Looking at the Causes of the Financial Crisis
Can we credibly blame the CRA, Fannie Mae/Freddie Mac, and the like for the mortgage crisis?
Barry Ritholtz has done an excellent job of addressing what he called “The Big Lie” in regards to understanding the financial crisis. His first column (which James Joyner noted here) was in WaPo in which he detailed the following:
Wall Street has its own version: Its Big Lie is that banks and investment houses are merely victims of the crash. You see, the entire boom and bust was caused by misguided government policies. It was not irresponsible lending or derivative or excess leverage or misguided compensation packages, but rather long-standing housing policies that were at fault.
In response to criticisms of the piece, he has now written a follow-up on his blog: Examining the big lie: How the facts of the economic crisis stack up:
It’s fair to say that our discussion about the big lie touched a nerve.
The big lie of the financial crisis, of course, is that troubling technique used to try to change the narrative history and shift blame from the bad ideas and terrible policies that created it.
Based on the scores of comments, people are clearly interested in understanding the causes of the economic disaster.
I would recommend reading Rithotlz’s entire piece (indeed, both columns if one has not yet), but the bullet points of the piece are as follows:
1. The boom and bust in housing was global: it is difficult to blame the Community Reinvestment Act (CRA), for example, for a housing boom and bust cycle in Spain (or, in fact, in a large number of countries), for example.
2. Defaults were not Concentrated in CRA regions, indeed it was the opposite: if we look at the actual data, we find that “if the CRA was to blame, the housing boom would have been in CRA regions; it would have made places such as Harlem and South Philly and Compton and inner Washington the primary locales of the run up and collapse.” Instead, “what occurred was the exact opposite: The suburbs boomed and busted and went into foreclosure in much greater numbers than inner cities. The tiny suburbs and exurbs of South Florida and California and Las Vegas and Arizona were the big boomtowns, not the low-income regions.”
3. From 2001-2007, Nonbank mortgage underwriting “exploded”:
Check the mortgage origination data: The vast majority of subprime mortgages — the loans at the heart of the global crisis — were underwritten by unregulated private firms. These were lenders who sold the bulk of their mortgages to Wall Street, not to Fannie or Freddie. Indeed, these firms had no deposits, so they were not under the jurisdiction of the Federal Deposit Insurance Corp or the Office of Thrift Supervision. The relative market share of Fannie Mae and Freddie Mac dropped from a high of 57 percent of all new mortgage originations in 2003, down to 37 percent as the bubble was developing in 2005-06.
Consider a study by McClatchy: It found that more than 84 percent of the subprime mortgages in 2006 were issued by private lending. These private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year. And McClatchy found that out of the top 25 subprime lenders in 2006, only one was subject to the usual mortgage laws and regulations.
Ritholtz has quite a bit more on this point.
At any rate, the notion that the crisis in mortgage financing was caused by, as NYC Mayor Michael Bloomberg put it, “It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp,” is patently absurd.
This is all rather important because it does get to fundamental questions of how much regulation there should be of the financial sector. The evidence suggests that some level of reasonable regulation is warranted, and this is not an insignificant finding. It is quite legitimate to debate what the scope of such regulation ought to be, but it is pure ideology to pretend that the government caused this crisis and that if we would just let the unfettered market do its job then we wouldn’t have had these problems in the first place. To take that position one has to start by explaining why the financial crisis was clearly linked to a specific set of mostly under-regulated mortgages and not the more traditional (and hence, more regulated) ones.
Beyond anything else, proper policy requires proper analysis rather than ideological preferences. It strikes me as rather difficult to look at the facts and accept that things like the CRA are the reason we ended up where we did, for example.
Excellent summary of Barry’s points. His book, Bailout Nation, provides a wider perspective.
He doesn’t absolve Fannie and Freddie for their sins but they were not the primary driver of the housing crash.
Now prepare for the fact free wingnut onslaught.
It was lonely making these points at OTB over the last few years.
You have to admire the careful crafting of the lie that the global economic meltdown happened because the government helped a few minority families get mortgages.
Whoever invented it knew it would prove irresistible to Republicans.
