What Caused Our Economic Crisis Video

This video, called “Burning Down the House: What Caused Our Economic Crisis” (although, oddly, set to the tune of “Money for Nothing”) is apparently all the rage (at least in my wife’s office). It traces the subprime crisis to the Jimmy Carter era Community Reinvestment Act.

To the extent this view is correct (and I suspect, like anything else complex, there are multiple causes) the irony is that government regulation of the economy — not absence of it — was the problem.

It stands to reason, certainly, that banks have little interest in making loans for people who are poor credit risks or whose incomes are too low to afford a home. Indeed, the Wikipedia entry on the bill’s history begins, “The CRA was passed by the 95th United States Congress and signed into law by President Jimmy Carter in 1977 as a result of national grassroots pressure for affordable housing, and despite considerable opposition from the mainstream banking community.” Furthermore, “until 1995 the Act was laxly enforced and banks only were required to advertise in local minority newspapers or sit on the boards of local community groups.”

So, what happened in 1995?

In early 1993 President Bill Clinton ordered new regulations for the CRA which would increase access to mortgage credit for inner city and distressed rural communities. The new rules went into effect on January 31, 1995 and featured: requiring strictly numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups to complain when banks were not loaning enough to specified neighborhood, income group, and race; allowing community groups that marketed loans to targeted groups to collect a fee from the banks.

There’s a longish section entitled “Controversy” that gives both sides of the discussion as to how much CRA contributed to the current mess. But, certainly, the bubble was partly fueled by lending to people who simply would never have been able to get a mortgage without loosened rules.

It should be noted, too, that this was not an unalloyed bad. While the bubble has burst and some of these people are now unable to pay their mortgages, it’s far from clear that they’re worse off than they otherwise would have been. They were renters before and, for all intents and purposes, they were renters while in their homes. That’s especially true if they got in without a substantial down payment. In the interim, they not only got to live in a house but gain the benefits that come with it, including mortgage deductions and better schools. Furthermore, a goodly number of these people have managed to make their mortgage payments and become part of the middle class.

FILED UNDER: Bureaucracy, Economics and Business, Government, , , ,
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Triumph says:

    Exactly! It was Carter’s fault! Wild speculation in the mortgage-backed securities market had nothing to do with fueling the current credit crisis.

  2. carpeicthus says:

    Mind-bogglingly stupid.

    “It stands to reason, certainly, that banks have little interest in making loans for people who are poor credit risks or whose incomes are too low to afford a home.”

    The far bigger reason for this crisis was that was no longer the case thanks to rebundling, etc. They weren’t giving away huge loans without credit checks my accident.

  3. Tad says:

    A less blatantly partisan video might come across as more informative. or as informative I should say.

  4. rodney dill says:

    A great video that has only a couple of major problems. People in general have a hard time processing and accepting, cause and effect when a time lapse (especially a large one) is involved. Most peoples’ attention spans are not longer than a snarky sound bite like, ‘I’ll get back to ya.’

  5. Alex Knapp says:

    This would be more convincing if the CRA was responsible for more than, say, a quarter of subprime loans. But it wasn’t. The rest was just good old fashioned, “Hey, prices are rising! Let’s ride it! Why, there’s no way home prices could ever go down!” thinking.

  6. Derrick says:

    Republican’s definitely have a sense of humor. I’ll give two facts that will show how ridiculous their placing blame on the CRA is. The first fact is that while there are about $1 trillion in subprime loans out there, there are $60 trillion in credit-default swaps covering those subprime loans. And secondly, whites make up about 75% of subprime loans.

    We’ve had our share of home crisis before and dealt with them fairly quickly. This crisis is about derivatives held by banks, not the actual loans by banks. And to blame this on increased minority ownership is just as weak of an argument when the majority of subprime loans were issued by private lenders who weren’t even covered by the CRA and didn’t do it just to help the “colored folks”.

    This is just an unwillingness to accept blame for this problem and another opportunity to try to pin this on minorities from the “Party of Lincoln” that we keep hearing about. This is complete b.s.

  7. Michael says:

    I’ll give two facts that will show how ridiculous their placing blame on the CRA is. The first fact is that while there are about $1 trillion in subprime loans out there, there are $60 trillion in credit-default swaps covering those subprime loans. And secondly, whites make up about 75% of subprime loans.

    Do you have a reference for those?

  8. Michael says:

    This would be more convincing if the CRA was responsible for more than, say, a quarter of subprime loans. But it wasn’t.

    Again, references would be nice.

  9. Anderson says:

    I’m sorry, but I don’t understand the contention.

    Did legislation pushed by Carter or Clinton *require* banks to make loans to borrowers who had no plausible shot at paying the loans back?

    Or did that legislation *permit* such loans?

    Big difference.

    Haven’t listened to it yet, but This American Life’s piece from months ago on the mortgage crisis seems to be well received and not especially partisan.

  10. Michael says:

    A breakdown on how old these failing mortgages are would be helpful here, if the problems started in 1995, then we would expect to see a steady increase in bad mortgages starting from about that point.

    My own observations, however, tell me that there was no major change in defaults until around 2003/2004, and then it increased exponentially from there. If that is indeed the case, then the question is what changed a year or two before that?

  11. James Joyner says:

    Did legislation pushed by Carter or Clinton *require* banks to make loans to borrowers who had no plausible shot at paying the loans back?

    Or did that legislation *permit* such loans?

    It certainly encouraged them. Banks basically couldn’t get a passing grade if they weren’t making loans to the proper demographic cohorts which were inherently risky.

    I agree — and say in the post — that this isn’t the whole cause. I just offer this up, though, because the talk now is that it’s entirely a problem of greedy bankers and anti-regulation Republicans.

  12. Rick DeMent says:

    ever believe this blatant spin. The problem was outright fraud in the mortgage application process that was not required under the CRA. Please show me where in the CRA it said that lenders were required to fabricate incomes, fabricate home values, and securitize them so they could wash their hands off the fraud?

    Further, the fact that the lenders had no skin in the game since they were going to repackage the loans and sell them made the fraud easy to rationalize. And since they were committing outright fraud anyway no reason to make any attempt to value the homes honestly.

    The deregulation that made credit default swaps legal made all of this possible.

    The dishonesty of this meme is jaw dropping.

