In the video above, we hear a Canadian perspective on the US housing bubble and financial collapse from Pierre Poilievre, a member of Canada’s Parliament representing the Nepean-Carleton (Ontario) district. He was speaking to Canada’s House of Commons in April 2012 about the economy and how to avoid a fiscal cliff, here’s a slice (emphasis mine):
What went wrong in the United States? Many believe that the 2008 financial collapse and recession were the result of irresponsible behavior by business and banks. In fact, this behavior was merely the symptom. The illness was massive government intervention to turn the mortgage business into a social program.
The roots of this go back three decades. Presidents from Carter to Bush Jr. wanted to expand home ownership, a worthy mission no doubt. To do this, they mandated government-sponsored enterprises like Freddie Mac and Fannie Mae to cover the risks of loans to people who would otherwise not qualify for them. We call these subprime mortgages.
According to a 2010 World Bank report, Freddie and Fannie, both government sponsored enterprises, bought an estimated 47% of these toxic mortgages. Harvard financial historian Niall Ferguson estimated that between 1980 and 2007 the amount of government backed mortgages increased from $200 million to $4 trillion. Furthermore, the American government not only encouraged but forced banks to provide these loans.
To quote the World Bank report, “In the mid-1990s, the government changed the way the Community Reinvestment Act was enforced and effectively compelled banks to initiate risky mortgages”.
Once Americans are in debt, the U.S. government encourages them to stay there by allowing them to write off their mortgage interest. The bigger the mortgage debt, the lower the taxes.
In sum, the government encouraged millions of Americans to spend money they did not have on homes they could not afford, using loans they could never repay and then gave them a tax incentive never to repay it. The state had pumped so much air into the mortgage bubble that it burst. Financial institutions collapsed, taxpayers were on the hook, millions were jobless and one in five American households went under water, and that is to say their mortgages were bigger than the value of their homes.
HT: Don Geng