What’s the Point of Insurance if it’s Not Socialism?

This post is derived from a conversation I had on Facebook with a middle-aged Californian.

Q: What’s the point of insurance if you can’t force people to cover treatments they’ll never use (e.g. charging men for women’s birth control pills)?

A: Are you saying that you do not understand the difference between managing risk and redistribution of known costs? I can explain this to you.

Think about how your car insurance works. It insures you against collisions and the associated liability- a situation that has a low chance of occurring, but is associated with high costs. When you pay your premiums, you are buying the mitigation of risk. If you have a 5% chance of incurring $20,000 in damages each year, then your customer group is costing the insurance company an average of $1000/year. So they charge you $1170/year, spending 15% on bureaucratic overhead, and walking away with a 2% profit margin for the service of converting your individual risk into a certain, statistically-weighted charge.

But in situations where the chance of a cost being incurred are either 0% or 100%, it makes no sense to buy insurance. If the chance is 0% (e.g. the chance of a man needing an abortion, or the chance of a woman needing Viagra), then your risk is zero, and the insurance company has nothing to offer you on that plan. If the chance is 100% (or you have control over the event’s occurrence), such as with birth control pills that you know you want, or that vasectomy that a guy chooses to get at a particular time in his life, then the premium cost associated with the service will be the cost of buying it without insurance, plus 15-30% bureaucratic overhead, plus 2-5% profit. In these cases, you already have complete control over the costs, yet you’re paying the insurance company extra to manage no additional risk. Financially, this is not a smart decision.

However, you seem to want people who have zero risk to share your known (100% chance) costs. This is not insurance. This is known as “social ownership” of costs. Social ownership is always advantageous to those who spend more and contribute less, and disadvantageous to those who are more responsible with their cost-management. There are only 3 cases I can think of where this sort of arrangement happens voluntarily for a long term: marriages, corporate ownership, and socialist communes. These arrangements only survive if they are very selective about who is allowed to participate, and have established mechanisms for removing (divorcing) members who take advantage of the contract without contributing much in return. Otherwise, the best members will always leave first, collapsing the arrangement.

When you use government force to mandate social ownership of costs throughout an entire society, that is known as “socialism.” In this case, there is no check on the behavior or character of participants. There is no mechanism for removing bad actors from the arrangement. It’s like being stuck in 300 million bad marriages all at once…unless you’re the one being a bad partner. This system violates the human right of free association, incurs unnecessary bureaucratic overhead costs, reduces productivity, reduces innovation, and ultimately reduces prosperity for everyone involved.

So if you’re seeking social ownership, insurance companies are not the institution you’re looking for. Let insurance companies sell insurance, and get your desire for social ownership fulfilled through family, communes, or (if you think your desired organizational structure is more efficient than existing companies) start a corporation. Don’t try to force insurance companies to be something they’re not, and don’t try to force us all to participate in a social ownership plan that some of us really don’t want to be a part of. Involuntary association of that nature will only make us all poorer.

UPDATE: She responded that I was “mansplaining” to her, and argued that because birth control “is a basic part of health care,” insurance must cover it, completely ignoring my argument. Logic and reason doesn’t get through to these socialist idiots. They only understand the fear of having their own smears turned back against them. So I called her a bigot for trying to use my gender to demagogue me into silence through that misandrist term. That’s when she “lost interest” in the conversation…meaning she no longer had any way to maintain dignity while making her argument. This is just about the best outcome that can be hoped for with people like this- they’ll never admit they’ve lost the debate, but they’ll be too embarrassed to make those arguments in public again.

Breaking: Obama fought for race-based subprime loans

As most should know by now, the financial crash of 2008 was caused by the housing crisis of 2007, which happened because banks were putting out so many subprime loans. There are many reasons why so many banks were putting out all these risky loans, from the Clinton version of the Community Reinvestment Act (which required banks to lower their lending standards for minorities), to Fannie Mae and Freddie Mac (who were required to buy up these risky loans to insure against losses), to the Federal Reserve (which lowered lending standards by keeping interest rates low).