  13. Michael says:

    It certainly encouraged them. Banks basically couldn’t get a passing grade if they weren’t making loans to the proper demographic cohorts which were inherently risky.

    How many of those loans, made between 1995 and 2000, have gone into default?

  14. rodney dill says:

    I agree — and say in the post — that this isn’t the whole cause. I just offer this up, though, because the talk now is that it’s entirely a problem of greedy bankers and anti-regulation Republicans.

    It would be interesting to see a non-partisan time line of ‘all’ the contributing factors. I’m not sure who could be trusted to come up with such a time line, and I would be suspicious of anything that either appears before Nov 4th, or tries to blame one party more than the other.

  15. Whoa… James… channeling Rush and Sean today?

    This CRA thing is a complete red-herring and has been debunked a hundred times. CRA doesn’t even cover about 1/2 the mortgage lenders — not always banks — that made sub-prime loans. At most CRA affected about 25-40% of sub-prime lends… but that does not mean that all of those loans were made to comply with CRA. A realistic figure is probably more in the 10% range… and obviously, not all CRA-encouraged loans have gone bad, though many have.

    The problem was the housing bubble… and relaxation of capitalization requirement for Freddie and Fannie.. and lax regulation… and the insane doctrine of “too big to fail” and a host of other things. The CRA issue is, at most, a tiny piece of the puzzle.

    Some useful links.

    There was a time… and it hard to young people to believe it now… when the Republican Party was the party of ideas, challenging the increasingly bizarre orthodoxy of welfare-state liberals. It is so sad to see conservatives nowadays resorting to evidence-free diatribes that always come up the same answer — every problem is the fault of the government and every solution can be found in tax-cuts for the wealthy.

  16. Bithead says:

    This CRA thing is a complete red-herring and has been debunked a hundred times. CRA doesn’t even cover about 1/2 the mortgage lenders — not always banks — that made sub-prime loans

    Nice try.

    the CRA was what caused the entire qualification process to change… even for loans that were not under CRA.

    the new policies in terms of what is and is not a valid loan, were by nature of being ’fair’, not limited to the ’poor’, but to all who wanted loans. If any kind of deliniation of policy had been inserted between ’rich’ and the ’poor ’, how long do you suppose it’d be before lawsuits started flying around like so many bats?

    When the LTV, LTI and other elegibility factors were altered to help the poor into housing, the banks were forced by legal (and lawsuit) considerations to extend such value scales to ALL comers.

    Argue if you will about that being poor policy, but that policy was put in place as a direct result of CRA and of F&F snapping up bad loans as quick as the banks could generate them. This is a failure of government policy.

    Oh… And I know this stuff. I was attached to an HE division for nearly a deacde.

  17. Bithead… your anecdotal evidence is just that anecdotal.

    The issue is this: No one promoting the CRA argument has been able to produce any actual evidence to support it. And the evidence ought to be out there — in terms of changing lender qualifications, variation betwene CRA and non-CRA lenders, default rates, and so on.

    Instead, all we get is conjecture and anecdotes, whereas the other side in the “debate” actually provides facts, figures, and detailed analyses.

    On your side is a belief. On the other is facts. I provided 3 links, each with many additional links to follow for anyone who actually wants to bother to read the underlying analysis. Or you can believe that Bithead’s personal experience somehow gave him a birds-eye view of the whole expanse of the problem.

    Your call, my friends.

  18. angellight says:

    Banks which are Regulated do not have the current crisis problem! Those who are not Regulated do.

    My take on this crisis, is that Lenders suckered average folks into mortgages which they could afford at first. Because there were no Regulations or Oversight, these Lenders would raise the monthly mortgages on the Buyers to an amount they could no longer afford! The houses were then foreclosed on and then re-sold again to some other unsuspecting victim, until the whole deck of cards has collapsed. What is compelling, is that before the total collapse, CEO’s pay themselves millions, sometimes billions as compensation pay for the said collapse! For instance, “In 2007, Wall Street’s five biggest firms– Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley – paid a record $39 billion in bonuses to themselves.” From ABC’s Political Punch

    Could these enormous salaries the CEO’s unjustly earn be one of the Main reasons why these companies fail and go under, and which actually, and in the end, bankrupt these companies to fail!

  19. Bithead says:

    terms of changing lender qualifications, variation betwene CRA and non-CRA lenders, default rates, and so on.

    As I’ve suggsted… there IS no diffeence between them, by order of possible lawsuit.

    On your side is a belief. On the other is facts. I provided 3 links, each with many additional links to follow for anyone who actually wants to bother to read the underlying analysis. Or you can believe that Bithead’s personal experience somehow gave him a birds-eye view of the whole expanse of the problem.

    Is calm experienced voice from the same group of folks who brought us the “Great society”?

  20. Michael says:

    Oh… And I know this stuff. I was attached to an HE division for nearly a deacde.

    Doing what, exactly?

  21. Michael says:

    As I’ve suggsted… there IS no diffeence between them, by order of possible lawsuit.

    If CRA was the cause of this, either directly or indirectly via legal concerns, then the evidence would show a consistent increase in the problem between 1995 and 2005, is that the case?

  22. Bithead says:

    Doing what, exactly?

    I’m kinda limited by contractual legalities in my answer, so I don’t want to get into specifics, but I guess it’s safe enough to tell you that I was doing what I call ‘soup to nuts IT’ for a division of about 400 people. You can imagine that would expose me to about everything going on, including policy, from an orginizational birds eye view.

  23. Anderson says:

    because the talk now is that it’s entirely a problem of greedy bankers and anti-regulation Republicans

    Oh, hey, don’t get me wrong — I’m sure plenty of Dems were eating from the cash-toting hand of the financial sector, too. After all, what could possibly happen?

  24. Bithead says:

    If CRA was the cause of this, either directly or indirectly via legal concerns, then the evidence would show a consistent increase in the problem between 1995 and 2005, is that the case?

    Consistant, of itself? No.
    I submit that the figures would be market driven as much as anything else. As an example, the spike in bad loans of 05 to 07 was certainly market driven. Bad loans always tend to spike prior to or during a downturn. But what caused the bad loans to be accepted in the first place? Polcies adopted post-CRA.
    Absent that, the lot would have been rejected.