Don’t make the mistake of thinking that only Republicans want to blame “the other.” Anybody who has “it” and is afraid of losing “it” will tend to blame those “other people who don’t look or sound like me.” The Republicans are just playing class warfare better than anyone else right now.
Easy and over used credit is one of the causes of the financial problems of today. Everyone wants it now and plan to pay for it some time in the future, if at all. Our government is the same way. There is no one group, corporation, or policy to blame. Government should not bail out corporations because they don’t have the money and they aren’t any better at managing anything.
Sure, but placing the blame on a combination of government programs and black people was specifically targeted at Republicans.
Remember Rush Limbaugh tried a similar thing in the first days of the recession by blaming the financial meltdown on Barack Obama even though, at the time, Obama was just a candidate for the Democratic nomination…a bridge too far even for the wingnuts.
So kudos to the Wall Street propaganda firm for thinking it up and putting it into the right wing digestive tract and on into the “liberal” press so quickly.
I would disagree. The GOP could blame it on Democratic “winged unicorns” and the base would eat it up. This lie was aimed at independents, the majority of which, I suspect, are white.
The right loves to talk about the CRA, but you never seem to hear them mention CDO’s.
It was a nice scam. Make risky (or doomed to fail NINJA) loans, skim your profit off the top and sell the risk to some sucker with a little help from Moody’s and S&P.
@anjin-san: Nail? Meet hammer.
Keep in mind that a lot of the non bank loans were themselves fraudulent. I suggest you read The Monster: How a gang of predatory lenders and Wall Street bankers fleeced America – and spawned a global crisis by Michael W. Hudson.
Yes. We can’t credibly blame anything else.
The irresponsible lending was the direct result of government “equality” policies. The law of unintened consequences bits the liberal mantra once again.
Did you actually read the article? Here, I’ll highlight the relevant quote:
To aid your comprehension let me dumb it down for you: CRA does not apply to private lenders.
If you want to come in with both guns blazing, you may want to check to see if documented facts detailed in the the article you are commenting on directly contradicts your talking point first.
Remember when Baltimnore sued mortgages companies for redlining and then sue mortgage companies for reverse redlining. http://real-estate.lawyers.com/residential-real-estate/Baltimore-Sides-with-Homeowners-in-Redlining-Lawsuit.html and http://www.responsiblelending.org/media-center/press-releases/archives/groups-oppose-lenders-attempt-to-overturn-montgomery-county-law.html
The CRA may not have caused the meltdown since it was mainly due to the “bigger fool” problem in economics but the constant lawsuits out of the bluest cities in the U.S. do not make progressives look good.
the situation goes far deeper than the law, and you know it. The fact of the matter is the banks were under intense pressure to loan to anybody, under the guise of a limitation of redlining. The government in that attempt overrode and altered the good business practices that banks had followed for generations. The result of that was predictable.
And yet you deny it all exists.
Liberal? If George W. Bush was a liberal……okay, I guess.
The Big Lie works if people are predisposed to believe it. Which doesn’t reflect well on the people believing the Big Lie (unfortunately this includes my Mother), but it is extraordinarily damning to those who tell the lie – exploiting prejudice to evade blame for nearly wrecking the world economy.
What’s scary is that we now have financial firms employing Southern Strategy tactics. That’s super classy.
The other day you claimed “lenders were told to make loans to people who could not pay them back or they would go to prison”.
Kindly provide some evidence to support this rather wild claim.
See point 1 above. Explain how that affected prices in Spain.
Private. Lenders. Are. Not. Subject. To. CRA. Requirements.
@superdestroyer: @Eric Florack: Wingnuttery truly is a religion. You believe what you believe on faith in spite of facts.
Not to mention that conservatives of this ilk cannot see (or must remain blind to) the global nature of the single family home loan bubble.
Today’s Republicans aren’t conservatives, they are radical fanatics.
Nor that CRA has been around since 1977, and regulatory changes made in 2005 and 2007 made it substantially easier for those banks / lenders subject to its guidelines to satisfy CRA requirements. I.e., those changes substantially weakened the CRA.
@ponce: Radical fanatics who have declared jihad on reason.
These folks like Florack, Superdestroye and many more believewhat they want and what they hear on right-wing radio and Fox News. They couldn’t care less about facts.
