Friday, December 23, 2011

Myth Exposed; Governtmnet regulation caused the economic crisis

The audit over at the CJR has a great piece, honoring a great piece, the pionts out a handful of holes in the Republican myth that claims the federal governments bloated regulatory agenda caused the economic crisis, specifically via Fannie and Freddie, when they were forced to lend to those who could not afford to pay back loans.

The first thing I ever read to poke holes in this myth argued that the regulation did not force loans to be given out willy nilly, to anyone. The regulation merely said that after decades of banks refusing to go into low income neighborhoods causing them to further deteriorate and giving them no hope of rebuilding that the banks had to open up shop in those neighborhooods. But they did not have to give out loans to unqualified individuals. There are still many who qualify for loans in poor in communities.

Now to the audit for more proof.

  • here were contemporaneous housing bubbles in countries like the UK, France, and Australia, that are beyond the reach of Fannie, Freddie, and the Community Reinvestment Act. 
  • It points to the gigantic commercial real estate bubble that inflated at the same time as the housing bubble, with no government aid, and collapsed worse than housing.
  • Blaming the GSEs is seriously problematic too. While they certainly contributed to the size of the bubble, it was on the margins of a private-securitization-driven bubble. Frannie-bought loans were also far better than private-sector loans, defaulting at about half the rate of private-sector loans.
  • The CRA thing is particularly funny since the Federal Reserve, of all bank-friendly places,found that “areas disproportionately served by lenders covered by the CRA experienced lower delinquency rates and less risky lending.”