But now we know of another direct contributor to the subprime lending culture that has torn economies apart across the world: Barack Obama

In 1995, Obama led a class action lawsuit against Citibank, claiming they were racist because they weren’t issuing enough subprime loans. Yes, that’s right. According to (now President) Barack Obama, it is racist to not put out enough subprime loans, because such a cautious policy disproportionately hurts African Americans. This is the same argument he uses against Voter-ID laws and to fight cuts in welfare programs.

So Obama won that case in 1998. He and his fellow lawyers profited to the tune of nearly a million dollars. The plaintiffs got a $60,000 pittance. And Citibank was forced to institute a policy of lowered lending standards with more subprime loans, so that African Americans can have greater access to loans and mortgages. Yes, Barack Obama personally forced Citibank to embrace the subprime loans that would spell doom for our financial sector.

But do you think it stops there? When a class action suit like this is settled, every other similar company in the country will rush to adjust their own policies to avoid being the targets of similar lawsuits. Without a doubt, most other banks in the nation would have increased their subprime lending activities to avoid being sued.

In other words, Barack Obama, through the cries of racism that he is so fond of, helped push our entire financial system over the edge. And then we made him President. And gave him a Nobel Prize. All because people were afraid of being called racist.

Those cries of racism have caused a financial crisis, have gotten one of the men personally responsible for the crisis elected president, and are now being used to try to reelect that same man. I think it’s time to treat those who cry “Racist!” as they deserve to be treated: as pariahs in our society. No person who tries to racialize an issue should be given any better treatment than absolute disdain.

Barack Obama represents everything that is wrong with America, and he must be defeated.

Keeping Track of Obama’s Attacks on Liberty and Fiscal Sanity

I recently had someone on the forums ask, “Why do you think Obama is such a bad president?”

Well let’s see…

• Obama wasted over a trillion dollars on a failed stimulus based in an economic hypothesis that was already discredited in the 1970’s.
• He used additional taxpayer money to prop up his own personal investments (such as Solyndra), which later failed spectacularly.
• He pushed through and passed a monstrous law giving his health secretary Kathleen Sebelius absolute dictatorial control over the health care services in this country, while raising costs for all Americans.
• He has kept the budget deficit above $1 trillion because his socialist sentiments have led him to refuse to cut any sort of spending or government programs.
• He has maintained a crusade against the job-creators and innovators in this country, threatening them with higher taxes and greater regulation at every turn.
• He has altered the patent system to give patent rights to the first-to-file the patent application for a thing, as opposed to the first to invent the thing.
• He signed the “Food Safety Modernization Act,” converting the FDA from an organization that levies fines against food safety violators to an organization that actively micromanages and harasses food producers, defining the procedures they must use. Under this law, hundreds of Amish farms were raided by regulators in SWAT gear with assault weapons, all for the “crime” of selling raw milk and raw honey.
• He nationalized the student loan industry, confiscating student loans from banks so that students in debt now owe the Department of Education. Students who have missed payments recently have been raided by regulators in SWAT gear with assault weapons (notice a trend here?).
• He has encouraged his Federal Reserve Chairman to continue printing money, even as inflation in necessary goods that all Americans must buy, such as food and gas, soars above 8%.
• He has refused to reform Social Security, which continues to grow exponentially in costs.
• His head of the Department of Justice, Eric Holder, sold thousands of fully automatic assault weapons to Mexican druglords in a failed sting operation (Operation Fast and Furious) while arguing for greater gun restrictions on US citizens. He lied about his role in overseeing this operation, yet still holds his job.
• He has inflamed racial tensions, crying “Racism!” against anyone who is critical of his authoritarian socialism.
• Obama has violated numerous court orders, and was actually held in contempt of court for his defiance in maintaining his illegal ban on oil drilling.
• He continues to fancy himself a dictator, contemptuous of constitutional restrictions on his power, openly admiring the way the People’s Republic of China keeps their citizens submissive to the State…

This is just what comes to mind off the top of my head. There’s certainly plenty of room to expand this list and provide more details.

