Cause and effect

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cause-and-effect

Situated as we are in the midst of the financial crisis, many of the major papers (tabloid and broadsheet), are confusing the effect of the crisis with cause of it. As such, it is good to see that Bruce Anderson in The Independent has written instead on the original sin that caused this crisis.

Anderson writes: “Excessive benevolence is much more to blame than excessive greed." Going on to elucidate that “In the late 1990s, a Democrat-controlled Congress virtually compelled US banks to advance mortgages irrespective of the applicants' financial status. Racial factors played a role in this; a large percentage of sub-prime borrowers were Black or Hispanic. But everything was underpinned by economic optimism. The assumption was that the economy would just keep on growing, so that even the poorest families could have their stake in the American dream."

We at the Adam Smith Institute have been making this point for a while now. Certainly, blame should be apportioned to many individuals outside of the US government, but the fact remains that the nascent cause of the current trouble was anti-redlining laws instituted in the US in 1977 and strengthened in 1995, along with the enormous expansion of the money supply that took place under the auspices of Fannie Mae and Freddie Mac (backed by the Department for Housing and Urban Development). Even as the severity of the credit bubble was becoming increasingly evident, such socialistic polices were advocated by the likes of Polly Toynbee in The Guardian, suggesting that poorer people should be given even more opportunities to borrow.

Bad government policies sowed the seeds that made this current crisis. It is time that the press at large acknowledged this, instead of confusing cause with effect. Government’s must learn their lesson and not be allowed to introduce such utopian policies again. Once again the problem was too much government, not too little.