Bouncing Ball Politics
” For years, home ownership was a big “good thing” among both liberal Democrats like Congressman Barney Frank and Senator Christopher Dodd, on the one hand, and moderate Republicans like President George W. Bush on the other hand.
Raising the rate of home ownership was the big red bouncing ball that they pursued out into the street, in utter disregard of the dangers.
A political myth has been created that no one warned of those dangers. But among the many who did warn were yours truly in 2005, Fortune and Barron’s magazines in 2004 and Britain’s The Economist magazine in 2003. Warnings specifically about the dangerous roles of Fannie Mae and Freddie Mac were made by Federal Reserve Chairman Alan Greenspan in 2005 and by Secretary of the Treasury John W. Snow in 2003.
In pursuit of those higher home ownership rates, especially among low-income people and minorities, the many vast powers of the federal government — from the Federal Reserve to bank regulatory agencies and even the Department of Justice, which issued threats of anti-discrimination lawsuits — were used to force banks and other lenders to lower their standards for making mortgage loans.
What makes all this painfully ironic is that the latest data show that the rate of home ownership today is lower than it has been in 18 years. There was a rise of a few percentage points during the housing boom, but that was completely erased during the housing bust. Housing has been just one area where the bouncing ball approach to political decision-making has led the country into one disaster after another.”
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Tag Archive: Freddy Mac
Wait! Government Did Cause The Housing Bubble
” Regarding the latter example, however, there has been a persistent dispute among mainstream economists about the role of government housing policy, particularly the Community Reinvestment Act which was used, in the 1990s, to make banks increase their lending to particular low-income neighborhoods. Paul Krugman asserts, for example, that the “Community Reinvestment Act of 1977 was irrelevant to the subprime boom.” Actually, no. A new NBER paper (gated) on the CRA is causing quite a stir. Authored by four economists from NYU, MIT, Northwestern, and Chicago, the paper is the first to use instrumental-variables regression to distinguish changes in bank lending caused by the CRA from changes that would likely have happened anyway. (The authors use the timing of loan decisions relative to the dates of CRA audits to identify the effect of the CRA on lending.) The results suggest that CRA enforcement did, contra Krugman, lead banks to make substantially riskier loans than otherwise. Raghu Rajan puts it in a very Austrian-sounding way:
The key then to understanding the recent crisis is to see why markets offered inordinate rewards for poor and risky decisions. Irrational exuberance played a part, but perhaps more important were the political forces distorting the markets. The tsunami of money directed by a US Congress, worried about growing income inequality, towards expanding low income housing, joined with the flood of foreign capital inflows to remove any discipline on home loans. And the willingness of the Fed to stay on hold until jobs came back, and indeed to infuse plentiful liquidity if ever the system got into trouble, eliminated any perceived cost to having an illiquid balance sheet.
I’d reverse the order of emphasis — credit expansion first, housing policy second — but Rajan is right that government intervention gets the blame all around.”
Related articles
- Obama: Let’s Start a New Financial Crisis (frontpagemag.com)
- Is It Time To Say Sayonara To CRA Funded Housing Agencies? (mfi-miami.com)
- Here We Go Again: Regime Pushes Banks To Make Mortgage Loans To People With Weak Credit (constitutionclub.org)
- ‘What Does the New CRA Paper Tell Us?’ (economistsview.typepad.com)
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.. Under Democrats and Republicans, regulation grows. “
” So Clinton — not Bush — was the bank deregulator.
Were those acts responsible for the financial debacle of 2008? No. Bear Stearns, Lehman, etc. were not affiliated with commercial banks.
Banks got in trouble because they filled their portfolios with securities built on shaky mortgages. And here is where Clinton does bear responsibility.
His secretary of housing and urban development was Andrew Cuomo, now governor of New York and apparent presidential wannabe.
Cuomo, as Wayne Barrett wrote in the VillageVoice in 2008, made a series of decisions that “helped plunge Fannie and Freddie into the
subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing
Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a
federal judge has branded ‘kickbacks’ to brokers that have fueled the sale of overpriced and
unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.” “
We are being pushed into poverty by the very powers that are supposed to protect our interests .
It’s fast approaching the time to abandon pitchforks and torches and pick up the gun .
You think that is extreme ? Then explain to US exactly what authority can now be trusted .
Read this from the New York Sun .
” So it turns out that the great scandal of the London Interbank Offered Rate has spilled over to the Federal Reserve. It seems, according to a dispatch of Reuters, that the Federal Reserve Bank of New York “may have known as early as August 2007 that the setting of global benchmark interest rates was flawed.” It was consulted when the problems first arose at Britain, and it sent some suggestions for reform. But these are now looking inadequate. “As one of the world’s most powerful regulators, the New York Fed has the power to ‘jawbone’ banks to force them to make tough decisions,” Reuters reported, attributing the point to a former associate general counsel at the Federal Reserve in Washington, Oliver Ireland.”