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The Subprime Meltdown

Fannie and Freddie had little to do with it. The CRA, even less.

[I originally had the full post mirrored to this site, but rather than monopolize Uncle's front page, I figured I'd just redirect you to Lean Left.]

Posted in Current Events, Politics, The Issues on February 13th, 2009 by tgirsch | RSS 2.0 |

55 Responses to “The Subprime Meltdown”

  1. Manish Says:
    February 13th, 2009 at 5:46 pm

    T..why bother? They have their talking points in hand. It was evil government regulation that brought down the house of cards, not the lack of it. I bought my home in 2005 and I’m not poor and I was amazed at the exotic mortgages available to me: no documentation loans, 1% loans, etc. I think anyone who got a mortgage in the last several years could really think that all of this was healthy.

  2. David Avera Says:
    February 13th, 2009 at 6:46 pm

    Lot’s of private institutions ORIGINATED the subprime loans because government regulations encouraged them and Fannie and Freddie made it profitable by buying them up.

  3. tgirsch Says:
    February 13th, 2009 at 6:50 pm

    That’s what people keep saying, but it’s not borne out by the facts. It was too little regulation, not too much, that made these loans possible.

  4. N.U.G.U.N. Says:
    February 13th, 2009 at 6:51 pm

    Let’s not forget the following:

    a) Some of those major private banks were sued and threatened by the government to provision more urban loans or lose access to monies.

    b) That those private banks were forced to compete in against a socialized mega bank for mortgages.

    Factor those two things in, and I still lean toward government meddling created this problem.

  5. Dave R. Says:
    February 13th, 2009 at 7:01 pm

    You’re being fed a line of bull if you believe that. Apologies for the long quote from the linked article, but I think its relevant:

    “Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.

    Federal Reserve Board data show that:

    More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

    Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

    Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics.

    The “turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007,” the President’s Working Group on Financial Markets reported Friday.”

    This didn’t happen in a vacuum and it didn’t happen voluntarily. It happened under deliberate pressure from congress and from special interest lobby groups. Color-blind lending standards that resulted in different numbers of mortgages to different neighborhoods or income groups were vilified as “redlining,” and got lenders protested and threatened with investigations. So, they eased up on their lending requirements until the poor and “victim groups” started to qualify. But they couldn’t afford to have minority-only categories of loans, so the exotics went industry-wide, as Manish notes.

    The important point is this happened only under political pressure and legislative mandate.

    Freddie and Fannie were first out of the gate in lowering standards. Focusing on 2004-2006, or even 2001-2007 is a neat trick, because that is the height of the activity, but the ball got rolling before that.

    I do blame the private actors who were selling the re-packaged paper as securities, but at the same time I understand how it came about. If you were a lender mau-maued into making loans you would not have chosen to, you wouldn’t want to hold onto that paper either. The biggest private villains were the brokers who figured out they were making money moving the darn things.

    Steve Sailer has had some good stuff on this topic. See:
    http://isteve.blogspot.com/2009/02/how-to-guide-to-being-community.html
    And:
    http://isteve.blogspot.com/2009/02/countrywide.html
    Also:
    http://isteve.blogspot.com/2009/02/wamus-375-billion-in-cra-loans-was-for.html
    And less directly:
    http://isteve.blogspot.com/2009/02/1990s-fha-mortgage-default-rates-by.html

  6. tgirsch Says:
    February 13th, 2009 at 7:33 pm

    I’d like to see some evidence of both claims, please. Not evidence that either one ever happened; rather, evidence that they were common enough occurrences to be major contributors to the problem. From the linked item:

    Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.

    During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.

    That seems to contradict what you’re arguing.

  7. Tomcatshanger Says:
    February 13th, 2009 at 7:39 pm

    So the 24% of bad loans made by Freddie and Fannie or covered and regulated by the CRA where in a vacuum, all on their own, not affecting the rest of the evil capitalist market in any way?

    The other 76% of loans did NOT in any way, shape or form have to compete with Fannie, Freddie, or regulated by the CRA loans?

    Nifty.

    I like markets that aren’t effected by other variables in the self same market. That’s pretty cool.

  8. tgirsch Says:
    February 13th, 2009 at 7:44 pm

    And actually, according to this, newly-instituted caps on Fannie and Freddie designed to reduce their dominance of the mortgage marketplace had the unintended consequence of opening the door to abuse by unscrupulous lenders:

    Two developments seem to have spurred the easing in US standards. First, a range of legislative and policy changes had been made to encourage the development of a non-conforming (Alt-A and subprime) lending sector, lying outside the model defined by the government-sponsored enterprises (GSEs, Fannie Mae and Freddie Mac). Part of the motivation for this was a desire to ensure that home ownership was accessible to households who had historically been underserved by mortgage lenders (Gramlich 2007). In addition, the administration had wanted to reduce the GSEs’ domination of the mortgage market. Following problems with accounting and governance at both institutions, the GSEs’ capacity to expand lending was capped by new regulatory limits on their activities (Kiff and Mills 2007, Blundell-Wignall and Atkinson 2008).