    Let’s remember, gang, the NYT predicted back in 99 this would happen, and told us WHY. Indeed, it’s not online anymore (old website) but I write a piece at the time agreeing with it’s conclusions. Among them; First downturn we get is a biggie.

    Well, guess what?

  25. anjin-san says:

    Oh… And I know this stuff. I was attached to an HE division for nearly a deacde.

    Look, bit worked in a bank. He is probably the most brilliant economist since Adam Smith. Has Palin taught you people nothing?

    And, judging by his reference to “deacde”, I think Battlestar Galatica is somehow involved. I will get back to you on that in a few centons.

  26. Anderson says:

    Tyler Cowen (no liberal he):

    Did policies such as the Community Reinvestment Act significantly worsen the housing bubble and the subsequent collapse? Basically not, although in my view these were bad policies for other reasons. They contributed to our current problems by only a small amount and of course these policies have been around for a long time before the housing bubble ever got started.

  27. Michael says:

    I’m kinda limited by contractual legalities in my answer, so I don’t want to get into specifics, but I guess it’s safe enough to tell you that I was doing what I call ‘soup to nuts IT’ for a division of about 400 people. You can imagine that would expose me to about everything going on, including policy, from an orginizational birds eye view.

    No, I don’t imagine that at all. You see, I’m in in much the same position, in a rather large commercial bank, and IT doesn’t get a birds eye view of business policy, nor legal’s position on things not IT related. Maybe your situation was different, but I have only your word on that to judge by.

    I submit that the figures would be market driven as much as anything else. As an example, the spike in bad loans of 05 to 07 was certainly market driven. Bad loans always tend to spike prior to or during a downturn. But what caused the bad loans to be accepted in the first place? Polcies adopted post-CRA.

    I’m still not seeing evidence of a correlation here. You have regulations enacted long before the problems started that would not have prevented the problems had they not been enacted.

    The best case you can make is that CRA made it easier/more likely for the problems to occurred. If you want to make that case, you’ll get no argument from me (nor, I suspect, many others), but the case you are currently making is that CRA was a primary mover.

  28. Bithead says:

    I’m still not seeing evidence of a correlation here. You have regulations enacted long before the problems started that would not have prevented the problems had they not been enacted.

    So, the bad efefct of bad relugation is always immidietaely apparent?

    Interesting.

    The best case you can make is that CRA made it easier/more likely for the problems to occurred. If you want to make that case, you’ll get no argument from me (nor, I suspect, many others), but the case you are currently making is that CRA was a primary mover.

    I am.
    Perhaps it’d help if you or Bernard would describe where else this scenario occurred, abesent the government trng to push a political goal on the backs of private banks, hmmm?

  29. Michael says:

    So, the bad efefct of bad relugation is always immidietaely apparent?

    If the bad regulation is the primary factor in the bad effect, yes it is.

    I am.

    You are which? Claiming that CRA was a passive contributor, or a primary mover?

    Perhaps it’d help if you or Bernard would describe where else this scenario occurred, abesent the government trng to push a political goal on the backs of private banks, hmmm?

    Why would that help? If your theory can be falsified using available evidence, there isn’t a need for an alternate theory to exist in order to accept that yours is wrong.

  30. Dave Schuler says:

    The problem was outright fraud in the mortgage application process that was not required under the CRA.

    Interesting. Got proof?

    I’m prepared to think that the CRA was responsible for some proportion of the problem, that crime (as you suggest), was responsible for some portion of the problem, but I strongly suspect that people responding in expected and legal ways to the incentives they had were preponderantly responsible for the situation.

    I’ve also heard it said, without substantiation, that the SEC reduced its capitalization requirements.

    I’d certainly be interested in hearing proposals for specific regulations other than mandating a change in human nature that would prevent future problems of this sort. Those have been pretty scarce.

  31. Michael says:

    I’d certainly be interested in hearing proposals for specific regulations other than mandating a change in human nature that would prevent future problems of this sort. Those have been pretty scarce.

    Transparency. You can usually depend on people doing what it in their own best interest. But without all the information, people are not always able to determine which choices are in their best interest, and which aren’t.

    People took out mortgages because the information they were presented made it look like it was in their own best interest. People bought mortgage backed securities because the information that was available to them made it look good for them.

    Just like with campaign finance, transparency is better than regulation.

  32. Good grief… it isn’t really that complicated.

    The core condition was that over a period of time the connection between risks and rewards in the mortgage business was broken. We should have seen it coming, but we didn’t really. The problem ballooned because of a the self-reinforcing dynamic — more loans increased housing prices which made the previous risky loans look less risky, which bolstered the amount of lending. Though no one really understood how to value some of the mortgage-backed securities, they had recurrent evidence of making money off them.

    Mortgage lenders were pursuing profits.

    Anyone who knows anything about finance — which may marginally include me, but seems likely to exclude some of the other posters in this thread — know that speculative bubbles can exist through pure market dynamics and have over hundreds of times occurred throughout history. Combined with the spread of exotic financial instruments that effectively hid risk, you just don’t need convoluted, evidence-free stories about the CRA to explain what happened.

    Could effective government regulation have prevented this bubble. Maybe. Maybe not. I really don’t know. Maybe it would have, but at the cost of crippling the housing market altogether.

    I am not necessarily in favor of more regulation. Indeed, I readily admit that regulation often causes more problems that it is worth. And as a general rule, I strongly prefer to allow the market to operate freely. But where I differ from people like Bithead is that I refuse to accept the extreme position that market failures never occur absent government intervention, nor do I accept that notion that government regulation is always bad. There is an ideological purity to Bithead’s approach that is appealing in a way. The challenge with his approach that it conflicts with facts, history, and common sense.

    But then again, it is well known that reality has a liberal bias nowadays.

  33. Grewgills says:

    It is my understanding, though I have lost the link, that the 1995 bill modifying the CRA allowed securitizing CRA loans. In any case Bear Stearns and First Union marketed the first CRA backed securities in 1997. Many others followed. Had these loans not been securitized and leveraged 20:1 – 30:1 we would not be in a mess of near this scale and would not be in a panic to push through flawed legislation to fix it. If you want to blame the 1995 changes you should blame the changes with the greatest impact.

