A Tragic Tale: Instant Gratification and the Great Recession

As the popular saying goes, "hindsight is 20/20."  Hence, ten years after the 2008 financial crisis, it's time to look back and reconsider the story you've been told of the "Great Recession."

According to legend, the Great Recession was wrought by big banks' insatiable greed.  The fake news media, pompous politicians, and all-knowing elites universally blamed evil fat-cat bankers for the foreclosure crisis that sparked the Wall Street meltdown.

Popular history often casts big banks as the villain and low-income Americans as the victims in this epic saga of greed run amuck.  Apparently, big banks preyed upon vulnerable Americans by peddling predatory loans and tricking naïve Americans into mortgages they did not want.

However, could it be that "vulnerable Americans" were partially at fault for the housing crisis?  How about lawmakers and bureaucrats?  What if they were also culpable for the subprime mortgage crisis that fueled the global economic breakdown?

Consider the following scenario: a federal law compels banks to provide home loans to low-income Americans.  Millions of Americans willingly take out loans because they want to own a home (or two in some cases) – even though they cannot afford to.  In turn, banks pass the risky loans on to foreign banks and taxpayers.  Eventually, this house of cards tumbles down, bringing the worldwide economy to the brink of disaster.

What if the real cause of the 2008 financial crisis was not simply big banks' lust for more profits, but a culture of instant gratification gone wild?

The Federal Law that Started It All

In 1977, President Jimmy Carter signed into law the Community Reinvestment Act (CRA), which forced banks to provide home loans to lower-income Americans in predominantly minority neighborhoods.

Upon signing the CRA, Carter stated, "This bill takes a giant step forward and gives me and the administration ... a framework within which we can make great improvements in the housing of our people."  No doubt, Carter and Congress believed that the CRA could be a force for good, possibly ending housing discrimination in the United States.

However, might there have been other driving forces behind this law?  Is it possible that the Carter administration and Congress craved power and used the CRA to buy votes?  Not only is it possible; it's very probable.

Time and time again, politicians have sought to fulfill voters' cravings for instant gratification with a quick-fix legislative solution.  However, in the case of the CRA, the short-term desires of politicians (and many American families, too) set in motion a series of events that brought the global economy to the verge of collapse.

In his book The Housing Boom and Bust, Thomas Sowell wrote, "Despite the title of the Community Reinvestment Act, it was not just in particular communities that lenders were pressured to make loans that they would not have made otherwise[.] ... [L]enders were increasingly pressured by federal officials to relax lending standards, so as to make mortgage loans to people whose incomes and credit histories would not make them eligible under the traditional standards."

As with almost every government program in history, the CRA's goals evolved dramatically over time.  Indeed, every president after Carter expanded the size and scope of the CRA to continue to satisfy Americans' voracious hunger for housing.

By the time President George W. Bush took office, the CRA had morphed into a government housing giveaway.  In fact, between 2005 and 2007, federal government-sponsored enterprises Fannie Mae and Freddie Mac had acquired approximately a trillion dollars of subprime and non-traditional mortgages, according to Sowell.

In short, the CRA fed an immediate gratification-fueled housing monster that created a trillion dollars' worth of mortgage debt that taxpayers would ultimately be on the hook for.

Low-Income Americans Live the High Life

Historically (pre-CRA), Americans rented and built a large amount of savings before buying a starter home.  To purchase a home, one had to fulfill a number of requirements, including a substantial down payment and income certification.  However, the CRA swept many of these tried-and-true housing requirements aside.  Over the decades, buying a home became as easy as ordering a pizza.  By 2004, 69 percent of Americans owned a home, the highest rate in American history.

Whereas past generations viewed home ownership as a privilege that could be earned only with decades of hard work and sacrifice, by the 1990s, many Americans considered home ownership a right.  Unfortunately, the CRA enabled this unrealistic (and unsustainable) notion of home ownership to spread like wildfire.

Big Banks Pass the Buck to Taxpayers

If the financial crisis were a three-legged stool – with the CRA as one leg and Americans' ravenous appetite for immediate home ownership as the second – then surely the role of big banks would encompass the third and final leg.  The CRA mandated that banks provide loans to low-income Americans, lest they reap the wrath of regulators.  Hence, bankers saw the writing on the wall.  In the ensuing decades, banks gave loans to millions of Americans, regardless of their credit qualifications.

However, rather than hold these risky loans on their books, banks disguised these loans and sold them to banks overseas.  Meanwhile, government-sponsored enterprises Fannie Mae and Freddie Mac sucked up more than $1 trillion in subprime loans.

Like a game of hot potato, the question became, who would be left holding these toxic loans when the bubble busted and the economic charade collapsed?  Unfortunately, taxpayers were the losers – as usual.

Was the Financial Crisis a Turning Point?

Before the Great Recession, Americans generally practiced delayed gratification.  However, by the late twentieth century, many U.S. families had succumbed to the siren call of unaffordable housing.  Americans' obsession with instant gratification appears to be getting worse.  In 2018, it infects every aspect of American culture.

They say those who don't study history are doomed to repeat it.  The same axiom applies when the history being studied is false or misleading.  The real history of the 2008 financial crisis is a tragic story of instant gratification run amuck.  Americans greedily chose to take on mortgages they couldn't afford, banks greedily passed their bad decisions on to others, and politicians greedily instituted policies they knew were dangerous but were popular with some constituency groups.

Hopefully, future generations will realize the doom that instant gratification wrought on the nation and refrain from repeating it.

Chris Talgo (ctalgo@heartland.org) is an editor at The Heartland Institute.  Emma Kaden is an intern at The Heartland Institute.

