What caused the eonomic meltdown?

[edthecynic]

I didn't think so, special Ed.

You are such a little child!

I'm sure this is a waste of time, but here are the facts that Invested Bigots daily cannot refute, which is why they merely pontificate their worthless opinion.

Community Reinvestment Act had nothing to do with subprime crisis - BusinessWeek

Fresh off the false and politicized attack on Fannie Mae and Freddie Mac, today we’re hearing the know-nothings blame the subprime crisis on the Community Reinvestment Act — a 30-year-old law that was actually weakened by the Bush administration just as the worst lending wave began. This is even more ridiculous than blaming Freddie and Fannie.

The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits. Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly. But it’s even more ridiculous when you consider that most subprime loans were made by firms that aren’t subject to the CRA. University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations.

snip/

Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley (PDF file here).

Finally, keep in mind that the Bush administration has been weakening CRA enforcement and the law’s reach since the day it took office. The CRA was at its strongest in the 1990s, under the Clinton administration, a period when subprime loans performed quite well. It was only after the Bush administration cut back on CRA enforcement that problems arose, a timing issue which should stop those blaming the law dead in their tracks. The Federal Reserve, too, did nothing but encourage the wild west of lending in recent years. It wasn’t until the middle of 2007 that the Fed decided it was time to crack down on abusive pratices in the subprime lending market. Oops.

Better targets for blame in government circles might be the 2000 law which ensured that credit default swaps would remain unregulated, the SEC’s puzzling 2004 decision to allow the largest brokerage firms to borrow upwards of 30 times their capital and that same agency’s failure to oversee those brokerage firms in subsequent years as many gorged on subprime debt. (Barry Ritholtz had an excellent and more comprehensive survey of how Washington contributed to the crisis in this week’s Barron’s.)

There’s plenty more good reading on the CRA and the subprime crisis out in the blogosphere. Ellen Seidman, who headed the Office of Thrift Supervision in the late 90s, has written several fact-filled posts about the CRA controversey, including one just last week. University of Oregon professor and economist Mark Thoma has also defended the CRA on his blog. I also learned something from a post back in April by Robert Gordon, a senior fellow at the Center for American Progress, which ends with this ditty:

It’s telling that, amid all the recent recriminations, even lenders have not fingered CRA. That’s because CRA didn’t bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA — or any federal regulator. Law didn’t make them lend. The profit motive did. And that is not political correctness. It is correctness.


And this comes from your favorite source wikipedia, so you can't dismiss it:

Subprime mortgage crisis - Wikipedia, the free encyclopedia

The Financial Crisis Inquiry Commission reported in January 2011 that "the CRA was not a significant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only 6% of high-cost loans – a proxy for subprime loans – had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law."[66]

 

[Toro]

The primary cause of the tech and housing bubbles is not politics but central banks. Politics played a role but both the housing and tech bubbles were driven by the excess creation of money and lax lending standards. When credit becomes too abundant, it can feed into asset markets and create bubbles. This wasn't the only reason - there were many - but it was the primary reason. And both the tech and housing bubbles are linked.

People trying to blame Democrats or Republicans or the GSEs or the CRA or whatever are missing the point. This was a global issue, not simply an American issue.

Cause ---> effect.

Effect = housing bubbles in many countries across the globe.

Ergo, the cause is global, and you must look for global causes.

Of course, politics in America had an affect, but the CRA or George Bush didn't cause housing bubbles in Spain, Australia, Canada, Ireland, etc.

The Fed was a big factor, but still not the primary cause. The Fed has been trying to get another bubble going for 4 years now with no success at zero interest because credit standards are tight. Low interest rates do not create bubbles! Low credit standards create bubbles! Lending to anyone who dreams up a dot.com name regardless of their business experience, income, or credit was lack of lending standards. Just as lending to any bum who wants to buy a house regardless of their credit or income was lack of lending standards.

The Fed can raise rates to help pop bubbles but then again, if you have no lending standards a bum will barrow money regardless of what the rate is. When someone is not concerned about paying you back, do you really believe they care what the interest rates are? The Pay-Day loan places make a killing at 650% annual interest rate (APR).

