We should follow Japan's lead

Charles Crouse, in his letter in the April 25 Daily Herald, is off target. He would have us believe that the "housing crisis" was caused by President Bush, homebuilders and banks making loans to people who couldn't afford them. Actually, the first shot was fired in 1968, as part of the Great Society, in the form of the Community Redevelopment Act. The goal was to get more low-income people into homeownership.

Another major step took place 10 years later, in the form of the Community Reinvestment Act, which took the idea further. In the ensuing years, Congress held hearings on such subjects as "redlining," the practice of marking off neighborhoods on maps, to warn lenders of "high risk" areas. Those hearings were threats of legislation, unless practices such as "redlining" stopped. For 30 years or more, Congress pushed lenders to make "bad loans."

But banks ended up with too many dubious loans in their portfolios. They had problems at audit time. So Congress created Fannie Mae and Freddie Mac to buy dubious loans and clear banks' books. When people said Fannie Mae and Freddie Mac needed "oversight," the idea was vigorously opposed.

Our mortgage industry ended up much like Japan's "goshos," clusters of major corporations related through a single major bank. These companies typically supply each another. They financed Japan's remarkable growth by borrowing on real estate. That worked, until there was a drop in the real estate market. Then the banks needed more collateral, which the major corporations didn't have. If the banks had foreclosed, their "goshos" would have "folded." Japan ended up sitting tight, waiting for the real estate market to come back, which it finally did.

There were no bailouts. They realized that spending too much, and borrowing too much, had gotten them into that pickle, and they were smart enough to know better than to make the situation worse.

Peter G. Malone

St. Charles