Here’s what Obama is gonna do if he stays for 4 more years

He will continue doing much of what he’s done for the last 2.5 years. That means:

More indefensible bureaucratic expansion. [link]
More regulation of company mobility to prevent profitable enterprises from fleeing Democratic majority states to search for more freedom elsewhere. [link]
More economic failure, leading to Carter-style stagflation. [link]
More debt growth, as he resists all attempts to steer the country away from an imminent Greek-style crash. [link]
More moralistic nationalization, enforced through militarization of the US police forces, pushing us towards a Soviet-style police state. [link] [link] [link]
More corrupt abuses of executive power, bordering on illegality. [link] [link] [link]

If you want to continue these disturbing trends, to disregard liberty in favor of a Soviet-style socialist nation under a government with totalitarian control over your personal life and endeavors, then by all means, vote for Obama in 2012. But if you want change- economic recovery and the restoration of the values of liberty -then for your own sake, vote against the Democrats!

Microfinanced Science

Ever had an idea for an interesting project that you knew you could pull off if only you had the funding for it, but didn’t think you could qualify for any established fellowships? Alternatively, have you ever wished you could contribute directly to research projects you thought were cool without that funding being diverted towards other projects?

There exists a new method of funding research, called Research Microfinancing, which allows anyone to put up a proposal for a project, and anyone to donate to it. Here are a number of Research Microfinancing foundations:
http://sciflies.org/index.php
http://apply.fundscience.org/
http://eurekafund.org/
http://www.theopensourcescienceproject.com/microfinance.php

The way it works is you submit a proposal, complete with a proposed budget to one of these websites. Your proposal is circulated among peer-reviewers who determine whether your proposal qualifies as a serious project with an appropriate level of planning. If it qualifies, then your project is posted on their website, with a certain monetary threshold listed, determined by your proposed budget. Anyone at all can read the project details and donate to the project. Once the donation amount reaches the listed budget threshold, the money is released to the researcher, and the project can begin. Most of these foundations have a few reporting requirements to ensure the researcher is working on the proposed project, and progress is being made.

The best part about this system is that you don’t need to convince a review board that your project should be funded based on arbitrary or exacting “broader impact” requirements. If anyone- anyone at all -thinks your project is worth funding, they can contribute to it. You also retain the intellectual property rights to anything you produce.

Right now, most of these organizations are a bit underdeveloped simply because they are new, but this could be the future of scientific funding. This is a way to free scientific funding from the bureaucratic oversight of large foundations and governments, and to put control in the hands of curious individuals. What this system needs most to help it get off the ground is publicity. So if you think this is as cool as I do, spread the word!

On Tax Policy

During a debate on tax policy, someone made this comment:

A tiny tax increase on a small percentage of the population is not “overruling the will of the individuals and satisfying governmental priorities.” It’s sane fiscal policy, and it used to be perfectly acceptable before lunatics and their useful tools like you took over.

I decided to give a full explanation of why raising taxes to generate revenue doesn’t make sense:

See, based on the fundamentals of economic theory which have stood the test of time over the last 200 years, I disagree that “raising taxes is sane fiscal policy.”

Here, let’s take a step back to a point where we can agree. Sane fiscal policy means collecting more revenue than we spend. Now, I know you’re not particularly fond of reducing spending, so let’s just ignore that option for now and assume that all that spending is absolutely necessary, and is a function of population. Bear with me, because this train of thought will take a little bit to lay out.

So, if we raise taxes on businesses and wealthy individuals, do you think the IRS will collect more revenue in the long run? Hauser’s Law empirically demonstrates that no tax rate in the US, from 28% to 90%, has ever generated revenue exceeding 20% of the GDP. To explain this effect, on a theoretical level, I can point to the Laffer Curve, and on a practical level, I can point to all the different ways by which wealth-creation mechanisms disintegrate in a country where it’s too expensive to do business (outsourcing, expatriation, decreased investment incentives, decreased trade due to the expense, etc.). But regardless of its cause, it’s a safe assumption to say that Hauser’s Law, for whatever reason, cannot be broken.

So, in fiscal year 2009, this country spent $3.518 trillion. The GDP for that year was $14.266 trillion. That means for that year, the government spent 24.66% of the GDP. If we freeze spending at that absolute level (meaning no increases in the dollar amount), we need to raise the GDP at least 25% in order to match revenues to costs without breaking Hauser’s Law. Additionally, the Reagan era showed us that we maintain revenue at the upper limit imposed by Hauser’s Law, even with a 28% top tax rate. Hence, the debate over what will balance the budget (and therefore, the question of what constitutes “sane fiscal policy”) comes down to a matter of what will raise the GDP the quickest, the most efficiently, and the most sustainably. This significantly simplifies our problem.