If Government created another GSE that said they would cover loan losses at 100% for any bad loan you make, we could get another bubble going tomorrow!!!

GSE's cause sub-prime bubbles by themselves. Just look back in history & you will see them.

"In spring 1972, a major scandal struck the Federal Housing Administration (FHA), which since passage of the Housing and Urban Development Act of 1968 and the creation of the Government National Mortgage Association (Ginnie Mae) had been responsible for helping the poor buy homes in inner-city areas via government-backed mortgages. This was financed by mortgage-backed securities, the first issues of which George Romney had announced in 1970. A number of FHA employees, along with a number of real estate firms and lawyers, were indicted for a scheme in which the value of cheap inner city homes was inflated and sold using those government-backed mortgages to black buyers who could not really afford them, and the government was stuck for the bad loans when owners defaulted. FHA was under Romney's purview, and he conceded that HUD had been unprepared to deal with speculators and had not been alert to earlier signs of illegal activity. The FHA scandal gave Nixon the ability to shut down HUD's remaining desegregation efforts with little political risk; by January 1973, all federal housing funds had been frozen."

The GSEs played a role. You can't be 40% of the market and not. However, again, if you believe in the efficacy of markets, the GSEs couldn't have been the primary driver. The GSEs lost share every year of the 00s before the crisis until the last year when the market peaked in 06. But by that time, they had lost significant share, nearly half if I recall correctly. Also, the biggest moves in home prices were fueled by nonagency credit, not by the GSEs. If the GSEs were the primary cause, you would have seen rising market share and greater home price movements, but neither happened.

The GSEs did have an effect, however. They acted like a Wall Street bank and insanely over-leveraged themselves, which created too much mortgage credit.

 

[KissMy]

If Toro or someone else would lend me $12 million so I can drill for oil in the Bakken oil field in North Dakota then I will show them how making bad loans cause a crisis if my drilling company fails to turn a profit.

 

[Toro]

If Toro or someone else would lend me $12 million so I can drill for oil in the Bakken oil field in North Dakota then I will show them how making bad loans cause a crisis if my drilling company fails to turn a profit.

Your company would be too small.

Like the CRA.

 

[KissMy]

The GSEs played a role. You can't be 40% of the market and not. However, again, if you believe in the efficacy of markets, the GSEs couldn't have been the primary driver. The GSEs lost share every year of the 00s before the crisis until the last year when the market peaked in 06. But by that time, they had lost significant share, nearly half if I recall correctly. Also, the biggest moves in home prices were fueled by nonagency credit, not by the GSEs. If the GSEs were the primary cause, you would have seen rising market share and greater home price movements, but neither happened.

The GSEs did have an effect, however. They acted like a Wall Street bank and insanely over-leveraged themselves, which created too much mortgage credit.

The GSE's have caused these problems before on a small scale. They were not the only factor this time but they were one of many.

Here are some contributing factors
- Major CRA push from community groups.
- GSE's Fannie, Freddie, Genni, etc to boost CRA support.
- In 1994 The Bank Holding Company act of 1956 was repealed to boost CRA support.
- In 1999 Glass Steagal was repealed to boost CRA support.
- The Commodity Futures Modernization Act of 2000 to boost CRA support.
- Government imposing "Mark to Market" accounting on Wallstreet.
- Mortgage interest deductions.
- Down Payment Assistance.
- The Fed's easy money & low interest rates.

 

[KissMy]

If Toro or someone else would lend me $12 million so I can drill for oil in the Bakken oil field in North Dakota then I will show them how making bad loans cause a crisis if my drilling company fails to turn a profit.

Your company would be too small.

Like the CRA.

But if congress pushes Wallstreet to loan to anyone who wants to drill for oil in Bakken & a million of us held out our hand.

 

[Toro]

If Toro or someone else would lend me $12 million so I can drill for oil in the Bakken oil field in North Dakota then I will show them how making bad loans cause a crisis if my drilling company fails to turn a profit.

Your company would be too small.

Like the CRA.

But if congress pushes Wallstreet to loan to anyone who wants to drill for oil in Bakken & a million of us held out our hand.