Government, Democrats, liberals, blacks and homosexuals are the devils responsible for every problem. That’s why the Big Lie works so well. It’s so easy to fool these people because they want to be fooled.
@Pug: You forgot Mexicans, Pug.
@Pug: “They couldn’t care less about facts.”
Oh, they care about facts. They just have this tendency to forget what they’re doing is making an argument. In their minds, their arguments (true or not) become facts.
It does not. As I pointed out, the biggest cause of the real estate bubble was the same as the cause of the dot.com bubble: Bigger fool syndrome. People from Orange County to Broward County to Spain thought that they could purchase overpriced, risky real estate and a bigger fool would come along and pay even more. Eventually the game of musical chiars stopped and many people were the last fool.
The real question is what does the government go to ensure that the ones investment in real estate and not being bigger fools while also limiting the regulatory impact of something like the Consumer Financial Protection Bureau. How does one make sane loans without being accused of redlining. How does one make prudent investments without being affect by people being foolish.
Ron, I did not say that CRA was the cause. However, why can’t progressive see the irony of Baltimore suing mortgage companies for redlining (not making loans to minorities) and then suing the same companies a few years later for reverse redlining?
You should also look up Montgomery County Maryland (and other locations) that tried to pass anti-predatory lending regulations that would have allowed anyone who signed a mortgage to sue the lender and get out of the loan.
“. The fact of the matter is the banks were under intense pressure to loan to anybody, under the guise of a limitation of redlining.”
It was said above, but the firms making the subprime loans were not subject to the CRA or housing goals. There were no prosecutions for failing to meet CRA goals of which I am aware. The GSEs were committing accounting control fraud just like all of the other banks. It is odd that the right will claim that the loss of a few thousand dollars in taxes might alter someone’s behavior, but the opportunity to make billions will not.
This will not faze most of the right. They have fixed false beliefs with no data to back them up.
For those interested, neat paper on the importance of repo in creating the crisis. Without the ability to treat mortgage backed securities as AAA for repo, the subprime crisis was likely aborted.
you had me at
But you had one to many S’s in there and two to many ,, It should have read Government Democrat liberals, pigments variations and alternative life styles are irrelevant.
Plus I would go with brainwashed greenneck Marxist puppets vs.devils. Devils is a bit vague and also would be more unto a description of your puppet masters and their puppet masters.
Opposing both red-lining and predatory lending is not self-contradictory. Nor is it “ironic”.
please… not another super thread hijack
@de stijl: ]
There is no way a business can function in the mortgage business in places like Baltimore in the very narrow space between Redlining and anti-predatory rules while still making a profit. If a company has high standards for mortgages then there will be disparate impact (more blacks will be deny than whites) and the business will be forced to spend a huge amount of money on demonstrating statistical compliance. If a company tries to avoid anti-predatory loans, then it faces real problems managing risk. How does a company make loans to avoid disparate impact and ensure that blacks default at the same rate as whites.
It would be the same no-win situation if Baltimore was forced to ensure that whites and blacks are arrest and convicted at the same rates and that whites and blacks are the victims of felonies at the same rate. If you can solve that problem, you could solve the problem of making loans in Baltimore.
@ de stijl
Why are you having a conversation with this racist prick?
And the wingnuts do not fail to live up to expectations…
I am with you anjin-san, we can’t have idiots and morons occupying OTB when it’s commentors are producing such worthwhile exploration into the the truth about what happened with the Causes of the Financial Crisis and the extra frontal lobeishness of comments by those commentators who we have come to know that dwell in the know.
Yup, that sure is super…..
As I pointed out above, CRA was not the main cause of the housing bubble collapse. However, if the federal government does create a Consumer Financial Protection Bureau that will get to second guess every loan and every mortgage, then what impact will it have on the industry. Even if every company offers just one type of mortage (30 y, 20% down conforming loan that limits mortgage holders to 1/3 of income), whites will qualify at a higher rate than blacks (has to do with savings). That disparate impact will give the Consumer Financial Protection Bureau an excuse to regulate the mortgage company out of being profitable. Then what happens to the housing industry.
If progressives get what they want on financial regulation, the big investment will be apartment buildings because the construction loans will be less regulated and leases will have less regulation. More people will end up living in rental instead of being owners.