To answer this question, we have to decide where the wealth should be allocated in order to generate the most new wealth, dollar for dollar. If we raise the tax rate, then we’re putting a larger percentage of the wealth produced by investors and businesses in the hands of the government. If we decrease the tax rate, then we’re leaving a larger percentage of that wealth in the hands of the people who created it. So who is able to more efficiently create new wealth? The government, or the private investors who originally generated that wealth.

To answer this question, we need to consider the mechanism of wealth-generation. The following explanation is what you’ll learn in any introductory economics class. Every time you buy something without being deceived or forced through the threat of violence/incarceration, you are gaining something which is of greater value to you than the price you paid for it. Otherwise, you wouldn’t buy it. Hence, even though you’re giving up monetary wealth, you are becoming more wealthy in the general sense every time you buy something which is worth more to you than its price. Generalize this over the entire population, and you have the basis for wealth generation in an economy. Workers labor for an amount of money which they feel is worth more than their time, and they in turn spend that money on goods and services which are worth even more to them. Likewise, business owners give up a product for a higher price than the sum of the monetary cost and their investment of time. Investors give up their money for a more valuable opportunity to make money later.

What this means is that the more effectively money is being used to satisfy individual desires for value-increasing exchange, the faster the economic growth. Whoever knows an individual’s value system best is going to have the greatest capability to bring wealth to that individual through exchanges. And really, nobody knows a person’s value system better than the person himself. There is no possible way for the government to know more about the values and incentives for trade of the entire populace than the sum total of the individuals within that populace. Thus, every time the government takes money from individuals and spends it, instead of letting the individuals spend it on their own, some people will be less happy than others, and some may even gain negative utility as a result of the exchange. Hence, the government cannot possibly generate wealth off of money faster than the sum total of the individuals if that money is left with them. Friedrich von Hayek got a Nobel Prize for formalizing this idea (known as “The Knowledge Problem“).

Coming back to tax policy, what this means is that taxes higher than 20% (the limit from Hauser’s Law) are self-defeating. You actually decrease revenue if you raise taxes above that threshold for more than one year. On the other hand, the lower the tax rate (i.e. the more money we leave with the individuals in the economy), the faster wealth is generated, and the more efficiently the GDP will grow. This faster GDP growth, in turn, results in higher revenues (as an absolute dollar figure) for the government if you’re still collecting 20% of the GDP. This is what people are talking about when they discuss the “Revenue-Maximizing” and “Growth-Maximizing” points on the Laffer Curve. A flat tax of 20% puts you at the revenue-maximizing point on the Laffer Curve. The growth-maximizing point is somewhere even lower. Then, the fastest way to increase the revenue collected by the IRS (and therefore, by your admission, the sanest fiscal policy) is to set taxes somewhere between the growth-maximizing and revenue-maximizing points. When we need money fast, we should set it at the revenue-maximizing rate. When we are looking more towards long-term prosperity, we should set it closer to the growth-maximizing rate.

So that’s where my stance on tax policy comes from. I hope it sounds rational enough.

Should America Bid Farewell to Exceptional Freedom?

Representative Paul Ryan of Wisconsin gave this speech on March 31st:

Last week, on March 21st, Congress enacted a new Intolerable Act. Congress passed the Health Care bill – or I should say, one political party passed it – over a swelling revolt by the American people. The reform is an atrocity. It mandates that every American must buy health insurance, under IRS scrutiny. It sets up an army of federal bureaucrats who ultimately decide for you how you should receive Health Care, what kind, and how much…or whether you don’t qualify at all. Never has our government claimed the power to decide when each of us has lived well enough or long enough to be refused life-saving medical assistance.

This presumptuous reform has put this nation … once dedicated to the life and freedom of every person … on a long decline toward the same mediocrity that the social welfare states of Europe have become.

Americans are preparing to fight another American Revolution, this time, a peaceful one with election ballots…but the “causes” of both are the same:

Should unchecked centralized government be allowed to grow and grow in power … or should its powers be limited and returned to the people?

Should irresponsible leaders in a distant capital be encouraged to run up scandalous debts without limit that crush jobs and stall prosperity … or should the reckless be turned out of office and a new government elected to live within its means?

