The Subprime Crisis: Creating the Monster

Posted: Mar 12, 2009 3:17 PM

Everybody has their opinions as to who is to blame for the current mess in the mortgage world. The Democrats are positive that it's all Bush's fault, Conservatives like me think a lot of the blame goes to Bill Clinton, Chris Dodd, and Barney Frank - and of course Ron Paul thinks this would never have happened happened had we stayed on the gold standard and not created the Federal Reserve (which is true - then again we'd have fewer plane crashes if we were still using horse and buggies). However, nobody has really traced the roots of the hair-brained idea that banks could safely loan out billions of dollars to people who obviously would never be able to pay back their loans.

If you do your homework, you uncover a few unlikely culprits to go with the slew of governmental figures who have already been blamed. Namely, you will eventually work your way back to a partnership between the Ford Foundation and a credit union in North Carolina. It all started in 1994 when the non-profit Self-Help Credit Union, founded by Yale-educated do-gooder Martin Eakes, started a little program to help poor people get access to the "Home Loan Secondary Market." Nobody really noticed, because it was such a tiny program, but a snowball had just started rolling that would eventually bring the entire mortgage industry to it's knees.

By 1998, the program was big enough to catch the eye of one of the country's largest philanthropic organizations, The Ford Foundation. These people decided that Self-Help's efforts had to be taken national, and they laid down an obscene amount of cash to make sure it happened. So, taking on the role of Dr. Frankenstein, the foundation breathed $50 million worth of life into the Self-Help monster - with the understanding that Self-Help would be able to make $2 billion in loans to 35,000 low income families across the nation. In addition to the money, they also brought in Fannie Mae, which "made a commitment to purchase and/or securitize the total $2 billion in loans Self-Help will acquire." Starting to sound familiar? I thought so.

The $2 billion target was achieved by 2003, and the program was so "successful" that they decided to shovel even more money into the fire. Fannie Mae agreed to purchase another $2.5 billion in bad loans, and the rest is history. Of course, there were probably many other culprits, but Self-Help and their friends at the Ford Foundation certainly seem to have had a big hand in it. They created quite a monster, and now we're all dealing with the consequences. Unfortunately, this probably serves as a warning to future generations: philanthropists are good people, but they aren't economists, and it's a bad idea to let them try to reinvent the economy according to their own goals. If you try to restructure the world as a better and fairer place, you're probably just going to make it even more unfair than it already is - and probably hurt a lot of people on the way. There's a place in this world for do-gooders, but economics is best left to economists, bankers, and businessmen. The best way to to "do good" for the free market is, ultimately, to get the heck out of  it's way.