And if only a small percentage if you got those loans, and your ratio of dry wells was no different than everyone else's, and all the big hitters took no loans but had a greater variability of results...

 

[KissMy]

Your company would be too small.

Like the CRA.

But if congress pushes Wallstreet to loan to anyone who wants to drill for oil in Bakken & a million of us held out our hand.

And if only a small percentage if you got those loans, and your ratio of dry wells was no different than everyone else's, and all the big hitters took no loans but had a greater variability of results...

If Bakken can only support 60,000 wells or there is not sufficient pipeline service the local oil price collapse would cause a large percentage of our small companies to collapse.

 

[Toro]

But if congress pushes Wallstreet to loan to anyone who wants to drill for oil in Bakken & a million of us held out our hand.

And if only a small percentage if you got those loans, and your ratio of dry wells was no different than everyone else's, and all the big hitters took no loans but had a greater variability of results...

If Bakken can only support 60,000 wells or there is not sufficient pipeline service the local oil price collapse would cause a large percentage of our small companies to collapse.

I agree. So you have to wonder why all the big hitters who took no loans or guarantees were drilling in the first place.

 

[KissMy]

And if only a small percentage if you got those loans, and your ratio of dry wells was no different than everyone else's, and all the big hitters took no loans but had a greater variability of results...

If Bakken can only support 60,000 wells or there is not sufficient pipeline service the local oil price collapse would cause a large percentage of our small companies to collapse.

I agree. So you have to wonder why all the big hitters who took no loans or guarantees were drilling in the first place.

GSE's got the boom started & "Mark to Market accounting" made all those wells more valuable every month so non GSE backed lenders thought they would get all their money back by selling them at the foreclosure/bankruptsy auction. Also tax credits, low rates, derivatives leverage & easy access to pools of FDIC government backed cash sitting in commercial banks.

 

[Toro]

If Bakken can only support 60,000 wells or there is not sufficient pipeline service the local oil price collapse would cause a large percentage of our small companies to collapse.

I agree. So you have to wonder why all the big hitters who took no loans or guarantees were drilling in the first place.

GSE's got the boom started & "Mark to Market accounting" made all those wells more valuable every month so non GSE backed lenders thought they would get all their money back by selling them at the foreclosure/bankruptsy auction. Also tax credits, low rates, derivatives leverage & easy access to pools of FDIC government backed cash sitting in commercial banks.

There's a Chaos Theory element to this argument, and it is interesting. The problem is that this contradicts the dogmatic adherence to free market ideology. If the programs were small, they should have been recognized as such and thusly priced away. Small incentives shouldn't cause all the drillers to assume that oil is going to go $200 and never fall. A rationale free market would account for small incentives and adjust accordingly, not punch holes in the ground every 50 yards and assume each will produce 5k bbls/d right across the basin.

 

[KissMy]

I agree. So you have to wonder why all the big hitters who took no loans or guarantees were drilling in the first place.

GSE's got the boom started & "Mark to Market accounting" made all those wells more valuable every month so non GSE backed lenders thought they would get all their money back by selling them at the foreclosure/bankruptsy auction. Also tax credits, low rates, derivatives leverage & easy access to pools of FDIC government backed cash sitting in commercial banks.

There's a Chaos Theory element to this argument, and it is interesting. The problem is that this contradicts the dogmatic adherence to free market ideology. If the programs were small, they should have been recognized as such and thusly priced away. Small incentives shouldn't cause all the drillers to assume that oil is going to go $200 and never fall. A rationale free market would account for small incentives and adjust accordingly, not punch holes in the ground every 50 yards and assume each will produce 5k bbls/d right across the basin.

Who ever said improperly or unregulated markets are rational over the short term. During the Dot.com bubble Fed Chairman Alan Greenspan even told them they had irrational exuberance. He tried to talk the market down & then had to raise rates to put the brakes on. Raising taxes is another way to reign in a boom. You could say the Fed & Congress are always behind the curve & rarely shifts policy fast enough or extreme enough to prevent huge boom & bust.

