Since March of 2008, Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch and Washington Mutual have all failed. Fannie Mae and Freddie Mac were taken over by the federal government and placed in a conservatorship, JP Morgan Chase was given a $29 billion federal loan to facilitate its purchase of Bear Stearns and the Bush administration recently requested an additional $700 billion in bailout money.

What the Bush administration is trying to avoid, according to economist Thomas Sowell, is “a major contraction of credit that could cause major downturns in output and employment, ruining millions of people, far beyond the financial institutions involved.”

Unfortunately, this proposal has negative effects that go beyond costing taxpayers an almost unimaginable amount of money. One of these effects is that politicians will undoubtedly try to grab some of this money for themselves. But another, more dangerous effect is what’s known as moral hazard.

Moral hazard is the idea that when you reduce the negative impact of risky behavior, people are more likely to engage in risky behavior. For example, someone who has auto insurance will be more likely to engage in risky driving because it won’t cost them as much if they wreck their car.

It works the same with banks. Banks are more likely to engage in risky behavior, such as lending to high-risk buyers, if they know that the government will bail them out in the event that things go badly. The Bush administration is simply reinforcing that idea with its proposal to spend $700 billion of taxpayer money.

Another problem is that if a bank realizes it’s going to fail, it has incentive to make sure that its failure will have such a large impact that the government can’t afford to let the failure happen. This can be done by making even riskier loans to ensure that you will go further into debt and by linking yourself to other firms so your failure would cause those firms to fail as well. This is what’s called the “too large to fail” phenomenon, which is exactly why Bear Stearns got a bailout and Lehman Brothers didn’t.

What we now need to do is ensure this doesn’t happen again. The best way to do this would be to refuse to bail these companies out. If we continue to subsidize bad behavior, all we are going to get is more bad behavior. Although the negative effects of letting these banks collapse could be considerable, it is far better than going through this same thing every time housing prices drop. Plus, we’d save ourselves $700 billion.

We also need to understand what caused these banks to collapse in the first place. According to Senators McCain and Obama, it’s greed. So there you have it. We can just outlaw greed, and we’ll never have to worry about this again. At least they agree.

Obama, during the first presidential debate on Friday, also said, “This is a final verdict on eight years of failed economic policies promoted by George Bush, supported by Senator McCain.” In other words, since it happened during the Bush administration, it’s President Bush’s, and by association, John McCain’s fault, and you should vote for Obama.

Obama also said, “Two years ago I warned that, because of the sub-prime lending mess, because of the lax regulation, that we were potentially [going to] have a problem.” So now we can also blame a lack of regulation for the current banking crisis.

But wait! We already had regulation. In fact, there was an entire government agency designated to regulating Fannie and Freddie. It is known as the Office of Federal Housing Enterprise Oversight, and its mission statement is, “To promote housing and a strong national housing system by ensuring the safety and soundness of Fannie Mae and Freddie Mac.” Good thing we had them. Otherwise we might have a real crisis on our hands right now.

The real causes of this crisis started in 1977 with the Community Reinvestment Act. This act is “intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations.” Its purpose was to prevent “redlining,” which is a practice where banks excluded high-risk, low-income neighborhoods and minorities from their services.

According to the LA Times, “In 1992, Congress mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers. Operating under that requirement, Fannie Mae, in particular, has been aggressive and creative in stimulating minority gains. It has aimed extensive advertising campaigns at minorities that explain how to buy a home and opened three dozen local offices to encourage lenders to serve these markets. Most importantly, Fannie Mae has agreed to buy more loans with very low down-payments or with mortgage payments that represent an unusually high percentage of a buyer’s income.”

This happened again in 1999. According to the New York Times, government sponsored enterprise Fannie Mae, “In a move that could help increase home ownership rates among minorities and low-income consumers … is easing the credit requirements on loans that it will purchase from banks and other lenders.

“These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.”

In other words, political correctness created our sub-prime lending crisis. The government forced banks to loan money to high-risk borrowers at low interest rates, which was all fine and dandy while housing prices were going up. As long as borrowers who couldn’t make their payments could still sell their houses to pay off their mortgage, there wasn’t a problem. But once housing prices dropped, as everyone knew they eventually would, this wasn’t an option anymore, and banks lost billions of dollars on mortgages that these high-risk borrowers couldn’t pay off. And now these borrowers are going to get a bailout. Once again, if you subsidize stupid decisions, all you’re going to get is more stupid decisions.

Unlike Obama says, we need less, not more, regulation in the housing market. One last example of how excessive regulation is responsible for the subprime lending crisis is the Equal Credit Opportunity Act, passed in 1974, which states, “It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction … because all or part of the applicant’s income derives from any public assistance program.”

As the Federal Trade Commission says, this means that, “When evaluating your income, a creditor may not refuse to consider public assistance income the same way as other income.”

In other words, we forced banks to loan money to poor people on welfare, and now we have another $700 billion dollars of welfare to pay to rich people. How ironic.

— Blake Hasenmiller is a senior in industrial engineering from De Witt.