Wednesday, August 8, 2007

Sub-Prime Politics

Thomas Sowell says the sub-prime problem is the direct result of two popular political decisions : restrictions on building that resulted in rapidly rising home prices, and pressure to loan money to people who otherwise would not qualify. He writes:

"Attractive and heady phrases like “open space,” “smart growth,” and the like have accompanied land use restrictions that made the cost of land rise in many places to the point where it greatly exceeded the cost of the homes built on the land...

Politicians have also been a key factor behind pushing lenders to lend to borrowers with lower prospects of being able to repay their loans.

The Community Reinvestment Act lets politicians pressure lenders to lend to people they might not lend to otherwise — and the same politicians are quick to cry “exploitation” when the interest charged to high-risk borrowers reflects that risk."

The usual result of a political attempt to engineer a specific economic result is a new economic problem. The bigger the attempt, the bigger the problem.

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