Star Parker

Watching the housing/mortgage/financial crisis unfold, I keep thinking about the joke about the difference between neurotics and psychotics. The former builds castles in the sky and the latter moves into them.

Until the bubble burst, a lot of folks were living in these castles in the air, made possible by bountiful and creative mortgage financing.

Now, we're being reminded that there is indeed something called reality from which many became detached.

Peter Thiel, president of the global hedge fund Clarium Capital Management and co-founder of PayPal, writing about market bubbles in the latest Policy Review journal of the Hoover Institution, says that "U.S. real estate prices in 2005 were more distorted than in 1929, 1979 or 1989, or at any other time in history."

As with every crisis, there is a search for the culprit -- the cause of it all. But what is striking in what we are now witnessing is the diffuse and highly egalitarian nature of the suffering.

The pain is spread across the full spectrum of the housing marketplace, from the homeowner, to the brokers, to the loan originators, to the financial geniuses who designed and managed the high-tech securities delivering John Smith's loan to the global capital markets, to the CEOs of the financial giants managing all of this.

We're, of course, hearing rhetoric about so-called predatory lending, and low-income borrowers being peddled loans that they could neither understand nor afford. But if this was really about predators, they had to be predators with a death wish because the hunters have gone to slaughter along with the hunted.

As the Cato Institute's Alan Reynolds points out, foreclosures have not been limited to low-income families with sub-prime adjustable-rate mortgages. Reynolds, citing the Mortgage Bankers Association, notes that "prime mortgages (mostly fixed-rate) accounted for 45 percent of all foreclosures in the third quarter of last year, while sub-prime ARMs accounted for 43 percent."

There is reasoning tracing all this to the Community Reinvestment Act passed in 1977 under President Jimmy Carter, designed to address allegations of redlining -- banks refusing to set up shop and lend in low-income minority neighborhoods.

The claim here is that the CRA put banks between a rock and hard place. They had to either loosen their lending standards and accept the inevitable financial consequences or incur fines.

Undoubtedly, the CRA did cause distortions, as all political impositions on markets do, and surely contributed to the problem. But the explosion could not have occurred without problems and distortions in every part of this market.

Star Parker

Star Parker is founder and president of CURE, the Center for Urban Renewal and Education, a 501c3 think tank which explores and promotes market based public policy to fight poverty, as well as author of the newly revised Uncle Sam's Plantation: How Big Government Enslaves America's Poor and What We Can do About It.