Should America bid farewell to exceptional freedom and follow the retreat to European social welfare paternalism … or should we make a new start, in the faith that boundless opportunities belong to the workers, the builders, the industrious, and the free?

We are at the beginning of an election campaign like you’ve never seen before!

We are challenged to answer again the momentous questions our Founders raised when they launched mankind’s noblest experiment in human freedom. They made a fundamental choice and changed history for the better. Now it’s our high calling to make that choice: between managed scarcity, or solid growth … between living in dependency on government handouts, or taking responsibility for our lives … between confiscating the earnings of some and spreading them around, or securing everyone’s right to the rewards of their work … between bureaucratic central government, or self-government … between the European social welfare state or the American idea of free market democracy.

What kind of nation do we wish to be? What kind of society will we hand down to our children and future generations? In the coming watershed election, the nature of this unique and exceptional land is at stake. We will choose one of two different paths. And once we make that choice, there’s no going back.

This is not the kind of election I would prefer. But it was forced on us by the leaders of our government.

These leaders are walking America down a new path … creating entitlements and promising benefits that model the United States after the European Union: a welfare state society where most people pay little or no taxes but become dependent on government benefits … where tax reduction is impossible because more people have a stake in the welfare state than in free enterprise … where high unemployment is accepted as a way of life, and the spirit of risk-taking is smothered by a tangle of red tape from an all-providing centralized government.

True, the United States has been moving slowly toward this path a long time. And Democrats and Republicans share the blame. Now we are approaching a “tipping point.” Once we pass it, we will become a different people. Before the “tipping point,” Americans remain independent and take responsibility for their own well-being. Once we have gone beyond the “tipping point,” that self-sufficient outlook will be gradually transformed into a soft despotism a lot like Europe’s social welfare states. Soft despotism isn’t cruel or mean, it’s kindly and sympathetic. It doesn’t help anyone take charge of life, but it does keep everyone in a happy state of childhood. A growing centralized bureaucracy will provide for everyone’s needs, care for everyone’s heath, direct everyone’s career, arrange everyone’s important private affairs, and work for everyone’s pleasure.

The only hitch is, government must be the sole supplier of everyone’s happiness … the shepherd over this flock of sheep.

Am I exaggerating? Are we really reaching this “tipping point”? Exact and precise measures cannot be made, but an eye-opening study by the Tax Foundation, a reliable and non-partisan research group, tells us that in 2004, 20 percent of US households were getting about 75 percent of their income from the federal government. In other words, one out of five families in America is already government dependent. Another 20 percent were receiving almost 40 percent of their income from federal programs, so another one in five has become government reliant for their livelihood.
…

It continues. I urge every American to read the entirety of the article and ask yourself the rhetorical questions posed in it. Paul Ryan is a smart man- he had Obama on his toes at the Health Care Summit  and he’s the one who exposed the deceitful gimmicks used by the Democrats to get the answer they wanted from the CBO. I don’t agree with everything in Rep. Ryan’s proposed solution, but he is right that we are at the tipping point, where we have a choice between a nation built on individual freedom and a nation hanging from the precarious limb of government support. We are approaching the end of an era, and it’s up to all of us to decide what the future will look like.

I, for one, choose freedom.

New Enemies of the State: Bankers

After a number of banks that received bailout money started handing out bonuses, people were furious that their tax money was being used by big bankers to turn a profit. The man who enabled all of this, President Obama, was rightfully embarrassed, and declared a need for a new tax on bank bonuses which would only affect about the 50 largest banks.

However, as recently as December, Obama was claiming that there would not be losses from the banking side of the bailout program. Rather, it’s the corporate acquisitions by the government that are turning massive losses.

So what exactly is Obama hoping to accomplish by imposing this massive tax on bankers? They’re not the ones losing the government’s money, so why does Obama want to punish them instead of GM and Chrysler?

Although, the banks are the ones who embarrassed Obama politically. And that’s where Obama’s true motivation becomes clear. Obama is upset about how a few bankers turned his own political machinations against him, and so the bankers at the 50 largest lending institutions, many of whom have not received any bailout money at all, are to be punished.

