Government (in)action

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March 16, 2008

JEFF JACOBY blames government for higher food prices and the subprime mortgage disaster ("How government makes things worse," Op-ed, March 9). What Jacoby misses is that business influence on government created the useless ethanol mandate and the subprime mess. No serious climate scientist ever entertained the idea that corn-based ethanol would lower carbon emissions. Instead, it was people in Congress, seduced by easy money from agribusiness, who pushed through the legislation, touting the empty claim that their vote would reduce emissions and our dependence on foreign oil. The subprime problem stemmed from a lack of regulation, not too much. The decoupling of mortgage originators and holders meant that the originators didn't have to worry about borrowers' ability to repay. It was Wall Street investment banks that bought these loans, packaged them into securities, and sliced them into ever more complicated financial instruments that caused the subprime debacle. What is clear in both examples is that business paid government to get out of its way, and we are suffering the consequences.


JACOBY'S CLAIM that the current subprime mortgage meltdown is the result of the Community Reinvestment Act, a law passed in 1977 and underenforced by the Bush administration, is absurd on its face.

In fact, the CRA encourages only responsible lending in low- and moderate-income communities, and banks covered by the law accounted for only 1.6 percent of all subprime mortgage loans in Massachusetts in 2006. The real problem with the CRA is that it has not applied to the out-of-state banks and independent mortgage companies that account for a majority of total lending in the state, including almost all of the subprime lending.

Fortunately, our Legislature and governor, guided by the facts on the ground rather than by free-market ideology, decided last fall to extend CRA-like obligations to the licensed mortgage lenders responsible for the bulk of subprime loans in Massachusetts. They recognized that markets require well-designed regulation in order to function efficiently and fairly.

Executive Director
Americans for Fairness in Lending

OF THE more than 200 homeowners facing foreclosure that we at Urban Edge have counseled in the past year, none has mortgages originated by a bank. Instead, thanks to banks, we have helped 50 of these homeowners save their homes.

Jacoby invokes the benefits of the free market's "decentralized process of free exchange" and "the voluntary interactions" of "buyers and sellers, each acting according to his best judgment and in his own best interest." These struggling homeowners were not "voluntarily" misrepresenting their incomes. Brokers and lenders may have been acting in their "own best interest," but not in their "best judgment," when they steered borrowers away from sound loans for which they qualified into unsustainable loans that generated higher fees for the brokers.

President, Urban Edge

MANY STUDIES have confirmed the environmental benefits of biofuels such as ethanol and ethanol's ability to mitigate carbon emissions. While the recently published studies in Science, which Jacoby cites, indicate otherwise, a recent study by the US Department of Agriculture shows that ethanol made from feed stocks with low or even no energy inputs emits 94 percent fewer greenhouse gases than petroleum. Ethanol also played a key role in the reformulated gasoline programs of the 1990s, helping to meet Clean Air Act standards. Earlier this year, the Environmental Protection Agency confirmed that these programs have exceeded expectations in significantly improving ground, water, and air quality. The recently passed energy bill calls for increases in ethanol production, but it does so in an environmentally responsible manner. The architects of the energy bill anticipated new developments in research, and built in global warming and pollution reduction standards that ensure that all new technologies meet a carbon benchmark before implementation. The nation will move toward energy sustainability in an environmentally responsible manner. Studies such as those published in Science are no cause for alarm.

Executive director, Clean Fuels Development Coalition
Bethesda, Md.

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