  9. tgirsch Says:
    February 13th, 2009 at 7:47 pm

    Freddie and Fannie were first out of the gate in lowering standards.

    This much is true. But they never lowered standards to anywhere near the lows that the private sector did on its own. From the above-linked PDF:

    The real distinction is between loans that were in the FHA pool or the conforming market — those insurable by the GSEs — and those that were not in either of those groups. Although there was some easing of standards in the conforming market, especially in the GSE’s extended programs and the FHA seller-financed downpayment program, it was minor compared with the one that occurred in the rest of the market. Arrears rates on the GSEs’ single-family home portfolio have risen a great deal recently, but this only started in the second half of 2007 (Figure 7, right-hand panel). Likewise, the increase in arrears rates on FHA mortgages has been fairly mild.

  10. irish red Says:
    February 13th, 2009 at 7:48 pm

    I like how you start your post with accusing everyone who disagrees with you as intellectually dishonest.

  11. Manish Says:
    February 13th, 2009 at 7:48 pm

    CRA didn’t apply to most of the lenders that were big into sub-prime, period. Ameriquest wasn’t subject to CRA..Countrywide wasn’t subject to CRA, but was rescued by BofA who is subject to CRA. In fact, the companies who have been bailing out mainly non-CRA lenders have been CRA banks. Wells and Chase are both covered by CRA and they’ve bought other lenders. The major CRA lender to go under was WaMu and they only wiped out shareholder value as Chase bought them and assumed all of their obligations.

  12. Manish Says:
    February 13th, 2009 at 7:58 pm

    Let me ask this to everyone…have you been to a mortgage broker in the last 5-7 years?

    If so, did this mortgage broker go over all the various mortgage products available to you including:

    a)ARMs where the rate would re-set to something that was likly way higher than your initial rate, but don’t worry because you can always re-finance (because, you know, rates don’t go ever go up..but don’t worry about that either because home values only go up so worst comes to worst you can just sell and make money on the place).

    b)Option ARMs, where you can pay as little as 1% per month even though the interest rate was actually higher and your principal grew..but you couldn’t pay 1% for-ever because there were safeguards in the mortgage (for the lender) to ensure that your principal didn’t get too high.

    c)Low and No Documentation mortgages where you didn’t have to prove that you had any money to put down or a little reserve in the bank to ensure that you could survive a layoff or some other rough patch. And lest we forget, the just tell us your income and we’ll take your word for it.

    d)No money down mortgages..even get money back from your closing so that you wouldn’t have any skin in the game.

    And once presented with some or all of the above choices, did no one think to themselves that these weren’t sustainable business practices?

  13. tgirsch Says:
    February 13th, 2009 at 8:07 pm

    B-b-b-ut Manish, the Big Bad Government forced those banks to offer all of those awful loan products, and prohibited those banks from doing simple things like verifying employment and income, or running credit reports!

    Just because there’s not a shred of evidence to support this view of events doesn’t mean they didn’t happen that way! Fox News forever!

  14. Tomcatshanger Says:
    February 13th, 2009 at 8:48 pm

    Yep, I went to a mortgage broker in August of last year, and finally got around to buying a house in December. I did the responsible thing and told them upfront I wasn’t interested in adjustable rate mortgages. It wasn’t even hard to do.

    I didn’t say the government made banks do stupid loans. I am saying that money lenders did stupid loans to compete with government mandated loans.

    Lenders not controlled or directly influenced by the Feds have to compete with Lenders that ARE controlled and influenced by the Feds, in the very same market. I’m fairly certain it’s not rocket science.

    Explain to me how that’s a conservative theory would ya?

  15. tgirsch Says:
    February 13th, 2009 at 9:06 pm

    I am saying that money lenders did stupid loans to compete with government mandated loans.

    Fair enough. Now how’s about you back that up with so much as a shred of evidence? I’ve provided links galore for my version of events, and not exclusively from left wing blogs and think tanks, either.

    Lenders not controlled or directly influenced by the Feds have to compete with Lenders that ARE controlled and influenced by the Feds, in the very same market.

    Then how do you explain the fact that the origination of bad loans increased dramatically only after the government took steps to reduce Fannie and Freddie’s market share, thereby reducing the so-called competition from the federally-backed-and-controlled lenders?

  16. straightarrow Says:
    February 13th, 2009 at 9:14 pm

    There goes tgirsch again. You show him proof, he denies it is. You give him references, he denies they say what they say. Now you know why I never play his game. He is dishonest in the extreme.

