Politicians crave power that their elected office conveys on them. Bankers on the other hand are concerned about profits, the soundness of the bank, share holder value and his own paycheck.

Here we go again: Politician=Bad, Banker=Good. More than just a little simplistic, Steve.

For starters, do you really think these bankers had nothing to do with the writing of the various changes to the CRA? The 2 FMs time and again fought back (successfully) against legislation to require them to increase their capitalization. This is something that would have cut into their short term profits, but would have increased their long term strength.

The politician realizes that he can secure his hold on power by tossing pork and other goodies to his constituents.

I can go along with this statement, tho I would have said, "one way he can secure his hold on office...", and added, "to the various business and financial institutions who fund their campaigns."

The banker realizes that one way to improve profits, soundness of the bank, shareholder value and his own paycheck is to not lend to borrowers who are too risky.

and yes, that would be one way to do it, but it was not the way they chose to do it. And yes, they did choose to lend to risky borrowers. I am not talking about home loans here (that mess is well beyond my limited comprehension), but rather credit cards. What does one call marketing high interest credit cards (with teaser rates) to college students with no credit rating and no job? Predatory?

When I first heard of sub-prime lending and these credit cards, I remember thinking, "What the F?" One did not have to be a finance whiz, or an ace economist to see this was a house of cards. I kept thinking, "There is way too much money out there."

I think now, I was wrong. The money wasn't out there. And that was the real problem.

ps: if these high powered execs were so concerned about "share holder value" they would all willingly give up their golden parachutes, wouldn't they? My bet is, they won't with out a fight.

This is so 1960s.

Your argument hinges on an outdated model that mortgages lenders retained the credit exposure. They don't, or at least very many of them didn't whilst the securitization freight train was hurtling down the tracks over the last 5-10 years when mortgage lending ballooned.

I am also very unimpressed at the general argument that government policy led to the explosion in subprime lending specifically and the housing bubble generally.

Why? Because nobody has produced a scrap of evidence that:

(a) regulated institutions (who are required to comply with the CRA) provided the a significant proportion of subprime loans. Unless they did, there is little evidence that this was instrumental in fuelling the housing bubble.

(b) most subprime lending was advanced toward low-income borrowers. Subprime and Alt-A products were heavily used by speculators in the housing market. What was the split between Hard-up Joes and Flash Tonys?

I'd be interested to see such data produced...

Oh look, here's something from 2004.

Doing the maths, the top five subprime lenders from 2003 - see any banks in there? - account for over one third of the subprime market.

So when you write - "CRA was the umbrella under which all of these changes took place" - I call bullshit on this. This is laughably inaccurate. The market liked, actually loved, subprime when the economy was growing and the housing market was booming, because defaults were both rare and virtually costless.

Not so much after the bust, obviously.

As someone who works for a firm that went balls and all into the subprime game, I know firsthand that most of our dialog with regulators was us arguing that the rates on products we were funding were not predatory. Kowtowing to government missives to lend to poorer people is simply not something that entered the equation.

Hope this doesn't come as a shock that private industry behaves this way.

Oh yeah, and having the government invest in banks is not about addressing the causes of the housing boom and bust; it is about preventing a collapse of the financial system. You did know that, right?

When the economy improves the banks can and should buy back their shares - that way the gov't is only in the banking business so long as the banks need gov't help.

Actually they do have that through section 8, of course you have to follow certain rule to keep it and a lot of slum lords won't take it, because they do not want to deal with the paperwork.

I do think there is also a difference between low income and bad credit. Seems to me taking a risk on a low income person with good credit is likely worth it, but requiring banks to float loans or even banks taking on loans for people with bad credit seems a little risky.

I do think the VA has a rather successful home loan insurance program. We used the VA loan system with two home purchases (we had about 5 years of renting and we qualified at that point again for the VA program). It has some very strict income/debt ratio-but I don't remember now what it was. I do know it was rather strict. They also had very strict rules about the type of property it would insure-the only one I remember off hand is that all stairs had to have a railing, because the first home we purchased had two steps off the front porch with no railing and the own had to install one for us to qualify for the loan.

Better yet, just dump the Federal Reserve Notes and start printing Treasury Notes. They surely would be worth more.

Not that this credit based economy has been over extended, if you give the banks money and the banks loan it to businesses, who are the businesses going to sell their products and services to?

The Cause

In 2001 we had about 650 foreclosures and about 9% had to use the guarantee because they had to sell their house at a loss. In 2007 we had 935 foreclosures and allready 140 who needed the guarantee because they had to sell their house at a loss. (16 million inhabitants, about half owns a house)

Our rules were rather strict, about how high the mortgage could be compared to your income. But due to privatization we had more foreign players offering mortgages (bank of Scotland, Lehmans) that were riscier. Since one of the conditions to get the NHG was that the interest should be fixed for more than 5 years and this started around 2003 we will have more foreclosures the coming years. That's not due to government influence, au contraire, that is due to privatization and lack of oversight/bad creditmanagement.

Our situation is not entirely comparable. We have better financial stability for most people and we have had a housing shortage since WW2. But we also have higher mortgages than people in most other countries. Still, the number of people in trouble will be relatively small and our biggest problem isn't our home market.

Aside from that, I've always wondered that about government financing programs. If they wanted to help low-income homeowners, then why not just lend them the down payment and closing costs' money at a very low-interest rate? That doesn't help those with bad credit, but perhaps you could help them with getting the deposit for renting.

I really wish instead of rushing out to hand banks a bunch of money to "save" them, we would really take the time to look at where the mess went wrong, and to get rid of the regulative steps that were a definite problem, enforce the regulations that do help, and do whatever with the neutral ones.

But it seems that doing the wrong thing right now would be a bad move and doing too much is a major over reaction.