And so, not withstanding any constitutional checks against bills of attainder, Obama feels he can use taxes punish those who do not act the way he wants them to. Fear will keep the local companies in line. Fear of new taxes.

I think this is the first time I’ve ever heard a President of the United States threatening their own citizens:

“What I’d say to these executives is this. Instead of sending a phalanx of lobbyists to fight this proposal, or employing an army of lawyers and accountants to help evade the fee, I’d suggest you might want to consider simply meeting your responsibilities and I’d urge you to cover the costs of the rescue not by sticking it to your shareholders or your customers or fellow citizens with the bill, but by rolling back bonuses for top earners and executives,”

A notable quote comes to mind:
“I’ve altered the deal. Pray I do not alter it any further.”

Government Buyouts and Bailouts to Become Permanent Policy?

The Democrats of the House of Representatives recently passed a bill which would give the President and the Federal Reserve Board members that he appoints the authority to take over and/or liquidate any financial company deemed “in danger of default,” so long as failure of the company may cause “adverse effects” to the economy or to the welfare of minorities. The language of the bill is actually that vague.

The process of acquiring a company goes something like this:

Step 1: The Secretary or Chairman of the Federal Reserve Board requests a vote by the Board (all of these people are appointed by the President) on whether or not the default of a financial company poses some risk to the economic “conditions or stability” of the United States, or to the economic “conditions or stability” of minorities.

Step 2: The Secretary of the Federal Reserve (who originally requested the vote) takes the recommendations and goes to deliberate with the President (who appointed all these people to begin with). Together, the President and Secretary make a determination as to whether the financial company is “in danger of default” and whether this default would have “adverse effects on financial stability or economic conditions in the United States.” Together, they determine what to do about the company.

Step 3: At this point the Secretary appoints a “Corporation” which takes financial control of the company, eliminates its management, and liquidates it, as seen with GM. This Corporation expires after a year, but there is no bar against the Secretary appointing a new one, extending the time frame of its control indefinitely.

All of this information can be found in sections 1603 and 1604 of H.R. 4173 at the Library of Congress Database.

With the language as to what constitutes a “danger of default” and what constitutes “adverse affects” left so vague and entirely at the discretion of the President and his appointees, under this bill, the President could hypothetical engineer the liquidation of any company which does not adhere to some set of policies. This leaves absolute control of the policies of financial institutions in the hands of the President. Control of all financial lending institutions means control over anyone who would ever want to take out a loan, which is pretty much everyone.

“What’s that? Your business doesn’t engage in affirmative action hiring? Well, we’re just going to have a conversation with your lenders, who might be in danger of default. Might you want to reconsider your hiring practices?”

“Oh? Your media station is going to criticize our administration? Well, let’s see what your lenders and investors have to say about that.”

“Well, we’ve decided that the voting record of your demographic poses a threat to the State, so financial institutions aren’t going to be letting you take out mortgages anymore.”

Signing of this bill into law would truly mean a total government takeover of our nation’s economy, and by proxy, our lives. Absolute control of everyone would be in the hands of the President. This would be Fascism.

On Greed and Recessions

Whenever I try to discuss the causes of this recession that we’re in, I always get the same answer: Greed did it. Banks and corporations got greedy and started offering risky loans to people who couldn’t pay them off in the hopes of making a profit off the poor. It was predatory.

But that doesn’t make sense to me. You see, greed is a constant. Greed is what leads banks to want to find people who will actually pay off their loans. Subprime loans are dangerous, and most banking institutions would be very cautious about offering them, absent of any external stimulus. So if banks were always greedy, why were so many risky loans issued all of a sudden? Why had subprime loans never crashed the market before? Something had to have changed to cause such a massive upset of the economy.

Something did change, and it wasn’t greed.

In 1977, US President Jimmy Carter signed into law the Community Reinvestment Act (CRA), a vague declaration of the power of the federal government to oversee and regulate financial institutions and ensure they uphold their “continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.” The act makes clear that race and sex of loan recipients may used as factors in determining whether or not financial institutions are “meet[ing] the credit needs of the local communities.” Essentially, affirmative action in financial loans and mortgages was established to be enforced at the federal level.