    As for Mannish in comment 11, yes. We didn’t fall for any of it. We took a decent fixed rate with money down and eschewed all the “magic”. We are still in good shape. Because we are smart enough to know a con job when we see it.

  17. Manish Says:
    February 13th, 2009 at 9:20 pm

    Lenders not controlled or directly influenced by the Feds have to compete with Lenders that ARE controlled and influenced by the Feds, in the very same market.

    No. The talking point, as I understand it, is that CRA-regulated lenders were FORCED to make loans that they KNEW were bad to sub-prime borrowers in low income neighborhoods or be faced with lawsuits, etc.

    First off, I’m a prime lender in a nice neighborhood and I was offered all these exotic products that wouldn’t have helped CRA compliance for any bank that I dealt with. In fact, it would mean that they would have to offer MORE loans to sub-prime low income borrowers.

    Second, the non-CRA lenders are under no obligation to compete in markets that they find unprofitable. If a business thinks that they are going to lose money servicing a particular market, they simply don’t service that market. There was plenty of mortgage market available in nice neighborhoods with prime borrowers.

  18. karrde Says:
    February 13th, 2009 at 10:19 pm

    I feel like a latecomer to the party.

    Tgirsch, I’d first like to ask if the causes you outlined are both necessary and sufficient causes.

    I happen to think that the interest rate business was necessary, as was the business climate brought about under the CRA and the government regulation.

    Neither was sufficient. Together, the combination was sufficient.

  19. Standard Mischief Says:
    February 13th, 2009 at 11:10 pm

    Someone’s been drinking the koolaid

  20. chris Says:
    February 13th, 2009 at 11:16 pm

    so let me get this straight… the ONLY industry that is more heavily regulated than the firearms industry is somehow full of problems because it isnt regulated enough?

    somewhere the logic on this one fails…

  21. HardCorps Says:
    February 13th, 2009 at 11:29 pm

    Jackass- thank you for linking to that study. Please see page 6 fig. 3. The left figure is a CDF of all MBS issued – of which it seems the GSEs issued over 10 Trillion in mortgages since 2000, and all others issued around 6T? That is around 63% of the mortgages right there. Now check out 2008 – looks like over 90% of mortgages were packaged by them.

    What now bitch? Go thank your socialist fuck-head friends for this depression. That includes bush. Ohh yea, but blame it on the finance sector and the free market, which that sector happens to be one of the most regulated areas in the entire world. How many different agencies are assigned to regulate and prosecute wall street? How many thousands of laws are there concerning banking and finance? Fucking lib-tard, that’s just like saying there aren’t enough gun laws in this country.

  22. Tomcatshanger Says:
    February 13th, 2009 at 11:50 pm

    You want proof that 76% of the bad loans where done by folks other than those controlled by the feds?

    REALLY??

    Or are you asking for me to prove that the home loans market is competitive? I don’t know how I’d do that, I suppose I could research marketing budgets.

    You mean the Feds reduced the market coverage of Freddie and Fannie and you then expect the market to shrink with the government and NOT expand to fill in the gap?

    How does that work? Best Buy is doing more business because Circuit City is closing. It’s the way of business. If Freddie and Fannie start a market share, then withdraw from it, what do you expect the demand to do? Shrink? Folks where told for years that they could afford a house for no money down, no matter their income.

    Why in the world would that market shrink just cause the Feds demand it to?

  23. William Says:
    February 13th, 2009 at 11:51 pm

    I posted this on tgirsch’s blog as well, but it’s “awaiting moderation”…

    tgirsch, what exactly are you trying to prove? Business cycles are a natural part of the economy–things are profitable in one area, so everyone pumps more capital into it, and they overshoot the opportunity. It happens all the time, in lots of industries.

    You seem to think that we can somehow “regulate” these business cycles, so that the economy grows at a steady 2%/year forever, or at least steadier than what we’ve got now. But remember–just because you’ve “proved” that businessmen want to make money (duh!) and the masses will sign anything (duh!) doesn’t mean that bureaucrats are intelligent, disinterested, incorruptible, and prescient. I’ll take capitalism (with laws against crimes, not stupidity) over collectivism/socialism/”regulation” any day–because businessmen get punished by the market for their stupidity (well, they did before the bailouts) and bureaucrats get away with whatever they heck they want. Planned economies don’t have a record of steady growth, but by all means, demonstrate that Hayek and Friedman were wrong, show us all how a planned economy can survive long-term, and then we’ll have something to debate.

  24. Les Jones Says:
    February 14th, 2009 at 12:33 am

    I haven’t seen any evidence that CRA was a major contributor.

    However, Fannie and Freddie were major contributors, particularly in taking no-doc loans. See Congressional testimony here:

    Freddie Mac’s senior executives ignored similar warnings. Donald J. Bisenius, a senior vice president, wrote in April 2004 to a colleague that “we did no-doc lending before, took inordinate losses and generated significant fraud cases.”