Fair point, and I think the real way the problem bites is this: no where in the world does a free market, a truly free market, in loans lead to wide middle class home ownership. Everywhere there are long term loans at reasonable rates, the government is involved.
I was a little bit shocked myself to learn that there were no 30 year mortgages in the US before “intevention” and without it, there would be none now.
So, it becomes a question of political economy to what degree we should have an ownership goal and how to support it.
This one is overblown by the right wing media. The Consumer Financial Protection Bureau has only, repeat only made calls for clear contracts and unambiguous obligations.
It has never, repeat never called for any limit on financial products offered.
“. If a company has high standards for mortgages then there will be disparate impact (more blacks will be deny than whites) and the business will be forced to spend a huge amount of money on demonstrating statistical compliance.”
Not all financial institutions are subject to these rules. What is interesting is the GSEs had a long history of buying loans with FICOs below 660, Pinto and Wallison’s definition of subprime. They performed well. It was the creation of liar’s loans, pushing loans with prepayment penalties and the exploding ARMs that helped create the crisis.
The answer is to do away with these “innovative loans”. Require PMI and/or 20% down. That was what was going on before the private labels got involved. Also, just for good measure, do away with the mortgage deduction. Canada does those things and has home ownership rates about the same as ours.
You really don’t care one whit about facts, do you? Forget even dealing withe evidence, yes?
There’s only irony if one thinks that stopping redlining is some politically correct policy that keep banks from making reasonable credit decisions rather than policy that keeps banks from making irrationally racist credit decisions.
Of course, the reality is loans to neighborhoods that formerly were redlined don’t have a a higher default rate than average so no one can justify redlining on it’s own merit.
@Steven L. Taylor: It’s not easy to accept that there’s no point in engaging some people. Eric’s view is so distorted by ideology that to him, you’re the one arguing irrationally. No conclusion other than “it’s the government’s fault” is acceptable. The only bright side of engagement is that the silent majority reading the blog can see his opinions for what they are.
@Ben Wolf: All true–but it still amazes me at times (although it shouldn’t).
@Eric Florack: @de stijl: The facts don’t matter to Eric. After all, one man’s indisputable fact is another’s lie from the liberal media. If Obama hadn’t started the CRA all those years ago, this problem would never have happened.
@Just nutha ig’rant cracker:
I figured that out and stopped. I still kind of want to respond to SD’s 18:35 comment, but what would be the point. The goalposts would be flung at the wall, another red herring would be floated and only EF & GAP would salute.
Congresss gave the Consumer Financial Protection Bureau a very vague policy. All they have to so is propogate regulation such as been proposed in many blue areas like Montgomery County Maryland and the CFPB would have almost unlimited power to decide what is a good consumer contract and what is not. Of course, they would probably let the courts have the final say that would make the trial lawyers happy.
Blacks have a higher loan default rate than whites. http://findarticles.com/p/articles/mi_qa3750/is_199909/ai_n8869517/
If redlining was going on back in the 1980’s and 1990’s, the default rate should have been lower for blacks than whites instead of being higher If whites were getting loans that blacks could not get, then whites should have a higher default rate.
To aid you, I’ll dumb this down…. by quoting Wikipedia:
So, you’re suggesting the government was redlining?
See, here’s the part you missed…
First note it’s now the government and no longer the bank itself, that defines “safe and sound operation”. Further note that if the bakns didn’t comply, they’d screw with the banks ability to do business.
Let’s make this even more clear, shall we?
IN other words, all banks… unless you can name one that’s not FDIC insured.
Are you writing this down?
One more time. The other day you said they were told they would go to prison if they did not make loans to people who could not pay them back. Still waiting for you to back this up. Of course it will be a long wait, as it is total crap.
Dude, you are a proven liar. Why do you even bother coming here? You have no credibility, no friends and no respect.
One where the penalties involved with CRA, Anjin?
Oh, and this little tid bit:
Rains playing CYA again. Whoda thunkit?
From Rithotlz (and quoted above):
Tell me: do you actually read the posts you comment upon?