 

[EdwardBaiamonte]

You could say the Fed & Congress are always behind the curve & rarely shifts policy fast enough or extreme enough to prevent huge boom & bust.

are you saying that it is the governments jobs to prevent booms and busts? it seems to me that if they would not interfere that would end the boom and bust cycles. People are very steady and disconnected in their habits and needs so won't often cause booms and busts, but, totalitarian liberal government can do it easily as it lurches this way and that way.

 

[KissMy]

You could say the Fed & Congress are always behind the curve & rarely shifts policy fast enough or extreme enough to prevent huge boom & bust.

are you saying that it is the governments jobs to prevent booms and busts? it seems to me that if they would not interfere that would end the boom and bust cycles. People are very steady and disconnected in their habits and needs so won't often cause booms and busts, but, totalitarian liberal government can do it easily as it lurches this way and that way.

The government believes it is their job to prevent the boom & bust cycles. They are not any good at it though. They rarely even recognize the problem until it is to late.

 

[EdwardBaiamonte]

You could say the Fed & Congress are always behind the curve & rarely shifts policy fast enough or extreme enough to prevent huge boom & bust.

are you saying that it is the governments jobs to prevent booms and busts? it seems to me that if they would not interfere that would end the boom and bust cycles. People are very steady and disconnected in their habits and needs so won't often cause booms and busts, but, totalitarian liberal government can do it easily as it lurches this way and that way.

The government believes it is their job to prevent the boom & bust cycles. They are not any good at it though. They rarely even recognize the problem until it is to late.

but no one is good at it so isn't it better to create a free market system where the government is impotent as to recognition, cause and cure?

 

[regent]

Would the American people, today, accept a government that sits and watches an economic recession/depression, waiting hoping something good turns up? The problem with a prevention/cure is that politics enters the picture, both parties use the economic problem to further their political philosophy. Note the presidential debate.
Republicans use it to reduce regulations, change the tax code and help their donors. Democrats use it to--well they use it correctly. Some day perhaps we can feed the raw data into a computer and bingo out comes correct answers, but today we feed some of the raw data into a politically dominated government and bingo out comes politically dominated garbage.

 

[The Rabbi]

Would the American people, today, accept a government that sits and watches an economic recession/depression, waiting hoping something good turns up? The problem with a prevention/cure is that politics enters the picture, both parties use the economic problem to further their political philosophy. Note the presidential debate.
Republicans use it to reduce regulations, change the tax code and help their donors. Democrats use it to--well they use it correctly. Some day perhaps we can feed the raw data into a computer and bingo out comes correct answers, but today we feed some of the raw data into a politically dominated government and bingo out comes politically dominated garbage.

How did Democrats use the recession correctly? The results have been nothing short of disaster.

 

[TakeAStepBack]

Would the American people, today, accept a government that sits and watches an economic recession/depression, waiting hoping something good turns up? The problem with a prevention/cure is that politics enters the picture, both parties use the economic problem to further their political philosophy. Note the presidential debate.
Republicans use it to reduce regulations, change the tax code and help their donors. Democrats use it to--well they use it correctly. Some day perhaps we can feed the raw data into a computer and bingo out comes correct answers, but today we feed some of the raw data into a politically dominated government and bingo out comes politically dominated garbage.

It was politics adn monetary policy that caused the last recession/depression, which is still in swing. I can think of nothing more insane than hiring the very people who caused such an enormous mess to "fix it".

Government is the problem witht he economy, not the solution.

 

[EdwardBaiamonte]

Would the American people, today, accept a government that sits and watches an economic recession/depression, waiting hoping something good turns up?

dear, the issue is not what the people, many of whom are liberal, would accept, but what is correct to accept.

Since governemnt does not invent new products it can't help the economy and so should not interfere at all since it can only make things worse.

Still over you head??

 

[EdwardBaiamonte]

Democrats use it to--well they use it correctly.

absolutely!!!

2010 GNP + 2.4%
2011 GNP + 2.0%
2012 GNP + 1.6%( first half)

U6 25 million unemployed.

To a liberal this is using it correctly!!

See why we are 100% sure a liberal will be slow, so very very slow.
It is actually unconstitutional to be as slow as a liberal. Our government is predicated on intelligent democratic participation; so how is that liberals are still legal?? Do they really belong in a democracy?