    “I’m not sure what makes us think we’re so much smarter this time around,” he wrote.

    Housing analysts say that the former heads of Fannie Mae and Freddie Mac increased their nonprime business because they felt pressure from the government and advocacy groups to meet goals for affordable housing as well as pressure to compete with Wall Street. But Mr. Pinto said one in five Alt-A loans in recent years were made to investors, not to first-time home buyers.

    Other big factors:

    Securitized mortgages. Some lenders wrote shite loans and pawned them off as investments.
    Moody’s and S&P then somehow rated those investments as high quality.
    Banks were massively over-leveraged relative to deposits and investments.
    The market was wildly inflated in many areas, with some areas (like California) much worse than others.
    Federal Reserve interest rates that stayed too low too long encouraged those crazy prices. Lowering the interest rate a couple of points makes an enormous difference in how much house people can afford, which drives up rates.
    Lending institutions went nuts, with things like 100% loan to value ratios (as opposed to the traditional 80%) and options ARMs, which are insane.
    There were some instances of intentional mortgage fraud, though that was relatively rate.
    There were also cases of people buying more house than they could afford, but the banks should have simply told them no.

    Overall, I rank the failings greatest at the government level, then at the banking level, and least at the individual level of honest buyers.

    The government – particularly the Federal Reserve under Greenspan – tried to prop up the economy with too-easy credit for too long. Greenspan in 2004 said that fears of a speculative housing bubble were exaggerated, and that more Americans should use adjustable rate mortgages.

    Banks and other lending insitutions betrayed their depositors and investors by glossing over risk and ignoring long-standing rules like the 80% loan to value ratio and the 3 to 1 annual income to mortgage ratio. Many buyers who went in seeking loans beyond their means should have been denied loans. That would have prevented many of the problems we’re seeing today.

  25. Tam Says:
    February 14th, 2009 at 1:52 am

    The government – particularly the Federal Reserve under Greenspan – tried to prop up the economy with too-easy credit for too long. Greenspan in 2004 said that fears of a speculative housing bubble were exaggerated, and that more Americans should use adjustable rate mortgages.

    If Greenspan isn’t lynched before this is all over, he’ll be a lucky man.

  26. Mikee Says:
    February 14th, 2009 at 4:07 am

    The wife & I bought at the crest of the Texas housing wave in 2000-2001, taking a low initial rate adjustable mortgage with the intent of refinancing before the rate increased. We rode out the dead market in 2001-2003, because we were living in our home and liked that our tax appraisal value was not increasing. We refinanced in 2004, again with an adjustable mortgage at a low rate. When the first rate reset occurred last year, our rates dropped about 1%, and will likely reset downward more than 1% again this year. When we see a fixed rate that we like, we will take it, likely before the end of 2010. Sometimes using the adjustable rate mortgages can save the homeowner money.

    However, when I’ve bought homes at foreclosure auctions to flip for a profit, for some reason the auctioneers demand immediate cash payment in full. It is almost as if the banks doing these foreclosures know that real money, right now, is the best way to do business after all.

  27. tgirsch Says:
    February 14th, 2009 at 1:10 pm

    Les Jones:

    I think that’s a pretty good assessment, for the most part. We seem to disagree only on the degree of impact of Fannie and Freddie’s involvement — neither of us holds them blameless, but you blame them somewhat more than I do.

    As for the rest of your analysis, I think it’s pretty much spot on. Especially about the role of Greenspan in the mess.

  28. tgirsch Says:
    February 14th, 2009 at 2:28 pm

    HardCorps:

    Question: Setting aside the difference between mortgages and MBS, and the fact that it doesn’t tell us anything at all about bad loans, and the fact that because of those two things I don’t think that graph tells us what you think it tells us. How does pointing to 2008, the year after the bubble burst and all the irresponsible private sector lenders went belly up, tell us anything at all about the cause of anything?

    And, of course, you still have Figure 7 (page 15) to deal with; that graph shows that non-GSE-backed loans are six times more likely to be in arrears than the GSE-backed loans. The private sector was making bad loans at a pace that absolutely dusted that of the GSEs. But I’m sure that’s all the fault of the GSEs, somehow.

    Anyway, since you obviously don’t have anything intelligent to contribute, by all means continue with the name-calling. It suits you.

  29. ravenshrike Says:
    February 14th, 2009 at 7:49 pm

    You’re entirely correct for once tgirsch. They did not cause the meltdown. They did however, cause the banks to start lending on a regular basis to untrustworthy lendees, which in turn caused the banks to look for an out in securities, at which point some bright-eyed little genius said why not play this game with ALL levels of loans, not just small ones. And thus the crisis occurred. Had the government not forced the banks to change their lending habits in the one instance it is rather unlikely they would have changed at all. Don’t think of the CRA et al as the loud noise that starts the avalanche, instead think of it as the sunlight that warms the snow priming the area for an avalanche.