Amazing. In their effortspass out loans to those who couldn’t afford them, HUD set up targets for Fannie and Freddie in 1992 to purchase low-income loans for sale into the secondary market that got as high as 52 percent of loans. These were given to folks who normally wouldn’t be considered for loans because of their inability to pay.
And you insist there’s no connection to these toxic loans.
I suggest to you folks two things. First , you may want to look at the idea that most of the loans in question were not bank loans…so why are banks getting blamed….?
Irony; the mega moron Krugman actually gets one close to right:
and secondly, if these loans to people who couldn’t afford payments were not an issue, as many lefties like to claim… why are Fanny and Freddie.on life support?
What Krugman is describing here is what I’ve always held to be the issue; Bad laws create unintended consequences. The banking standards, as I have always aid, got lowered by government fiat… even if they didn’t have a clue what they were doing. All so they could buy minority votes, of course.
Boy, it’s amazing how Nobel Prize winners and other financial experts are completely powerless in the face of Eric and Wikipedia.
@Steven L. Taylor: And so, having seen the frightening specter of wingnutiness, another “liberal” is born. My push to the left was a result of the Clinton witchhunt and the Bush idiocy. Welcome aboard.
“Amazing. In their effortspass out loans to those who couldn’t afford them, HUD set up targets for Fannie and Freddie in 1992 ”
And where was the housing bubble then??
You and SD are retarded racists.
I told you the onslaught would happen.
It’s always the darkies for these guys.
I’ll assume you’re just ignorant and not stupid and try to make this clear so that you will understand the distinction.
Mortgage lenders like Wells Fargo Home Mortgage are part of Wells Fargo which is a bank. A bank with deposits (checking and savings accounts). A bank that is subject to OCC, FDIC and SUBJECT TO CRA REGULATION!!@!1!! All the stuff you copied without understanding from Wiki applies to WF, BofA and other chartered banks.
A private mortgage lender is not a chartered bank, doesn’t have deposits, and doesn’t have to answer to the OCC or OTS nor follow FDIC rules AND IS NOT SUBJECT TO CRA REGULTIONS! So all the stuff you copy / pasted but failed to grok – and I mean failed to grok on an astonishing and unbelievably embarrassing scale – does not apply.
Wells Fargo & Bank of America – CRA
Joe’s Live Bait, Mortgage Loans, and Cheese Shoppe – No CRA
Your “gotcha” had me laughing for ten minutes. Thanks for brightening my day!
Bit, I am not asking you to split the atom. Simply cite a single instance where a lender was told they would go to jail if they did not make a loan to someone who could not pay it back. This is what YOU said happened. Put up, or shut up. The babble you put on your blog does not impress anyone here. Try coming up with something factual.
Even one verified incident will do. From a credible source please.
Some Guy: Why wasn’t Les Steckel fined for his check to Sidney Crosby’s head instead of Victor Hedman?
Some Other Guy: It wasn’t Les Steckel, it was Dave Steckel. Dave Steckel is a hockey player who played for Tampa Bay last year; Les Steckel coached the Minnesota Vikings. You’re confusing the two. Look at the article you’re commenting on – it says Dave Steckel gave Crosby the concussion. Dave is in the NHL and Les was an NFL coach.
SG: The NHL should fine the pants off of Les Steckel.
SOG: NHL rules don’t apply to Les Steckel. Les Steckel was a faux-tough guy, horrible coach of the Vikings who indelibly tainted the memory of Bud Grant. He was never a NHL hockey player and did not cause Crosby’s injury.
SG: Les Steckel is a poopy head and the NHL should fine him.
SOG: NHL RULES DON’T APPLY TO FOOTBALL COACHES!
SOG: Are you insane?
Say what you will about the sweet miracle of unquestioning faith, I consider a capacity for it terrifying and absolutely vile!
– Kurt Vonnegut
One thing that always jumps out at me in these discussions is how hung up the right is on pointing the finger at minority lenders.
A large element in the current mess was people using their homes as ATMs, pumping cash out of them, cash that was sometimes put back into the home, sometimes not. Where I live an awful lot of folks were paying for boats and trips to Tuscany via refi. Paying of credit cards as well (trade unsecured debt for debt secured by your home – great idea).
Then there were people who bough half million dollar houses in places like Lodi. How exactly is a home in Lodi worth half a million dollars?