  34. anjin-san says:

    I’m kinda limited by contractual legalities in my answer, so I don’t want to get into specifics, but I guess it’s safe enough to tell you that I was doing what I call ‘soup to nuts IT’ for a division of about 400 people. You can imagine that would expose me to about everything going on, including policy, from an organizational birds eye view.

    This is an interesting claim. Having been in IT divisions for 2 Fortune 500 companies, my experience is that the IT folks in general know little to nothing about business issues the larger organization has, and tended to have a fairly narrow focus on issues at hand. IT people tend to know little about legal. regulatory and compliance issues except as they relate to their own projects. A large percentage of IT workers know very little about the industries they are working in, they have a useful skillset, and they tend to focus on refining or expanding that, not understanding the tactical and strategic issues their employer has.

    Looks like my attempt at humor above is pretty accurate, bit worked for a bank, therefore he is an economist.

  35. anjin-san says:

    We should have seen it coming, but we didn’t really.

    My guess is that risk managers made noise, but were told to shut up in light of the vast profits being made…

  36. Dave Schuler says:

    Transparency. You can usually depend on people doing what it in their own best interest. But without all the information, people are not always able to determine which choices are in their best interest, and which aren’t.

    Transparency in what? The MBS’s are inherently opaque; that their creators obviously don’t understand them suggests that much. The mortgage closing process? That’s what lawyers are for. Are you suggesting that it’s possible to make financial and legal transactions sufficiently comprehensible to the average guy or gal that they’ll be able to make informed decisions without professional guidance? I very much doubt it.

    People seem to be under the misapprehension that bankers are advocates for consumers. That ain’t the case and it shouldn’t be the case.

  37. Bithead says:

    You see, I’m in in much the same position, in a rather large commercial bank, and IT doesn’t get a birds eye view of business policy, nor legal’s position on things not IT related. Maybe your situation was different,

    As you say.

    Why would that help? If your theory can be falsified using available evidence, there isn’t a need for an alternate theory to exist in order to accept that yours is wrong.

    That’s just it; that hasn’t been done. Perhaps some practical application of this in history is in order.

  38. Bithead says:

    This is an interesting claim. Having been in IT divisions for 2 Fortune 500 companies, my experience is that the IT folks in general know little to nothing about business issues the larger organization has, and tended to have a fairly narrow focus on issues at hand. IT people tend to know little about legal. regulatory and compliance issues except as they relate to their own projects

    You’re right; that stuff is usually need to know. But, as I say, I really can’t get into it, for legal reasons. My duties were unusually broad, is about all I can say. Sorry.

  39. Bithead says:

    My guess is that risk managers made noise, but were told to shut up in light of the vast profits being made…

    Well, that, and the idea that the bad stuff was going to be moved off to F&F before the toner cooled on the documentation.

  40. Are you suggesting that it’s possible to make financial and legal transactions sufficiently comprehensible to the average guy or gal that they’ll be able to make informed decisions without professional guidance? I very much doubt it.

    I just want to flag this particularly insightful comment by Dave.

    Transparency — and I here I do speak as something of an expert on the issue (Google me if you’d like) — is too often considered to be synonymous with disclosure. But it increases information, not necessarily knowledge. There is the possibility that with better transparency provisions, someone would have pieced together the problems… and perhaps some people did. But look, it is tremendously hard to explain to people the likely consequences of the current financial crisis even when it is staring us in the face. It would have been virtually impossible to build a compelling case for action a priori.

    The transparency argument also relies on the notion that markets operate perfectly with given enough information. They don’t because going from information to “knowledge” involves assessments that are conditioned by a variety of psychological, social, and cognitive dynamics. And again… this is wholly uncontroversial to any fair-minded observer. Markets often are susceptible to bubbles and over-corrections and other forms of irrational behavior.

  41. Bithead says:

    It is my understanding, though I have lost the link, that the 1995 bill modifying the CRA allowed securitizing CRA loans. In any case Bear Stearns and First Union marketed the first CRA backed securities in 1997. Many others followed. Had these loans not been securitized and leveraged 20:1 – 30:1 we would not be in a mess of near this scale and would not be in a panic to push through flawed legislation to fix it. If you want to blame the 1995 changes you should blame the changes with the greatest impact.

    Correct. That brings up something I meant to say earlier. I’ve been saying the CRA, when in most instances, it would be more correct to say “the CRA as modified by Clinton”

  42. Bithead says:

    If the bad regulation is the primary factor in the bad effect, yes it is.

    If that were true, the crash of ’29 would have been forseen decades earlier, for example.

  43. Michael says:

    As you say.

    Yes, but I’m not asking anybody to “trust me” on being particularly insightful about the business policy of my employer.

    That’s just it; that hasn’t been done. Perhaps some practical application of this in history is in order.

    The Michelson-Morley experiments disproved the aether theory before QM and Relativity were available alternatives. Yours has been similarly disproved, unless you wish to now modify the specifics of your theory. An alternative isn’t required to know that yours predicts the existance of some phenomena which is not present.

  44. Dave Schuler says:

    Thanks for the kind words, Bernard.

    There’s another unrelated factor that I don’t think is being sufficiently recognized: this is a global problem. If national regulation is a sufficient and necessary response to the problem, why are the EU countries which, presumably, have heightened levels of regulation suffering too?

    I really don’t believe that the problems we’re seeing are criminal ones and I’m skeptical of calls for criminalizing the activities. But while heightened regulation may be necessary I’m not convinced that it will be sufficient. It’s a different world out there.

  45. Michael says:

    The MBS’s are inherently opaque; that their creators obviously don’t understand them suggests that much.

    Then the transparency should have been that their creators didn’t understand them, thus implying more risk than people actually knew about.

    Are you suggesting that it’s possible to make financial and legal transactions sufficiently comprehensible to the average guy or gal that they’ll be able to make informed decisions without professional guidance? I very much doubt it.

    It’s possible, but I don’t know of any efficient way to make the financial and legal frameworks sufficiently simple. Still, we could probably simplify some things that are needlessly complex, and provide some base level of education about law and finance as part of our public education.

    Also, there can be made available free material on at least the basics of such matters for those interested. I don’t expect the average Joe to read up of the financial and legal aspects of a mortgage, but I don’t think it’s too much to expect that the average Joe who is about to take out a mortgage to read up on it.

