth in all the blogs about mortgages, foreclosures, appraisers, lenders, legislation, redlining and the stupidity of people. But all this is just the symptoms and results of poor government.

It all started in 1964 with Lyndon Johnson and his “great society” spending programs. Except for wars or the 1930’s depression, The U.S. had always operated on a “pay as you go basis” without accumulating debt. Prices were stable, reacting mainly to supply and demand. Then Pres. Johnson and his Democrats decided we could have both guns for Vietnam and butter for the hungry, and pay for it by borrowing the costs over and above revenues. The result was a $44.8 Billion Dollar deficit by 1968, causing a sharp rise in prices due to too much manufactured money chasing too few goods and social programs of Welfare, Medicare, Medicaid, Aid to dependent children; the so called “war on poverty”.

Pres. Nixon inherited the deficit spending programs with all the automatic cost of living increases which increased the deficit by $67 Billion and caused the recession of 1973. Not to forget his disastrous price controls which caused shortages and increased prices, and Nixon was forced to remove us from gold backing standard.

Poor old dumb Gerald Ford decided to fight inflation with win buttons (whip inflation now) and with no gold backing the dollar, the Congress could now spend unlimited amounts. In just two years over-spending revenues amounted to $127 Billion. One term, “I aint got a clue”, Jimmy Carter’s administration provided Ronald Reagan with a total federal debt of $909 Billion.

Determined to stop the insane government spending which had by now infected all State and Local governments including individuals, Reagan set up the Grace Commission in 1982 to study cost control. Chaired by Peter Grace of Grace and Co. its members included CEO’s of private successful companies such as Johnson & Johnson, Motorola, Merck, Coca Cola, Rawlings & others. The Commission studied waste management and the results of over-spending historically world-wide.

In 1984 their report included 2,478 cost saving recommendations such as eliminating paying $436 for a simple hardware store hammer and adopting one accounting system instead of 332 systems then being used, resulting in $1.9 Trillion in savings by the year 2000.

The Pres & Congress thanked the Commission, then shelved the report, racking up another $1.34 Trillion in deficits by the end of Reagan’s term. George Bush Sr. then followed with another $1.04 Trillion. Bubba, Bush Jr. and the fools in Congress continued to spend America into oblivion, with a total debt now standing at $10.6 Trillion with the new Fannie/Freddie bail out.

Along the way there has been much debt speak and budget chicanery in Congress. With pork-barreling, incompetent greedy pigs in Congress, democracy and the monetary system is on its last leg. So proudly we’ve hailed at this dawn’s early light to find we have let our electors spend us out of sight. In a short few years the interest on the debt will exceed total government revenues. All that everyone is blogging about are preludes to death by debt. First hyper inflation, then the greatest depression in the history of the world as predicted by the Grace of Commission’s historical evidence.

At the time Johnson and his Congress started us on the road to destruction, the average new home price was $26,000, a hamburger cost .20 cents, a movie .50c, gas .30c a gallon, a weeks groceries $25 and a new ford $1800.

Submitted by MYTMITE on Fri, 07/25/2008 - 9:25pm.

It was unheard of to buy something on time. You made do until you could save up to buy that new refrigerator, stove, house, etc. The first house we bought in 1955 cost $7,500.00. It was a three bedroom, one bath and it worked fine for my family of six. Previous to that when my twins were born (we were a military family then) we bought a wringer type washing machine for $5. We lived in military housing, I would pull the washing machine up to the sink and attach the hose -put a wash tub on a chair, wash clothes for six people, put them through the ringer into the tub, rinse them by hand and put them back through the wringer then hang the clothes on the line. Before that I washed many a pair of navy whites (the old type) in the bathtub, using a special scrub brush. Can't you see a housewife doing that today! Houses are bought on time, no hand me down furniture or appliances for this generation. Everything has to be new and the best. Mommy, daddy and baby living in a house big enough to house three football teams. Both driving big SUVs or one SUV and expensive second car. Birthday parties for two year olds costing almost as much as a fancy wedding--pony rides, clowns, choo choo trains--each one more extravagant than the previous one. Dressing babies in forty and fifty dollars outfits-the list goes on and on. The thinking and expectatiions have to change or this will never again be the nation it once was.

JAFO 72's picture
Submitted by JAFO 72 on Fri, 07/25/2008 - 8:49am.

I was going to take out a third, fourth, fifth mortgage to buy a $500 car with $5,000 rims. I just want to "stimulate" the economy.

“Every time you vote Democrat God kills a kitten.”

AF A-10's picture
Submitted by AF A-10 on Fri, 07/25/2008 - 8:27am.

"Do not, do not, do not take out a home equity loan to buy a Hummer (car or other). "

Now THAT is funny stuff right there! Thanks!!!


Kevin "Hack" King

Submitted by Bonkers on Thu, 07/24/2008 - 6:55pm.

All you said was that Sowell was right!

Banks may try to blame the government for making such unprofessional loans (they did not have to) but they will be bailed out by taxpayers anyway. Are you for that Socialist action?

I see nothing else to be worth my arguing with you.

Cyclist's picture
Submitted by Cyclist on Thu, 07/24/2008 - 6:47pm.

Did you hear about the Clayton County family that had the "Extreme Home Make Over" TV show build them a new house? Well, that house is now going to foreclosure. The interesting thing is that the the builder paid off the mortgage and gave them $100,000. So, 15 months ago the family (losers) took out a $450,000 mortgage on the house.

Here's the story
Caution - The Surgeon General has determined that constant blogging is an addiction that can cause a sedentary life style.

Submitted by Spyglass on Thu, 07/24/2008 - 9:03pm.

NO WAY it could have been worth someone putting a 450,000 2nd mortgage on it. The area won't come close to justifying it. Had to be lots of people in on the gig.

Most anything can happen, as you can get SOME appraisers to give you most anything you need in regards to value. Smiling

mudcat's picture
Submitted by mudcat on Thu, 07/24/2008 - 7:00pm.

But I am sure not surprised.

"Give a man a fish and eats for a day. Teach a man to fish and he eats for a lifetime"

"Expect the worst from humanity and you will not be disappointed, but may occasionally be surprised"

Both quotations are relevant to this situation - guess the authors.

See how much nicer I am tonight? I am trying very hard. Speaking of hard, I need to go now.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.