  30. Number9 Says:
    February 14th, 2009 at 8:47 pm

    tgirsch, what exactly are you trying to prove?

    I feel for tgirsch. He really believed and now he knows he blew it. Went Full RetardMarxist. Everybody knows you never go Full Marxist.

    This is called rationalization. He needs to prove his heart was in the right place and he really didn’t mean to screw the pooch.

    You chose poorly, tgirsch. And that choice hurt this country.

    However, McCain was the wrong candidate and it tough to blame people for taking a chance. I now have some compassion for those who voted for anyone. I now get the Ron Paul voters. I understand it. It was a perfect storm.

    Obama, Pelosi, and Reid didn’t have to betray the country. They made that choice. And then they laughed about it. And don’t forget Bush was one of the worst ,if not the worst, Presidents on the economy. He spent more money than LBJ adjusted for inflation and it didn’t help us at all. So when ever anyone tells you Keynes is the answer, have some compassion for them. Hope can blind anyone. Still believe in change comrades?

    We are fucked. There is an old saying, “May you live in interesting times”. We are here for the death of the Republic and the birth of a social democracy. It is of little surprise they will move to take away our firearms.

  31. tgirsch Says:
    February 14th, 2009 at 8:50 pm

    ravenshrike:

    See, that’s the problem, though: the banks didn’t start massively expanding subprime loans because the government forced (or even encouraged) them to do so. They did it because as long as property values kept going up, they were making an assload of money doing it. Heck, if they were doing this reluctantly, because the government was prodding them into it, there’s no way they would have marketed them as aggressively as they did. All those late-night Countrywide and Quicken Loans commercials had nothing to do with the .gov. The only problem for those lenders was that it simply wasn’t sustainable: as soon as property values stopped increasing, the whole house of cards had to come crashing down.

    That seems to be the disconnect, the biggest part that the “pin it all on the CRA/GSE crowd” doesn’t seem to get. Subprime loans of that sort were small potatoes, and made up only a small portion of the bad subprime loans that were made. The overwhelming majority were made by private enterprises looking to cash in on the bubble.

    Of course, it would help if someone could provide some affirmative evidence that mortgage lenders didn’t want to make those loans, and only did so because the Big Bad Government browbeat them into it. Because thus far, I haven’t seen any such evidence.

    Number9:

    There isn’t a day that goes by when you don’t reinforce the fact that you have no idea what you’re talking about. ;)

  32. HardCorps Says:
    February 14th, 2009 at 11:46 pm

    Tgirsch-
    Fannie and freddie made so many good loans that they need $200,000,000,000 to survive. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aId2BJIzu0cQ. And they were doing so well last year that they went into receivership and their stock holders were wiped out of more than $68,000,000,000 from Jan-Sept 2008. Most 401k/DB plans own agency debt too, all y’all might want to look into your own plan. But don’t worry, Tgirsch says it’s not their fault so just remember his sweet lies when your life savings drops another 40% this year.

  33. HardCorps Says:
    February 15th, 2009 at 12:13 am

    And of course, what caused the bubble? Read here for full explanation: http://mises.org/story/3128

  34. Number9 Says:
    February 15th, 2009 at 10:41 am

    HardCorps, tgirsch no habla the Austrian school of Economics.

    He is hard core Keynes.

  35. tgirsch Says:
    February 15th, 2009 at 12:19 pm

    They need $200 billion? On $10 trillion worth of mortgages? Seems to me that an 0.2% failure rate is pretty good, especially in the current economy.

  36. tgirsch Says:
    February 15th, 2009 at 12:24 pm

    HardCorps:

    I was just reading through a couple of your mises links that talk about what caused the housing bubble and the subprime crisis. They blame not Fannie and Freddie, but the Fed cutting interest rates to ridiculously low levels and thus driving a bubble and encouraging excessive risk-taking in the market. Which is pretty much what I’ve argued. So thanks for the links that validate what I’ve been saying all along.

  37. Number9 Says:
    February 15th, 2009 at 12:48 pm

    So thanks for the links that validate what I’ve been saying all along.

    There it is. Textbook rationalization. And this is a reasonable progressive. Now you see how we got here.

  38. tgirsch Says:
    February 15th, 2009 at 12:49 pm

    Do you even know what rationalization means? Don’t answer that, the question was rhetorical. You conclusively proved that you don’t know what it means when you cited that as an ostensible example.

