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Author Richards: Don't Blame Wall Street Greed for Crisis

By John Bachman and Michelle Smith   |   Sunday, 18 Aug 2013 12:02 PM

It's time to stop blaming big banks for the financial crisis; if we haven't been lied to, we've been deeply misled, asserts best-selling author Jay Richards.

It's hard to speak over the camp claiming the crisis resulted from unfettered competition and capitalism, Richards tells Newsmax TV in an exclusive interview. But the cause wasn't Wall Street's greed; it was “full-spectrum cronyism.”

Financial institutions, government regulators and the nonprofit sector were “colluding and undercutting the beneficial aspects of competition and a free-market system,” creating the housing crisis, he says. Richards' newest book is “Infiltrated: How to Stop the Insiders and Activists Who Are Exploiting the Financial Crisis to Control Our Lives and Our Fortunes."

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With about 25 different federal departments pushing to get lower-income Americans into homes, government had a “visible hand” in the catastrophe. “The unfortunate consequences over time is that underwriting standards on loans were degraded,” Richards says.

“This would not have happened this way if the government had stayed out of the housing market to begin with.”

Editor’s Note: Forbes Columnist: ‘Who the Hell Cleared This?’ (See Shocking Video)

Although lobbyists have been portrayed as tools used by big business to further their interests, the disastrous policies that led to financial crisis were mostly born of the lobbying efforts of activist organizations like the Center for Responsible Lending, which pushed banks to extend risky loans, Richards says. “These are stories from the nonprofit sector that a lot of people don't know about. Housing activists in particular, played a crucial role in the crisis.”

While consumer advocates blame financial instruments, like mortgage-backed securities and credit default swaps, Richards insists that the crisis started in the housing market. He concedes that securitization helped spread the problem internationally by enabling investors around the globe to invest in U.S. mortgage-backed securities. “But there's absolutely no reason to think that derivatives actually caused the crisis,” he added.

“Everybody needs to be regulated,” Richards says. “But the most powerful regulator in the market is the market incentives themselves.”

“In a normal free market, a bank is not normally going to give out loans that it has good reason to think won't be repaid, even if you assume the banker's greedy,” he says. But  the entire incentive structure changes when banks are encouraged to extend risky loans then quickly resell them to Fannie Mae and Freddie Mac.

Advocates are rallying for more regulation but regulation has failed and looks to continue producing disappointing results, Richards argues.

The 2002 Sarbanes Oxley Act, which was designed to address flaws in corporate auditing, “clearly didn't stop the financial crisis, he says. And the 2010 Dodd-Frank financial-overhaul law “actually puts in place some of the very policies that led to the crisis in the first place.”

The provision deeming certain financial institutions or jobs as systemically important “solidifies in concrete” the too-big-to-fail mentality, making it “too big to be allowed to fail,” Richards said.

Now, President Barack Obama wants to overhaul the mortgage-finance system and phase out Fannie Mae and Freddie Mac. But, he still wants the government involved in making home loans available and affordable to lower income people, Richards says.

“So, while I agree with the president and applaud him for saying we should unwind Fannie and Freddie, I fault him for continuing to nurse and to encourage the assumptions that led to the crisis in the first place.”

Editor’s Note: Forbes Columnist: ‘Who the Hell Cleared This?’ (See Shocking Video)

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