Card is correct that the deleterious effects of forced and subsidized lending practices helped set up the sub-prime bubble. Unfortunately, the fundamental problem is much broader, much worse, and lies elsewhere. Indeed, it lies well beyond any issues about which Republicans and Democrats differ. The Big Government parties (available in an exciting selection of Blue and Red colors) are united on being unwilling or unable to say a single word about this larger issue.
To place the effect of the CRA in this larger perspective, it may be helpful to imagine the process of overinflating a balloon. The CRA created a weakness at a particular spot on the latex surface of the balloon. When the balloon popped, it naturally popped starting at the weakest point, after which the air proceeded to rush out altogether, deforming the entire balloon.
However, we would not expect the balloon, in the process of being overinflated, to have not popped if only the weakest point on its latex surface had happened to be somewhere else. We would expect it to pop perhaps half a second later, starting in a different place. This is not to advocate or excuse the unending list of nonsensical policies, such as the CRA, that weaken the surface of the balloon, it is rather to argue that the overinflation of the balloon is arguably worse than each and all of these lesser destructive policies.
What few but the Austrian school economists and the Ron Paul movement are currently addressing is the fact that the balloon is quite unlikely to pop at all unless it is being overinflated.
The air pump in this case consists of the fractional reserve banking system pyramiding on top of ever-expanding fiat currency and electronic "deposits" (of nothing) created on central bank computers. The underlying process has, in one form or another, been going on for centuries, becoming ever more refined, effortless, massive, and destructive up to the present day. It exists and persists for a very simple reason. It is the usual reason: the use of state power to channel money. But how does it work and in what direction does the money flow?
The government provides special exemptions to the ordinary rule of law for banks. This allows banks to simultaneously lend out the exact same money that they are supposed to be "safekeeping" on deposit, a form of fraud. Indeed, most of that "money in the bank" that people are lulled into feeling that they have, is not actually in the bank. In return for this special legal treatment of banks, the government, its best friends, and the banks themselves are the first beneficiaries of the new money and loans thus generated fraudulently out of thin air.
The classic question to ask about a policy system such as this is who benefits? Most of the early forms of such fraudulent loans of other people's money went straight from banks to the king for his wars, or to the city for its expanding budget. Of course, the system has come a long way since then.
Today, this process operates as a massive hidden tax that extracts wealth from all the people to whom this money and its effects "trickle down" only late in the process, after the general price level has already been lifted.
In understanding this racket, it is important to realize that creating money out of thin air lifts the price level artificially, but this is a process that takes time, extending out over several months or years. During this period, those who get the money first can spend it before the general price level has been lifted—in other words, when the money still buys more goods and services. Those who get the money later, can only spend it after the general price level has already been lifted—by which time it doesn't buy as much. This is a massive scheme to transfer wealth:
- From the poor, the retired and others on fixed incomes, savers, and those who work in industries farthest removed from government expenditures.
- To bankers, government employees, debtors, government contractors of all kinds, and any other industries and operations (don't forget universities) that are relatively close to the sources of government expenditures and new money creation.
Indeed, a more perfect criminal scheme has never been devised. It is insanely profitable, its victims are unaware of the source of their losses, and the state not only calls it all legal, but is itself at the top of the pyramid, the biggest player in the game.
It makes for fascinating reading, and once you know about it, perhaps also a certain degree of responsibility to learn more and spread the word. The first step is to find out more.
Books:
1. (Shorter, introductory): The Mystery of Banking (pdf), 2nd ed. by Murray N. Rothbard
Or order a physical copy.
2. (Longer, more detailed): Money, Bank Credit, and Economic Cycles (pdf) by Jesus Huerta de Soto
Or order a physical copy.