But, these are Republicans we are talking about. Let’s keep it simple. It’s all the fault of black people, brown people, and the government.
Sorry should be “minority lending”
Sad to see no comments from Jan or Drew…I hope they are OK…too bad Eric has to tilt at this windmill without them.
No. Rather at the Democrats in positions of power who wrote a bad law in their attempt to buy votes from said minorities.
Perhaps, someday, given the people they’ve been passing Nobel prizes out to lately, you can explain to me of what value they hold any more. And financial experts? Are these the ones who are for the last two years consistently surprised by the intensity of the economic downturn this administration has created? (After two years of economic downturn, you would think that the word “unexpectedly” would no longer be in their vocabulary when describing further downturns. )Sorry, I’m impressed by neither one of them.
Anjin; Perhaps someday you can explain to me how a postage stamp in San Diego is worth half a million dollars. But I doubt it.
You keep trying to cast this as a racial issue. At no point have I ever brought that up except insofar as to suggest that the democrats were trying to buy minority votes with a bad bit of law. You do understand the distinction, don’t you? Or should I dumb that down some more so you understand it?
As to the rest of the negative comments, it still comes down to a badly written piece of law, the purpose of which was to buy them minority voting. It’s that simple.
Tomorrow Eric takes on Acorn.
Tuesday will be Tax Cuts pay for themselves.
Wednesday will be Obama apologizes for the United States.
Thursday will be Birtherism.
And Big Lie week will finish on Friday with Obama caused the ’07-’08 Economic collapse.
Pretty simple actually:
San Diego, another of the top-ranking US cities for sunshine, gets more sun in winter than in summer.
San Diego enjoys about 266 days of sunshine each year
average daily temperature of 70.5
California beaches & warm water.
More than a few people I grew up with went to college in San Diego and liked it so much they are still there 30 years later. They are all people who are in a position to live anywhere they choose.
I mentioned the racial angle exactly once. Could you explain how that constitutes “keep trying”?
I guess you were out of town when Obama took office with the economy in the worst crisis of our lifetimes already underway…
My wife’s former bank, Chevy Chase, in Frederick MD, was threatened by the Feds in the 90’s (Clinton years I recall) for not making enough loans to minorities. They denied it. Intrigued, I delved into the issue and found they were probably innocent, but there was a push by the Feds to increase home loans, carrot and stick style. The carrot was they’d back the loans. Chevy Chase loosened their requirements. They are gone now, swallowed up by a former credit card company. Was that a direct CRA action? I never saw the CRA mentioned in the documents I looked at. So I conclude the CRA idea rippled through the economy. It ‘s not hard to believe as it has been said that foreign investments were leveraged against these investments. So despite the study quoted, I have doubts about how it squares with what I’ve seen.
This is my first look at this weblog, and I’m disappointed in the comments, the snarling invective. I suggest the condescending tone of many of the commentators masks a weak argument. You know, ad hominem…
BillZ – can you document any of that?
@Rob in CT: There will be no documentation, as he specifically said the CRA was not involved. He still suspects the CRA though, so much so that he is willing to ignore any evidence otherwise.
He’s just playing for the team that needs to blame the CRA, so that’s all evidence he needs. The thing that bothers me most about this nonsense is that it makes it harder to avoid bubbles like this in the future if we can’t even identify the causes.
I think this is potentially misleading. Did Spain have a program like the CRA? Does Spain have a Federal Reserve…well clearly the Federal Reserve played no role then. Right? Also, Ritholtz mentions counter-party risk, but then fails to take that into consideration when evaluating international impacts.
What is a non-CRA region according to Ritholtz?
Would some place like La Puente California qualify as a suburb? If so, I could see the CRA playing a role there, La Puente is also not a very…well its not what one would think of as an ideal suburb.
And to be clear, I don’t think CRA is the cause either. But it might have played a lesser role in the crisis.
Also, I think it would be a mistake to ignore the problem of moral hazard that the government created when it started bailing out various industries because it was politically convenient. Privatizing the profits, but nationalizing the losses is not a good policy, but it is one the government has done for awhile now. In this situation loosening regulations while still providing bailouts is a disastrous policy…one our government whole heatedly engaged in.