  46. Michael says:

    If that were true, the crash of ’29 would have been forseen decades earlier, for example.

    Why would that be?

  47. Steve Verdon says:

    Sorry Bernard that first link is crap. When an article starts off with an assertion that Cato is a far right think tank most credibility goes out the window. Second the article is misleading when it claims that CRA was signed into law in 1977, but sub-primes really only took off in the mid to late 1990’s therefor CRA is not to blame. Well no sh*t Sherlock, the contention isn’t that it was simply the 1977 legislation, but that it was the 1977 legislation followed by later legislation that really got the ball rolling on sub-prime loans.

    Now, this doesn’t mean the whole mess is due to the CRA and its follow-on legislation, but it played a part. Another part was the way many financial institutions set up performance benefits. Basing them on a single years profits made people take short term views, made jumping into bubbles more attractive, etc. Toss in the really low interest rates to get the housing market really rolling and things start to take the shape of a bubble. Throw in the creation of Mortgage Backed Securities that supposedly allowed risk of bad loans to be spread thus allowing for even more sub-prime lending and things start to really shape up in a bad way.

    There is plenty of blame to go around and you’ll come off looking alot better if you try to remain objective and not become a partisan fool looking to try and spin the “Conservatives are to Blame” just as others should refrain from “Liberals are to Blame”. The reality is both look like crap in this one.

  48. Michael says:

    If national regulation is a sufficient and necessary response to the problem, why are the EU countries which, presumably, have heightened levels of regulation suffering too?

    Monogamous people get STDs too.

  49. Dave Schuler says:

    Another part was the way many financial institutions set up performance benefits.

    I’ve been complaining about that for years. Once upon a time compensation was based on the experience over the life of the loan.

  50. Bithead says:

    Yes, but I’m not asking anybody to “trust me” on being particularly insightful about the business policy of my employer.

    But, you see, I’m not. If I were asking such, I’d have gone to far greater detail. As it is, and with the restrictions I am under, I simply state the truth as far as I can to the discussion, and let the discussion flow past that as it will.

    See, I can understand your reluctance here from a logical POV, but I’m also smart enough to understand that the usual suspects will deny anything I say, mostly because I’ve said it and because it doesn’t match their worldview… even if I give them a blow by blow, which I’m not about to do, given the situation as I described.

    So goes life.

  51. Bithead says:

    Verdon:
    Just so you know… We agree more than usual, here.

  52. Steve Verdon says:

    Reading the speech by Janet Yellen that is referenced in one of Bernard’s links I have to say I’m unimpressed.

    Before I turn to potential interventions, I want to make one final point. There has been a tendency to conflate the current problems in the subprime market with CRA-motivated lending, or with lending to low-income families in general. I believe it is very important to make a distinction between the two. Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans,16 and studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households.17 We should not view the current foreclosure trends as justification to abandon the goal of expanding access to credit among low-income households, since access to credit, and the subsequent ability to buy a home, remains one of the most important mechanisms we have to help low-income families build wealth over the long term.18

    Quite a bit hinges on reference 16 which reads,

    According to the 2006 HMDA data, 19 percent of the conventional first lien mortgage loans originated by depository institutions were higher-priced, compared to 23 percent by bank subsidiaries, 38 percent by other bank affiliates, and more than 40 percent by independent mortgage companies. Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner, “The 2006 HMDA Data,” Federal Reserve Bulletin, Volume 94 (2007), p. A89.

    In other words we can’t blame CRA because depository institution which are covered by CRA had only half as many high-priced mortgages as independent mortgage companies.

    Sorry not good enough!

    How about we see some time series of that data. Nothing fancy just the percentage over time. Was it always 19% or did it take a jump…say after Clinton signed the legislation putting more teeth into CRA? If so, the CRA played a role. Albeit a smaller one than the video is implying.

  53. not become a partisan fool looking to try and spin the “Conservatives are to Blame”

    But… I never said that. I said it was a market failure, and I wasn’t sure that more regulation would have made a difference. And I didn’t blame deregulation either.

    Truth be told… my beef here is not with deregulation. It is with bailing out unregulated firms. If a firm is “too big to fail” it is “too big to operate without close oversight from regulators.”

    All I said about conservatives was that their attempt to blame CRA is indicative of conservatives losing their way intellectually. At some point conservatives went from believing that the market usually provided the best solutions to the notion that the market is somehow infallible, and that if anything goes wrong with the market it must be due to government regulation.

    On some issues CATO is far-right, on some far-left, that’s what I love about em. But either way, I don’t see why the use of that characterization ipso facto colors all the other analysis and data.

  54. Sorry not good enough!

    How about we see some time series of that data.

    Good idea. Then also make sure you control for other factors like the recovery of the housing market after the 1990-91 decline and interest rates, and we can have a serious discussion.

    Look… maybe CRA is to blame. But all I can find in terms of evidence suggests otherwise. That was my initial argument. The blame CRA crowd makes a series of loose conjectures. The “its not CRA’s fault” crowd counters with actual data.

    If you can salvage the “blame CRA” argument with actual data, you will have significantly advanced the debate.

  55. Dave Schuler says:

    Why does there need to be a single root cause for the financial crisis?

    Other than human nature, that is.

  56. Grewgills says:

    I’ve also heard it said, without substantiation, that the SEC reduced its capitalization requirements.

    From Forbes (other outlets had much the same)

    Perhaps the worst decision made by the commission under Chairman Christopher Cox occurred in 2004, when the SEC issued a rule that allowed broker-dealers with at least $5 billion of capital to change the way they calculate their debt to net capital ratio–the gross leverage ratio. This was called the Consolidated Supervised Entities program. Goldman Sachs (nyse: GS – news – people ), Bear Stearns, Lehman Brothers (nyse: LEH – news – people ), Merrill Lynch (nyse: MER – news – people ) and Morgan Stanley (nyse: MS – news – people ) all eagerly signed up, having lobbied heavily for the new rule.

    The program effectively doubled the amount of leverage that the broker-dealers could use. The program also changed the rules for discounting (taking a haircut) on their capital. Estimates are that Lehman, Merrill and Bear Sterns all had leverage that exceeded 30%. With leverage that high, the firms did extremely well when times were good–but they effectively bet the firm on things staying that good.

    cox called an end to the program last week.