  39. Number9 Says:
    February 15th, 2009 at 1:03 pm

    tgirsch, you are one of the very few that can read mises.org and then justify your Keynesian position. This new meme of your, “that validates what I’ve been saying all along” is straight up rationalization. Textbook. Not only are you not listening, you aren’t thinking. Each time you show your preconceived notion was correct, in your mind. Autopilot right into a cliff.

    Face it, you do not believe in free markets. You desire a giant all knowing all controlling government to save us from ourselves. The rest of us see the government as the problem. Not the solution. Making it bigger and more powerful will not fix this.

    Carry on.

  40. HardCorps Says:
    February 15th, 2009 at 8:56 pm

    Tgirsch, I am very glad you read Mises.org. I believe in freedom in all areas of life, especially economically. I am glad you’re in agreement that this mess was caused by government artificially lowering interest rates. I believe most of our discussion was that the you thought the GSEs role was limited and it was free-markets that caused this depression. I will close with saying that the definite answers are presented at Mises.org by professors of economics, and that the GSE helped manipulate interest rates by their buying of mortgages at below free-market rates.

    It is because goverment controls our money and banks that our banks our now bankrupt. Our money might be next.

  41. tgirsch Says:
    February 15th, 2009 at 9:20 pm

    Number 9:

    Umm, how does complaining about the Fed keeping interest rates too low for too long count as “Keynesian?”

    Not only are you not listening, you aren’t thinking. Each time you show your preconceived notion was correct, in your mind. Autopilot right into a cliff.

    Have a look in the mirror there, bub.

    HardCorps:

    At least we can agree on the Fed’s role. Thing is, without the GSEs, the problem still happens, and on nearly the same scale. Did the GSEs contribute to the problem? Of course they did. Did they cause it? Absolutely not. Did the CRA contribute any significant amount to the problem that would exceed the range of statistical noise? No.

    Look, I’ve said repeatedly that I don’t hold the Democrats blameless in this. There’s plenty of blame to go around in both parties. But we can’t fix the problems and go forward unless we’re willing to take a long, hard, and honest look at what the causes really were, so we can avoid them in the future. And when we look at it that way, we see that while the GSEs really did get too big for their britches, and really did contribute somewhat to the problem, they were not the proximate cause, and in fact performed substantially better than the market at large.

    And, of course, the CRA argument has always been partisan bullshit.

  42. tgirsch Says:
    February 15th, 2009 at 9:41 pm

    For my money, this comment is the best summation of what went wrong.

  43. Number9 Says:
    February 15th, 2009 at 10:08 pm

    Umm, how does complaining about the Fed keeping interest rates too low for too long count as “Keynesian?”

    Loans were “too low”? According to whom. John Maynard Keynes?

    Maybe, just maybe, it had more to do with making loans to people who could not make payments? Rather than the actual rate of interest?

    You may remember how the 4th estate kept giving people advice on how to maximize their purchasing power? Give them some love on this.

    Was that Jimmah Carter who wanted everyone to own a home, even those who could not afford one? Was that Bill Clinton who allowed the law to be repealed that prevented arbitrage on loan swaps?

    Truth be told, Bush the Junior fucked it up too. Truth be told this has been in the works for a long time.

    This is like Thelma and Louise driving towards the cliff. Until Obama got in the car it was a casual drive off the cliff. Obama and company floored it.

    Whee, we’re flying. I sense pain coming soon.

  44. Xrlq Says:
    February 15th, 2009 at 10:22 pm

    Maybe, just maybe, it had more to do with making loans to people who could not make payments? Rather than the actual rate of interest?

    Potato, potahto. There are no bad risks, only inappropriately priced risks. But for some, the appropriate price would be so high they wouldn’t do it.

  45. karrde Says:
    February 16th, 2009 at 1:34 am

    Perhaps I should have been more clear.

    While Greenspan & Co.’s tinkering with interest rates was necessary for the mortgage meltdown to occur, it was not sufficient.

    That is, while removing the interest rate monkeying from the situation would have prevented the mortgage meltdown, it is not clear that the interest-rate monkeying would have guaranteed the mortgage meltdwon absent other factors.

    The business climate brought about by the CRA was seen as a variety of government using its power to stiff-arm banks into paying protection money.

    At least one commentator saw the protection money racket back in 1999, and accurately described the CRA as belonging to a family of regulations that allow regulators to tinker with something that will make Congressional campaign coffers rich with donations from the target of the regulations.

    I am still not certain that the mortgage meltdown was a first-order result of the CRA, nor that the CRA was a sufficient cause of the meltdown. However, the business climate engendered by the CRA appears to be a necessary cause of the mortgage meltdown.

    (To wit, if said business climate had been removed a decade before the meltdown, the meltdown would not have occurred.)

