This CF&P Foundation’s Economics 101 video discusses the Moral Hazard, which occurs when bad choices are subsidized. This often happens when government intervention lets people take risks while having little or no skin in the game. Housing policies, for instance, subsidized mortgages, thus enabling irresponsible borrowing and leading to bubbles and bailouts. Politicians may be setting the stage for the next crisis with a too big to fail policy that will subsidize the biggest financial institutions. www.freedomandprosperity.org
Economics 101: Moral Hazard
Posted by admin on April 24th, 2010
Posted in 
Tags: 
Great lesson.
Michael S. Barr, a Treasury Department official under President Clinton has admitted that about 50% of the sub prime mortgage loans came from banks at least partly regulated by the CRA and “former Fannie Mae CEO Franklin Raines said (CRA) might have been a catalyst encouraging bad behavior”.
Also, CRA was only PART of the problem. The biggest Moral Hazard was Fanni and Freddie buy risky mortgages from private banks. That was asking for trouble.
“6% were created under the CRA mandate”
That 6% figure comes from only a CERTAIN KIND of loan. A so called “higher price loan” That obviously doesn’t mean that 94% of the toxic loans had nothing to do with the CRA. You have to be more careful with your reading, government officials can be tricky like that.
“The Community Reinvestment Act attempted to increase home ownership among the poor. No, it did not force banks to lend to people”
Actually it did. In 1995 regulators of the CRA strengthened it. “Banks now had to show that they had actually made a requisite number of loans to low- and moderate-income (LMI) borrowers”
Fannie and Freddie were a HUGE in making the LMI loans “By 2007, Fannie and Freddie were required to show that 55 percent of their mortgage purchases were LMI loans”
I sincerely doubt that the makers of this video took the time to look at relavent data. If they had, they would see that of all loans that were part of mortgage backed securities that became toxic, 6% were created under the CRA mandate. I welcome anyone to make a case that 94% of loans that had nothing to do with CRA didn’t contribute to the crisis.
That is poor account of the financial crisis. The Community Reinvestment Act attempted to increase home ownership among the poor. No, it did not force banks to lend to people who couldn’t pay it back.
I’m not going to sell you my PS3
What I’m saying though is the tool that is used to barter with (Dollars) are being destroyed in value by the government and central banks through the process of inflation and increasing money supply without an increase in goods produced. i.e. More dollars are chasing the same amount of goods, that causes prices of those goods to increase. Very simple concept to understand.
One mans trash is another mans treasure!
Capitalism started with the first time ever man traded with another man an item for another item. You sound like you don’t understand what free market capitalism is. It is the process of the bartering for other’s good and/or services for resources that you acquire and the other person wants. i.e. If I have a Playstation 3 I want to sell you, we come to a mutual understand of what that item is worth and trade equal value for it. Money is just the tool used for bartering.
Certain workers are too valuable to a company (i.e. a CEO) to lose and there loss would hurt the company financially if higher ups were lost. Companies do not insure peon workers, they can be easily replaced. Moore is a moron because America hasn’t had free market capitalism in the last 100 years. What we are witnessing as a failure is social (more specifically fascism), cronie capitalism, and corporatism.
Michael Moore also brought these problems up in ‘Capitalism: A Love Story’. For example companies taking out life insurance policies on their workers. In short, you die, they collect!
she’s hot
The legislation for all this came LONG before Obama’s presidency. Additionally, the real culprits were not those seeking homes or the banks who bought the paper, it was the ‘middle men” who brought the bad paper TO the banks, often hiding dozens of ‘bad buyers’ in with 1000s of ‘good buyers.’ Race & gender had NOTHING to do with how it all came tumbling down! The laws that she speaks of? BUSH & COMPANY! Read the dates. WE are ALL responsible. We, the PEOPLE.
You cant get any clearer than that. wake up folks.
no ur saying blacks are idiots
why else would they vote for democrats
excellent video, ty
Blacks and other minorities are no less intelligent, have no less mental capacity to understand their own role and culpability as adults to work hard and save patiently in order to OWN a home. For you, Barack Obama, or Barney Frank to talk of their “victimization” is a roundabout way of saying they are inferior to the majority of Americans in their mental capacity. The left continues to infantilize them, and I can’t help but think this is the result of racism. The victims were the tax-payers.
Barney Frank, Barack Obama, and Fannie Mae/Freddie Mac capitalized on grown adults unwillingness to accept their roles as adults who should, by their age, be taking responsibility for their own financial decisions. All of us tax-payers are expected, by these legislators, to take responsibility for our earning and tending of our own money when tax season rolls around. They (pretty much by themselves) explode with outrage at the “despicable crime” of not paying our taxes, and haul us off to jail.
No. Barack Obama threatened and bullied banks into making loans for blacks and minorities, or else they’d sue. He barged crowds of people into some banks and threatened them. I don’t consider any adult who tkaes out a loan they can’t repay a “victim”- if they’re competent enough to vote in a president, they’re competent enough to evaluate the gravity of their ability to bear a home loan. These are goddamn adults. I do not agree that they’re victims. People need to grow up and quit blaming banks.
You are RIGHT ON THE MARK!
Had the “quasi- government” entities (whatever that means) not backed these loans the rates might of been higher and the hurdle to close the loan higher as well – we would all be in less trouble.
WATCH my video, go to my website, and search for awesome stuff!!!!!
if there is no regulation the system will be anarchy, i think it’s a feel-good reaction to poverty and loss of capital but it is a self indulgent position and will not improve your country.
i think the movement towards libertarianism and “every man for himself” is the opposite of the kind of democracy usa should be
i guess my point is she does not understand that in a capitalist system, there will be a certain acceptable amount of risk.
but to say that usa’s fallout was due to regulation not deregulation is ignorant of the facts
not deregulation…they passed bills REQUIRING banks to lend to risky people..the banks just found a way to make money off it. Thats what she is saying and the fact that when we subsidize risk there is no reason to take the risk seriously..aka the car insrance example at the beginning. If they hadent passed those bills this prob would not have happened
OK – a point missed here is that not only were banks given the opportunity to make bad loans, they were forced to make bad loans.
HUD policy and equal lending policy forced banks to loan to high risks. The guarantees were intended to mitigate the risk to the banks.
This is not the free market – it is misguided social engineering at it’s worst. Barney Frank and Chris Dodd should be prosecuted.