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.