    Correct. That brings up something I meant to say earlier. I’ve been saying the CRA, when in most instances, it would be more correct to say “the CRA as modified by Clinton”

    and of course the Gingrich congress and the Dole senate.
    The changes that I mentioned (removal of regulations) were requested by the financial sector that later abused them and demanded by congressional and senate republicans in order to pass the changes Clinton wanted. This runs counter to your thesis.

  57. Davebo says:
  58. Bithead says:

    and of course the Gingrich congress and the Dole senate.
    The changes that I mentioned (removal of regulations) were requested by the financial sector that later abused them and demanded by congressional and senate republicans in order to pass the changes Clinton wanted. This runs counter to your thesis.

    Be verrry careful here.
    Are you really saying Clinton didn’t want these changes?

  59. Grewgills says:

    Are you really saying Clinton didn’t want these changes?

    I am saying that the removal of regulations that allowed CRA mortgage backed securities was a far bigger problem than pushing more minority lending. Allowing securitization was heavily lobbied for by the financial institutions that later secutized these assets and leveraged them irresponsibly and republicans were 4 square behind this change*. Clinton pushed for accountability in meeting CRA standards (quotas) and republicans pushed for removal of regulations preventing securitization of CRA loans. Both got what they wanted and went along with the rest.

    However you spin it though the republican controlled congress and senate** voted for all of the changes you blame for our current mess and 6 years of full republican control did nothing to stop or mitigate it. Despite this you place all of the blame on democrats. How do you justify that?

    * and SEC rule changes that allowed greater leveraging
    ** along with Clinton and other democrats

  60. Floyd says:

    BRAVO! This article should help mitigate the useless noise from the left that every problem in the world from E.D. to education is the fault of President Bush.
    You can whine all you want, but C.R.A is one of the major reasons for this collapse.

    My previous residence went to a Burger King worker who received 25% above purchase price in cash at closing on a gov. guaranteed loan.
    He made no payment and the house was repo’d about 2-1/2 years later. FREE RENT AND CASH! What a deal!
    The house before that? Sold-FHA. Default without a single payment, Again, repo’d in just over two years. The buyers both worked for the State!

    Home loans should ONLY go to those who bring equity to the table and are capable of making the payments.
    Don’t take an A.R.M.and then ask for a HAND!

    The house I live in? Again a government guaranteed loan….. DEFAULTED!
    I bought it for 60 cents on the dollar.
    Same goes for the previous two houses.

    Of course this isn’t everything….Next stop?
    Reinstate the UPTICK RULE!

  61. Davebo says:

    You can whine all you want, but C.R.A is one of the major reasons for this collapse.

    Floyd, read Bainbridge.

    You are grasping at less than straws here, or you don’t understand what CRA actually did.

  62. Steve Verdon says:

    Why does there need to be a single root cause for the financial crisis?

    Other than human nature, that is.

    Exactly, I don’t think there is a single root cause (other than human nature) and all the spin in terms of the blame game is a waste of time.

    Not sure I agree with the “too big to fail” therefore they need to be regulated since the regulators are no better than the Wall Street Wizards when it comes to predicting the future and dealing with problems as they come up.

    The issue with simply increasing transparency is note, but at the same time I think it certainly could mitigate problems like this. Noting, explicitly, the opaque nature of the MBS and that their actual ratings is suspect might have helped.

    If you can salvage the “blame CRA” argument with actual data, you will have significantly advanced the debate.

    Wish I had such data. If I had the time I might try e-mailing some of the authors Yellen mentioned and ask for such time series data (it shouldn’t violate any confidentiality rules since it would be aggregated data).

  63. Steve Verdon says:

    I am saying that the removal of regulations that allowed CRA mortgage backed securities was a far bigger problem than pushing more minority lending. Allowing securitization was heavily lobbied for by the financial institutions that later secutized these assets and leveraged them irresponsibly and republicans were 4 square behind this change*. Clinton pushed for accountability in meeting CRA standards (quotas) and republicans pushed for removal of regulations preventing securitization of CRA loans. Both got what they wanted and went along with the rest.

    In other words, both are to blame.

    However you spin it though the republican controlled congress and senate**

    Ha ha ha ha.

    How often have Democrats recently sneered at such comments about the current Congress.

    Pot meet Kettle….

  64. spencer says:

    All this discussion about the CRA really misses the point.

    The real issue was the fundamental assumption that housing prices never fall in the US. Consequently, even if the borrower defaulted the lender would not be hurt because the worse case scenario would be that the lender now owned a house that was worth more than the loan. Consequently, the lender would actually make a profit if the borrower defaulted.
    But there would be no reason for the borrower to default because the rising value of the house would always allow them to refinance.

    This “belief”, supported by a ton of historical data, was what led to all the wild types of loans, not the political changes in the CRA.

    By ignoring this point all bithead is doing is demonstrating that he has no idea what he is talking about.

  65. Bithead says:

    In other words, both are to blame.

    yeah, gee, like we’ve never said this previously.

    This “belief”, supported by a ton of historical data, was what led to all the wild types of loans, not the political changes in the CRA
    This “belief”, supported by a ton of historical data, was what led to all the wild types of loans, not the political changes in the CRA.

    By ignoring this point all bithead is doing is demonstrating that he has no idea what he is talking about.

    .

    Had it occurred to you that assumption was one the modifications to the CRA were also based on?

    No I don’t suppose so.

  66. Bithead says:

    Clinton pushed for accountability in meeting CRA standards (quotas)

    So, you’re saying the only accountability Clinton was interested in was if we had enough minorities being placed in houses.

    Yeah, that sounds about right.

  67. Grewgills says:

    In other words, both are to blame.

    Yes, but that does not mean that they are equally to blame. Allowing securitization and increasing allowed levels of leveraging increased the size of the mess by orders of magnitude. The republicans took a bad democratic bill and made it a horrible bipartisan bill. In the end both democrats and republicans agreed to both parts and so both must share blame.

    How often have Democrats recently sneered at such comments about the current Congress.

    Pot meet Kettle…

    I don’t see how this applies to me. When democrats pass bad legislation pushed by Bush they must share blame for the consequences as well. If they make the legislation far worse they must take the lion’s share of the blame. Where have I deviated from that stance?

    yeah, gee, like we’ve never said this previously.

