Torch, Spring/Summer 2009

6 TORCH | Spring–Summer 2009 $11.1 trillion, an increase of about $4 trillion under former President George W. Bush. Interest on the public debt was about $451 billion in 2008. This is more than 12 percent of total government expenditures. According to Senate Budget Committee Chairman Kent Conrad, D-N.D., the national debt could rise by more than $1 trillion per year for the next 10 years, assuming current policies stay as they are. Another way to think of the fiscal irresponsibility of the federal government is to compare their costs to their revenues. The cost to run the federal government in 2008 was $3.64 trillion. Total revenues of the federal government were $2.66 trillion, a deficit of $980 billion. During that year, expenses increased 25 percent, while revenues increased 1.3 percent. Community Reinvestment Act The stage for this degree of national debt was established immediately following Johnson’s Great Society. At that point, many Americans were convinced the government would supply all their needs. Now, years later, many citizens think that if they are unable to satisfy their wants, no matter how trivial, more debt is the answer. With no upper bound on the amount of debt the federal government can assume, the real troubles are ready to begin. As the U.S. economy began to unravel in spring 2008, one of the main culprits was default on subprime mortgages. These loans were made to individuals unable to repay them, yet the government forced financial institutions to provide them to citizens anyway. The name of the offending legislation was the Community Reinvestment Act (CRA). The CRA, as revised in 1995, stipulated that down payments, credit history, and proof of income would no longer be required as qualifying criteria for mortgage loans. Banks that did not actively solicit these subprime loans were punished. The big picture is that the CRA was intended to increase home ownership among the poor. However noble this objective may sound, the government’s lack of foresight eventually led to massive defaults on these loans. Lending to unqualified borrowers had several other unpredictable effects. One of the most dramatic results was the bubble formed in real estate prices. The artificial demand for residential real estate created by the CRA caused home prices to increase about 120 percent between 1998 and 2006. Housing became increasingly unaffordable. Borrowers stuck in interest-only adjustable rate mortgages or negative amortization loans were further unable to make payments, and many had no recourse other than foreclosure. The national home foreclosure rate in the spring of 2008 spiked to between 200,000 and 250,000 per month, a 300 percent increase from the pre-crisis level of 2005. Subprime mortgages were bundled together, and claims against those loans were sold to financial institutions. As defaults increased, the value of those ALEX BRANDON / AP Senate Budget Committee Chairman Senator Kent Conrad, D-N.D., answers questions from reporters about the national budget on March 24, 2009, on Capitol Hill.