As the popular saying goes, "hindsight is 20/20."  Hence, ten years after the 2008 financial crisis, it's time to look back and reconsider the story you've been told of the "Great Recession."

According to legend, the Great Recession was wrought by big banks' insatiable greed.  The fake news media, pompous politicians, and all-knowing elites universally blamed evil fat-cat bankers for the foreclosure crisis that sparked the Wall Street meltdown.

Popular history often casts big banks as the villain and low-income Americans as the victims in this epic saga of greed run amuck.  Apparently, big banks preyed upon vulnerable Americans by peddling predatory loans and tricking naïve Americans into mortgages they did not want.

However, could it be that "vulnerable Americans" were partially at fault for the housing crisis?  How about lawmakers and bureaucrats?  What if they were also culpable for the subprime mortgage crisis that fueled the global economic breakdown?

Consider the following scenario: a federal law compels banks to provide home loans to low-income Americans.  Millions of Americans willingly take out loans because they want to own a home (or two in some cases) – even though they cannot afford to.  In turn, banks pass the risky loans on to foreign banks and taxpayers.  Eventually, this house of cards tumbles down, bringing the worldwide economy to the brink of disaster.

What if the real cause of the 2008 financial crisis was not simply big banks' lust for more profits, but a culture of instant gratification gone wild?

The Federal Law that Started It All

In 1977, President Jimmy Carter signed into law the Community Reinvestment Act (CRA), which forced banks to provide home loans to lower-income Americans in predominantly minority neighborhoods.

Upon signing the CRA, Carter stated, "This bill takes a giant step forward and gives me and the administration ... a framework within which we can make great improvements in the housing of our people."  No doubt, Carter and Congress believed that the CRA could be a force for good, possibly ending housing discrimination in the United States.

However, might there have been other driving forces behind this law?  Is it possible that the Carter administration and Congress craved power and used the CRA to buy votes?  Not only is it possible; it's very probable.

Time and time again, politicians have sought to fulfill voters' cravings for instant gratification with a quick-fix legislative solution.  However, in the case of the CRA, the short-term desires of politicians (and many American families, too) set in motion a series of events that brought the global economy to the verge of collapse.

In his book The Housing Boom and Bust, Thomas Sowell wrote, "Despite the title of the Community Reinvestment Act, it was not just in particular communities that lenders were pressured to make loans that they would not have made otherwise[.] ... [L]enders were increasingly pressured by federal officials to relax lending standards, so as to make mortgage loans to people whose incomes and credit histories would not make them eligible under the traditional standards."

As with almost every government program in history, the CRA's goals evolved dramatically over time.  Indeed, every president after Carter expanded the size and scope of the CRA to continue to satisfy Americans' voracious hunger for housing.

By the time President George W. Bush took office, the CRA had morphed into a government housing giveaway.  In fact, between 2005 and 2007, federal government-sponsored enterprises Fannie Mae and Freddie Mac had acquired approximately a trillion dollars of subprime and non-traditional mortgages, according to Sowell.

In short, the CRA fed an immediate gratification-fueled housing monster that created a trillion dollars' worth of mortgage debt that taxpayers would ultimately be on the hook for.

Low-Income Americans Live the High Life

Historically (pre-CRA), Americans rented and built a large amount of savings before buying a starter home.  To purchase a home, one had to fulfill a number of requirements, including a substantial down payment and income certification.  However, the CRA swept many of these tried-and-true housing requirements aside.  Over the decades, buying a home became as easy as ordering a pizza.  By 2004, 69 percent of Americans owned a home, the highest rate in American history.

Whereas past generations viewed home ownership as a privilege that could be earned only with decades of hard work and sacrifice, by the 1990s, many Americans considered home ownership a right.  Unfortunately, the CRA enabled this unrealistic (and unsustainable) notion of home ownership to spread like wildfire.

Big Banks Pass the Buck to Taxpayers

If the financial crisis were a three-legged stool – with the CRA as one leg and Americans' ravenous appetite for immediate home ownership as the second – then surely the role of big banks would encompass the third and final leg.  The CRA mandated that banks provide loans to low-income Americans, lest they reap the wrath of regulators.  Hence, bankers saw the writing on the wall.  In the ensuing decades, banks gave loans to millions of Americans, regardless of their credit qualifications.

However, rather than hold these risky loans on their books, banks disguised these loans and sold them to banks overseas.  Meanwhile, government-sponsored enterprises Fannie Mae and Freddie Mac sucked up more than $1 trillion in subprime loans.

Like a game of hot potato, the question became, who would be left holding these toxic loans when the bubble busted and the economic charade collapsed?  Unfortunately, taxpayers were the losers – as usual.

Was the Financial Crisis a Turning Point?

Before the Great Recession, Americans generally practiced delayed gratification.  However, by the late twentieth century, many U.S. families had succumbed to the siren call of unaffordable housing.  Americans' obsession with instant gratification appears to be getting worse.  In 2018, it infects every aspect of American culture.

They say those who don't study history are doomed to repeat it.  The same axiom applies when the history being studied is false or misleading.  The real history of the 2008 financial crisis is a tragic story of instant gratification run amuck.  Americans greedily chose to take on mortgages they couldn't afford, banks greedily passed their bad decisions on to others, and politicians greedily instituted policies they knew were dangerous but were popular with some constituency groups.

Hopefully, future generations will realize the doom that instant gratification wrought on the nation and refrain from repeating it.

Chris Talgo (ctalgo@heartland.org) is an editor at The Heartland Institute.  Emma Kaden is an intern at The Heartland Institute.