    Only that’s not what you have been saying. I have only see you lay blame on government regulation and democrats/ liberals. Please show me where you have attributed shared blame to republican representatives, senators, and Bush appointees.

    So, you’re saying the only accountability Clinton was interested in was if we had enough minorities being placed in houses.

    No, I am saying he wanted a quantifiable measure of CRA compliance with some teeth and that is the rubric he supported. Maybe there is a better rubric. Likely any rubric would have real flaws. Setting aside your disagreement with the aim, how would you quantify compliance without quotas?

  68. Floyd says:

    “”You are grasping at less than straws here,””
    “”””””””””””””””””””””””””””””””””””””””””””””””””
    Davebo;
    Bainbridge has written a well polished article. I don’t think there is anything definitive in it except a fairly well presented point of view,one which I do not share.
    I have not said that there is only one cause for this situation, in fact I made it clear that I thought otherwise.
    Root causes can be difficult to discern, but some things are clear,it has to do with unethical and imprudent activity and not to party affiliation.
    Bainbridge was displaying his racism, by trying to lump blacks and illegals together, or trying to imply that because a high percentage of these loans were given to whites,that they are legitimate.They are not.
    Sub-prime lending to high risk borrowers without equity is unethical and immoral regardless of the race of the recipient.
    Giving mortgages, of any kind, to people here illegally is exploitive and immoral and makes the lender an accessory to a crime at best.
    Lastly,If demographics were an issue,it would be the default rate that would matter ,not the rate at which the loans were issued.
    There are in fact legitimate principles that must be obeyed by any society in order to avoid adverse consequences.
    I read Bainbridge, now I invite you to read Kipling…

    http://tinyurl.com/bvepx

  69. Floyd says:

    Davebo;
    That link fail to go to the specific work to which I wished to refer. Hopefully this one will…

    http://tinyurl.com/4ovbf4

  70. Bithead says:

    Only that’s not what you have been saying. I have only see you lay blame on government regulation and democrats/ liberals. Please show me where you have attributed shared blame to republican representatives, senators, and Bush appointees.

    Here’s one.

    There is a lot of blame to be placed at the feet of both parties for our current condition; The Democrats for pushing us in this direction and the Republicans for their ‘go along to get along’ and “we’re all Americans” BS, in allowing this nonsense to get as far as it has, instead of fighting this stuff tooth and nail as they should have been

    .

    Oh, wait. You were looking for a condemnation of Republicans as the sole problem? Sorry, no. That doesn’t mesh with the facts. Most of the blame is on the left.

    No, I am saying he wanted a quantifiable measure of CRA compliance with some teeth and that is the rubric he supported.

    But the only thing the CRA was concerned about was getting minorities into houses they couldn’t afford. As amended by the Clinton administration it accelerated the process, and with it the inevitable crash.

    how would you quantify compliance without quotas?

    I wouldn’t, at all. And I’ll tell you why… because of where we are right now, today. CRA tried to get something for nothing. The result is the collapse we have on our plate right now. Every time the government fools with the normal running of a free market, it crashes.

    A few examples; Passenger Railroads. Passenger Airlines. Healthcare. Should I continue, or are you getting the point, yet?

  71. anjin-san says:

    Most of the blame is on the left.

    Bear in mind that bit blames the left when solar flares disrupt communications satellites.

  72. Bithead says:

    Interesting you should put it just that way. Doesn’t the left blame everyone else for solar flares and the resulting ‘global warming’?

    In any event, I note, without comment, your utter lack of a point by point defense on the charge, here, and your reliance instead on ad hominum.

  73. Michael says:

    Doesn’t the left blame everyone else for solar flares and the resulting ‘global warming’?

    Flares cause global warming now?

    It must be fun living in a reality where the laws of physics don’t apply. Can I import antigravity?

  74. Grewgills says:

    Here’s one.

    Sorry, could not read the whole rant, but I did control F for all mentions of Bush (none) and republican (a couple about caving in to dems and needing to get rid of the liberal ones). That is not exactly accepting their share of the blame. You haven’t done it here that I’ve seen and didn’t really do it at your blog if that’s the best you can come up with.

    But the only thing the CRA was concerned about was getting minorities into houses they couldn’t afford.

    No. It was concerned with getting banking and mortgage services to the underserved. Everything I have read indicates that the CRA loans did not default at a significantly higher rate than did other loans (certainly not higher than other sub-prime loans). Absent that it appears that they honored their debts just as well.

    As amended by the Clinton administration it accelerated the process

    Wow. Your capacity to blame all ills on Clinton astounds.

    I wouldn’t, at all. And I’ll tell you why… because of where we are right now, today…

    complete non-answer.

    Every time the government fools with the normal running of a free market, it crashes.

    When and where was there a free market that was not ‘fooled with’ by the government?

    Flares cause global warming now?

    It must be fun living in a reality where the laws of physics don’t apply. Can I import antigravity?

    I want to import time travel so I can prove the world is only 6000 years old.

  75. just me says:

    Doesn’t the left blame everyone else for solar flares and the resulting ‘global warming’?

    No they blame everything on Bush or Rove.

    And in Bush’s defense here he has been calling on a change in the mortgage market for years now-the GOP backed several bills, the house even passed some, but the DNC blocked them-saying Fannie and Freddie were fine. And that is the rub, because they weren’t.

    The whole collapse may not be entirely on Fannie and Freddie’s backs, but the reality is that for the last 9 years people in government and the media have been predicting this. The democrats had their heads in the sand.

    I am not convinced any of the proposed legislation would have fixed the problems, but some in the admin and GOP were at least saying there was a problem.

    I think in the end we just convinced ourselves the bubble wouldn’t burst. There is one aspect of the free market we sometimes seem to forget-it goes up and down-some things get overpriced and the bubble bursts. I think we somehow believed that the housing market wouldn’t go down.

  76. rodney dill says:

    Flares cause global warming now?

    I’m not so sure about flares, but some one scientist has implicating Solar cycles.

    How did you get off track on Global warming?

  77. Michael says:

    I’m not so sure about flares, but some one scientist has implicating Solar cycles.