    Of course, as with the interest rate, other economic events that were considered good at the time would not have occurred, also…we must remember that all of these things seemed to be good at the time, but that it seemed a good idea at the time isn’t an excuse for hiding the true value of a mortgage-based-security, nor for lying to a person about how much their mortgage will cost if an interest-rate change occurs. Nor is it a good excuse for accepting a loan under conditions that high-school mathematics would show to be too expensive.

    In summation, when you say one thing is a cause and another is not, make sure we known whether you are talking about a necessary cause or a sufficient cause.

  46. tgirsch Says:
    February 16th, 2009 at 9:54 am

    karrde:

    The CRA angle still doesn’t make a lick of sense. Let’s assume, for the sake of argument, that the CRA applied to a lot more financial institutions than it actually did. Let’s assume further that the government really was strong-arming institutions into making risky loans that they didn’t want to make. Given those assumptions, which do you think is more likely:

    1. Those institutions would do the bare minimum necessary to comply with such regulations
    2. Those institutions would start making such loans a cornerstone of their business

    My money’s on #1, not #2. Yet #2 is what actually happened. I fail to see any evidence that #2 was the result of “the business climate brought about by the CRA.”

    Again, from what I can tell from the evidence available so far, the Fed’s low rates were part of the cause, and the Fannie and Freddie issues were symptoms. Fannie and Freddie certainly had other serious problems, but the extent to which they contributed to the subprime crisis was relatively small given their size and their share of the overall market.

  47. John H. Says:
    February 16th, 2009 at 12:38 pm

    tgirsh,

    You misunderstand (perhaps deliberately?). You seem to think you’re proving people wrong when you point out that the CRA wasn’t an all-powerful law that nationalized the banking industry and forced them to make bad loans.

    DUH.

    No one’s arguing that. They’re saying that the CRA created CIRCUMSTANCES CONDUCIVE TO THE UNREASONABLE LENDING PRACTICES WE’VE SEEN. At least SOME banks had to make the bad loans – the rest were either scared of being forced into compliance, or had to make bad loans to compete. That blew the initial bubble.

    The unreasonable and irrational tinkering of the Fed (government regulation at its finest) blew the bubble bigger and bigger, and government stepping in left and right to prop up the banking industry (which is more or less an arm of the government, at this point) made it safe to profit from what would be treated as too dangerous in a freer climate.

    No one is saying the private lenders are free of blame. NO ONE. They’re saying that this would have been a far more minor, far more contained situation if it weren’t for the deliberate support of these institutions and their practices by government entities.

    The lending practices of these banks would have been considered suicidal in a free market. That they were engaged in is proof that the banks knew someone would come in to save them.

    And hey, they were right!

    The institutions knew they could lend more than the people could ever pay back, and still profit, because they knew that they could always request the government step in to pay the tab.

  48. John H. Says:
    February 16th, 2009 at 12:38 pm

    Erg. Sorry for the double-post, I mistyped your name, tgirsch. I apologize.

  49. tgirsch Says:
    February 16th, 2009 at 1:02 pm

    John H:

    See, but here’s the thing: I understand what the argument is, it just doesn’t make a lick of sense to me. And I haven’t seen a scrap of credible evidence that we wouldn’t have seen exactly the same thing in the absence of the CRA. Not. One. Shred. The CRA applied to such a small percentage of total mortgages that it barely registered as noise.

    The reason you started to see the huge increase in subprime and Alt-A mortgages is not because the CRA forced anyone to do anything, but because the market for traditional, prime mortgages had largely dried up. This meant that lenders had to expand into non-traditional markets if they wanted to continue to grow. That would have been true even in the complete absence of the CRA.

    Now, factor in dangerously low interbank interest rates, an administration that aggressively pushes home ownership (even more aggressively than previous administrations), and the advent of derivatives that made these non-traditional mortgages pervasive in the financial markets to an extent that few fully understood, and you’ve got a recipe for huge-scale disaster, wholly unrelated to the CRA.

    The lending practices of these banks would have been considered suicidal in a free market. That they were engaged in is proof that the banks knew someone would come in to save them.

    Once again, I’ve seen little evidence to support this. The worst offenders were the least-regulated institutions, not the most-regulated ones. They knew the practices were extremely risky and continued anyway, because they were making heaps and gobs of money in the short-term, and were being bailed out as they went along, not buy the federal government, but by Wall Street, which bought up MBS seemingly blind to risk. By selling the MBS, the people making the bad loans essentially took themselves off the hook, and put investors on the hook instead.

    And to be clear, I don’t hold the government blameless, either. But the blame lies in its irresponsible monetary policy and its unwillingness to better regulate the mortgage and financial markets, not in the CRA.

  50. Number9 Says:
    February 16th, 2009 at 2:54 pm

    The CRA had little to do with this train wreck?

    Maybe if you are a progressive defending a religion. Most people have enough common sense to know that not everyone can afford a house. But not progressives.