In 1995, President Bill Clinton asked CRA regulators to revise their standards to make them more consistent and “focused on results.” This meant establishing specific quotas that lending institutions had to fill in order to receive passing ratings under the CRA. Up to 50% of an institution’s rating would be based on the quantity, effectiveness, and “innovation” of loans to low- and moderate-income individuals and neighborhoods. At the time, the Cato Institute, a libertarian think-tank adamantly warned of the dangerous consequences of the proposed regulations. Most notably, Cato Institute Chairman William A. Niskanen testified that, “The proposed regulation would override any concern about bank soundness,” in its emphasis on helping poor communities. Essentially, banks would be required to provide many overly risky loans (many of them subprime) to people who couldn’t necessarily pay them back in order to meet CRA quotas.

Debate continued through Clinton’s second term as to the real effect of the CRA on financial institutions. Republicans complained that the Act was detrimental, whereas Democrats claimed it wasn’t going far enough. Thus, as a compromise, Congress passed the Gramm-Leach-Bliley Act, expanding the authority of the CRA to other types of financial holding institutions while requiring “a comprehensive study of CRA to focus on default and delinquency rates, and the profitability of loans made in connection with CRA.” This study would be delivered to Congress in March 2000.

The study concluded that nearly 50% of CRA-related home purchase or refinance loans were either unprofitable or barely profitable, compared to 28% for non-CRA loans. This, of course, would be due to the riskiness of the loans being issued. Clinton’s solution to this foreseeable unprofitability was to urge Fannie Mae and Freddie Mac, two government-sponsored mortgaging enterprises (GSEs) which had come under the CRA requirements with the passage of the 1999 Act, to start collecting these risky loans. This was meant to both increase the number of CRA loans available and to provide some insurance for CRA-regulated financial institutions by pooling risky mortgages (similar to the way the FDIC insures savings). Once the full scope of the problem was revealed in the March 2000 report, Fannie Mae and Freddie Mac redoubled their efforts.

And here we have the recipe for disaster. The CRA had filled the veins of the financial lending industry with these risky subprime loans, this poison, which Fannie Mae and Freddie Mac, the liver and kidneys of the system, were gathering up and trying to neutralize. All it took was a small shrug in the housing market to make enough of those bad loans in Fannie Mae and Freddie Mac turn to poison and kill these protective organs. With the liver and kidneys gone, the rest of the body suffered as people bankrupting from the Fannie Mae and Freddie Mac disaster defaulted on loans from other banks. Hence, we had the bank crash, and later, the automaker crash as large-investment segments of the economy fell apart.

So really, it wasn’t greed that caused this recession that we’re in now. It was humanitarianism. It was affirmative action. It was the government’s attempts to redistribute wealth by applying harsh regulations with the CRA.

This wasn’t the first time government regulation and interference in the market caused a recession. Tariffs throughout the 1920’s weakened the US economy by pushing away trading partners and decreasing gains from overseas trade. Finally, speculation started to become pessimistic in September 1929, as Senate committee debates over the Smoot-Hawley Tariff Act became public. This Act would drastically increase tariffs and protectionist measures, effectively placing a 60% tax on any farmer who bought equipment from overseas. The next month, the stock market crashed. In June 1930, despite the pleading of economists and businessmen such as Henry Ford and partners of J. P. Morgan, Hoover signed the bill into law, and US foreign trade started rapidly declining. Nations around the world responded by putting tariffs on their own goods to counter the effects of US tariffs. The Great Depression had begun.

The government cannot be trusted to take control of an economy for what it believes to be “the greater good.” When innovation and individual choice is allowed to flourish, we succeed together. When law forces us into bad choices, even when some realize how bad it could be, that is what causes us to fail together.

EDIT 4/10/16: The 2011 Financial Crisis Inquiry (FCI) Report includes a dissenting view (page 441-538) that fully corroborates my description of events as written here in 2009. Alternate link. Apparently, the majority opinion in that report tries to absolve the CRA of any responsibility, citing this paper by Fed economists Neil Bhutta and Glenn Canner to claim that “only 6% of subprime loans were in any way related to the CRA.” However, that paper completely ignores the role of the GSEs in creating an expansive market for subprime loans through their attempts to insure CRA-regulated institutions by buying up risky assets. This role is a historical fact, proven by the quote from HUD on page 497 of the 2011 FCI report, rendering the conclusions of Bhutta and Canner entirely baseless.