    Global warming is a trend, not a cycle, and Mars isn’t experiencing global warming, only regional warming.

    How did you get off track on Global warming?

    Sorry, Bithead’s fault.

  78. Bithead says:

    Flares cause global warming now?

    Always have. Do a little research, and you’ll note that flares are at a 50 year low just now. And what are the scientists predicting as a result? Global COOLING.

    Sorry, could not read the whole rant,

    I figured as much. I figure the truth makes you shrink. WHich of course is why you also ignored the quote of it I posted here.

    No. It was concerned with getting banking and mortgage services to the underserved

    Meaning loans to people who couldn’t afford it. There’s no way around this one.

    When and where was there a free market that was not ‘fooled with’ by the government?

    Lack of a perfect situation doesn’t defeat the argument. Our economy works best when government stays out of the way… and works in direct resverse proportion to the degree which government gets involved.

  79. anjin-san says:

    Solar Flares cause global warming now?

    Always have.

    How far back does meaningful data on solar flares go? My guess is not very. Got Facts?

  80. Bithead says:

    You’d guess wrong, as usual.

    Read and learn.

    Short version: Usful records go back to the middel 1600’s. Very detailed records go back to the middle 1800’s.

    There are records that apparently pre-date Man, if you’d like to go back quite that far.

  81. Michael says:

    Always have. Do a little research, and you’ll note that flares are at a 50 year low just now. And what are the scientists predicting as a result? Global COOLING.

    I have done the research and, contrary to your believe, so have climatologists. Yes, solar activity directly effects global temperature, and yes we see a cyclic change in global temperature that corresponds to them. But those changes aren’t what climatologists are talking about when they talk about global warming. If you plot the averages over the course of all of those cycles, you get an ascending line, that is what they are talking about when they talk about global warming.

  82. Michael says:

    How far back does meaningful data on solar flares go? My guess is not very. Got Facts?

    Records on solar activity probably go back further than direct recordings of global temperatures do. Don’t discount something just because it appears to contradict your point of view (especially in this case, because the evidence doesn’t actually contradict your point of view).

  83. Bithead says:

    But those changes aren’t what climatologists are talking about when they talk about global warming.

    Irony abounds here; a target rich environment. I guess the biggest target to be, it’s the peak of the sunspot cycle where Gore gets his figures from.

    But of course all this is sidetracking us from the main topic. To link back…

    These same people who are claiming the end of the world due to global warming…. that is to say, the left… these are interestingly, the very same who we trusted with the compartively simple task of maintaining a mere economy. Given the parallels between this and everything else government tries to do, including the aforementioned Passenger Railroads. Passenger Airlines, Healthcare, etc, etc, please, I beg you, don’t wonder if I don’t consider the prospects for their manangement of the ‘environment’ to be any better, or, given our current conditon, their alarmed cries of ‘crisis’ to have any greater accuracy.

  84. […] at OTB just now: These same people who are claiming the end of the world due to global warming…. that is to […]

  85. Grewgills says:

    I figured as much. I figure the truth makes you shrink.

    Nice try.

    WHich of course is why you also ignored the quote of it I posted here.

    No. I found that when I ctrl F’ed for republican and it is one of the couple of references I mentioned (Rs won’t stand up to Ds and liberal Rs must go). Your only criticism of republicans has been that they are too nice and go along with the big mean liberals and that some are too liberal. That is not what Steve was talking about in his comment that began this tangent and you (should) know it.

    Meaning loans to people who couldn’t afford it.

    I know that it is shocking to you, but there are/were communities that were underserved for reasons other than the credit worthiness of the residents. You (or anyone else) has not shown evidence of higher default rates in these communities or these loans. Until you can do that your argument will hold no water.

    Our economy works best when government stays out of the way… and works in direct resverse proportion to the degree which government gets involved.

    Certainly untrue if one bases this on TFP or GDP growth in the US. Admittedly technology throws a monkey wrench into the equation, but I guessing you really don’t have any data to back up your assertion anyway so that’s largely irrelevant.

    Do a little research, and you’ll note that flares …

    Perhaps you should read Lockwood and Froehlich* to begin understanding why solar flares do not explain current climate change.

    * available free through the PDF or HTML link on that page

  86. Bithead says:

    I know that it is shocking to you, but there are/were communities that were underserved for reasons other than the credit worthiness of the residents. You (or anyone else) has not shown evidence of higher default rates in these communities or these loans. Until you can do that your argument will hold no water.

    So why was it regarded by those pressig for it as in majority, a bill to overcome racism?

    but I guessing you really don’t have any data

    I’ve already cited several examples.

    Perhaps you should read Lockwood and Froehlich*

    I have. Their postulation is overcome by several other works on the subject.

  87. Michael says:

    So why was it regarded by those pressig for it as in majority, a bill to overcome racism?

    Wait, did you just prove his point?

  88. Bithead says:

    I said that’s how they were billing it, not that it actually accomplished that. See, the nasty little secret here is that most poor people are white.

  89. Grewgills says:

    I’ve already cited several examples.

    No, you have not.
    You have cited some examples of particular industries that you feel suffered due to government involvement. You have provided no evidence that government involvement was at fault in whatever failures you saw there and you have certainly provided no evidence to support the assertion that the general economy does better sans regulation. That would be a first step in showing that we as citizens would be better off with less regulations on business.

    I have. Their postulation is overcome by several other works on the subject.

    Then cite them. Web site rantings don’t count. Please provide something peer reviewed.

  90. Bithead says:

    You have provided no evidence that government involvement was at fault in whatever failures you saw there and you have certainly provided no evidence to support the assertion that the general economy does better sans regulation.

    Another one going to great lengths to avoid the obvious.

    Call me when you get back to the planet.

  91. Grewgills says:

    Bit,
    Your assertion is not self evident so you need to provide evidence.

    For instance if government involvement cripples rail travel, why do the trains provide such good service at such reasonable costs in countries with heavy government regulation on that rail travel (much of Europe)?

    BTW, CRA regs also covered communities that were underserved because they were/are small and rural. The beneficiaries of those services were mostly poor and white. And again the repayment rate on CRA loans has not been shown to be significantly less than for other loans.

    Still waiting for the cites that refute Lockwood and Froehlich (2007). I won’t hold my breath waiting.