    Social engineering from progressives and apathy from conservatives created this tragedy. Those who stood by and let it happen are just as responsible. Cowardice contributed to this.

    Thanks Jimmah and Slick Bill. Bush the First and Second also. Heckova job. Your “compassion” will be remembered long after you are gone. Say hi to Hoover when you reach your final destination.

    You have no idea how this will rock you life. Ten years from now you will have a fraction of the equity value you have today. You were robbed and never felt the pick pocket.

    Right tgirsch?

  51. tgirsch Says:
    February 16th, 2009 at 4:08 pm

    Jesus Christ, 9, do you even read what you link? From your Wiki link:

    However, others dispute the involvement of the CRA in the crisis. San Francisco Federal Reserve Bank Governor Randall Kroszner has stated that no empirical evidence had been presented to support the claim that “the law pushed banking institutions to undertake high-risk mortgage lending”.[56] In a Bank for International Settlements (”BIS”) working paper, economist Luci Ellis concluded that “there is no evidence that the Community Reinvestment Act was responsible for encouraging the subprime lending boom and subsequent housing bust,” relying partly on evidence that the housing bust has been a largely exurban event.[61] Others have also concluded that the CRA did not contribute to the current financial crisis, for example, FDIC Chairman Sheila Bair,[62] Comptroller of the Currency John C. Dugan,[63] Tim Westrich of the Center for American Progress,[64] Robert Gordon of the American Prospect,[65] Daniel Gross of Slate, and Aaron Pressman from BusinessWeek.[66]

    Some legal and financial experts note that CRA regulated loans tend to be safe and profitable, and that subprime excesses came mainly from institutions not regulated by the CRA. In the February 2008 House hearing, law professor Michael S. Barr, a Treasury Department official under President Clinton,[67][34] stated that a Federal Reserve survey showed that affected institutions considered CRA loans profitable and not overly risky. He noted that approximately 50% of the subprime loans were made by independent mortgage companies that were not regulated by the CRA, and another 25% to 30% came from only partially CRA regulated bank subsidiaries and affiliates. Barr noted that institutions fully regulated by CRA made “perhaps one in four” sub-prime loans, and that “the worst and most widespread abuses occurred in the institutions with the least federal oversight”.[68] According to Janet L. Yellen, President of the Federal Reserve Bank of San Francisco, independent mortgage companies made risky “high-priced loans” at more than twice the rate of the banks and thrifts; most CRA loans were responsibly made, and were not the higher-priced loans that have contributed to the current crisis.[69] A 2008 study by Traiger & Hinckley LLP, a law firm that counsels financial institutions on CRA compliance, found that CRA regulated institutions were less likely to make subprime loans, and when they did the interest rates were lower. CRA banks were also half as likely to resell the loans.[70] Emre Ergungor of the Federal Reserve Bank of Cleveland found that there was no statistical difference in foreclosure rates between regulated and less-regulated banks, although a local bank presence resulted in fewer foreclosures.[71]

    [Emphasis mine.]

    I suppose I’m just “rationalizing” when I say that those experts back up what I’ve been arguing about CRA.

  52. pdb Says:
    February 16th, 2009 at 4:35 pm

    Riiiiiiight.

    The CRA had no effect whatsoever.

  53. Number9 Says:
    February 16th, 2009 at 4:51 pm

    Riiiiiiight.

    The CRA had no effect whatsoever.

    Couldn’t help but notice how that looked like a hockey stick.

    There is nothing more religious than a secular progressive.

  54. Manish Says:
    February 17th, 2009 at 12:26 am

    They’re saying that the CRA created CIRCUMSTANCES CONDUCIVE TO THE UNREASONABLE LENDING PRACTICES WE’VE SEEN. At least SOME banks had to make the bad loans – the rest were either scared of being forced into compliance, or had to make bad loans to compete.

    So let me see if I follow and please let me know if I’m not following your logic..CRA regulated-banks made loans that they knew were bad to low income borrowers because they had to. Other banks were scared that they would be forced to make bad loans even though CRA didn’t apply to them. CRA could have been changed, in theory, so that it would apply to them. Under what political dynamic was CRA going to be changed? Was George Bush really going to sign an extension of CRA into law?

    Then there is the non-CRA lenders had to make bad loans to compete. Huh? Why would any business enter into a transaction that they knew they would lose money on? They would simply leave that market segment.

    Furthermore, none of your analysis jumps a basic hurdle of fact..the CRA lenders made loans that are performing better than the non-CRA lenders. If CRA made lenders make loans that they knew would go bad, why would non-CRA lenders make even worse loans?

  55. tgirsch Says:
    February 17th, 2009 at 12:30 am

    Manish:

    Shut up with your stupid facts and logic and reason! They have no place in Right Blogistan…

Remember, I do this to entertain me, not you.

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