[Aaronontheweb]

Actually, regulation was part of the problem - specifically the Community Reinvestment Act http://en.wikipedia.org/wiki/Community_Reinvestment_Act

This encouraged banking institutions to increase the number of sub-prime mortgages with the stated goal of increasing home ownership among lower income communities.

Changes to this regulation made during the 1990s, specifically the 1992 change to require Fannie Mae and Freddie Mac (USG-sponsored entities) to devote a percentage of their annual budget to securitizing (read: buy the loans made by other banks and bundle them into securities) these sub-prime mortgages.

This, among other factors, eliminated a lot of the risk for banks - there was always going to be someone to buy the sub-prime mortgages, thanks to this regulation.

And as long as housing prices went up they could afford to keep issuing predictably bad loans, since the assets that would fall under forfeiture would have a greater value than the principle of the loan.

When housing prices tanked in the mid-2000s, after a solid 10+ year housing bubble, all of this mania inevitably caught up with reality as home values went under water.

So let's not pretend that regulation is some short of magic wizard armor that prevents human stupidity and greed (on all parties: the banks, the Government, the realtors, the home builders, and the consumers who took the loans).

Regulation doesn't guarantee anything other than unintended consequences and should be looked at as a tool of absolute last resort when it comes to addressing market issues.

Consider the FDIC, often held up as an example of successful financial regulation - it's enabled plenty of new forms of reckless behavior on the part of financial institutions (see the Savings & Loan crisis from the 1980s) and more or less guarantees government bailouts to the depositors.

Laws are not magic patches to the fabric of reality and human behavior. They often don't even achieve their stated goals and aren't always so easy to correct.

[mikeyouse]

Do you honestly think that a few poor people in the US caused a Global Financial Crisis that took down dozens of banks and sent most of the Western World into a recession?

I would encourage you to read 'The Big Lie' by Barry Ritholtz that completely debunks this nonsense.[1] He even offered a bet of $100,000 to debate anyone in front of a 'jury' about the role of CRA in the crisis (unsurprisingly, he had no takers).[2]

I'll just point out some facts that address your most incorrect assertions, but just about everything you wrote is incorrect or extremely misleading.

    This encouraged banking institutions to increase the number of
    sub-prime mortgages with the stated goal of increasing home
    ownership among lower income communities.

CRA loans looked nothing like sub-prime loans.[3] In 2004, about 3.5% of CRA loans defaulted, while about 18% of subprime loans did, and 25% of broker-placed subprimes did. By 2006, 15% of CRA loans were defaulting, but almost 50% of subprimes were and 40% of broker-placed subprimes were.[4]

Additionally, many subprime defaults originated in prime loans, up to 60% in Massachusetts![5] So these people qualified for Prime mortgages, and then refinanced with Subprimes. They couldn't possibly be CRA loans.

    Fannie Mae and Freddie Mac (USG-sponsored entities) to devote
    a percentage of their annual budget to securitizing [..] 
    these sub-prime mortgages.

Fannie and Freddie did securitize many mortgages, yet during the housing bubble, their market share was cut in half by all the private banks running wild with MBS products.[6] They also had proper due diligence and lending standards, so their 'high-risk' loan performance was almost 3x better than private lender subprime performance.[7]

Also, if Fannie and Freddie were at fault, then why did the commercial real estate market, with absolutely no government support, have a much more severe price drop (45% compared to 30% [8])?

Or you could take it from the Financial Crisis Inquiry Commission[9]:

    The study found that only 6% of such higher-cost loans
    were made to low or moderate-income borrowers or in low
    or moderate-income neighborhoods covered by the CRA. The
    other 94% of higher-cost loans either were made by CRA-
    covered institutions that did not receive CRA credit for 
    these loans or were made by lenders not covered by the CRA.
 

I think that's enough for now.

I would love to hear how the Savings and Loan crisis was the fault of the FDIC though, that promises to be entertaining. Especially when the guy who literally wrote the book on the crisis noted that[10];

    Deposit insurance was not essential to S&L control frauds.

[1] http://www.washingtonpost.com/business/what-caused-the-finan...

[2] http://www.ritholtz.com/blog/2009/06/100000-cra-challenge/

[3] http://rortybomb.wordpress.com/2009/06/29/what-was-a-subprim...

[4] http://imgur.com/EPY5PyF

[5] http://www.bostonfed.org/economic/wp/wp2007/wp0715.pdf (page 4-5)

[6] http://i.imgur.com/DLHMGyg.png

[7] http://i.imgur.com/AswjnXN.png

[8] http://i.imgur.com/u1zx8Wj.gif

[9] http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf (page 220)

[10] http://en.wikipedia.org/wiki/Savings_and_loan_crisis#cite_no...

[Aaronontheweb]

Despite the fact that your emotional comment began with an argument I didn't make, thanks for providing a bunch of quasi-relevant links :)

[hderms]

"Actually, regulation was part of the problem - specifically the Community Reinvestment Act http://en.wikipedia.org/wiki/Community_Reinvestment_Act"

He then goes on to demonstrate an argument regarding how CRA loans had virtually nothing to do with the crisis. How on earth do you feel he isn't addressing an argument you made?

[the_hangman]

What the?? Your argument is thoroughly debunked and THIS is your response? When your wife calls you a bitch do you also thank her for the quasi-relevant information? Because that's basically what you just did.

[ahlatimer]

You should consider reading the article you linked. ""However, the Financial Crisis Inquiry Commission formed by the US Congress in 2009 to investigate the causes of the 2008 financial crisis, concluded that "the CRA was not a significant factor in subprime lending or the crisis"."" - http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Repo...

[Aaronontheweb]

Maybe read your own citation on my citation?

> According to American Enterprise Institute fellow Edward Pinto, Bank of America reported in 2008 that its CRA portfolio, which constituted 7% of its owned residential mortgages, was responsible for 29 percent of its losses. He also charged that "approximately 50 percent of CRA loans for single-family residences ... [had] characteristics that indicated high credit risk," yet, per the standards used by the various government agencies to evaluate CRA performance at the time, were not counted as "subprime" because borrower credit worthiness was not considered.[125][126][127][128] However, economist Paul Krugman argues that Pinto's category of "other high-risk mortgages" incorrectly includes loans that were not high-risk, that instead were like traditional conforming mortgages.[129] Additionally, another CRA critic concedes that "some of this CRA subprime lending might have taken place, even in the absence of CRA. For that reason, the direct impact of CRA on the volume of subprime lending is not certain."

So if you're basing your argument on the authoritative application of the label "sub-prime," please feel free to indulge in as much or as little semantic pedantry as you like.

[mikeyouse]

Pinto was pretty much the central figure in CRA-blaming, and the vast majority of his claims have been repeatedly and exhaustively debunked.

In a piece deeply critical of Fannie and Freddie, William Black (again of S&L crisis fame) addresses Pinto's attempts to place Fannie and Freddie's terrible risk management on the back of CRA regulation:

Pinto estimated that Fannie and Freddie held “34% of all the subprime loans and 60% of all Alt-A loans outstanding” [p. 7]. Pinto seems to have treated subprime loans as non-liar’s loans, but that is clearly incorrect. I cited Credit Suisse’s finding that by 2005 and 2006, half of all subprime loans were also stated income (liar’s loans). The presence of such large amounts of Alt-A loans is one of the demonstrations that Pinto, Wallison, and the Republican Commissioners’ “Primer” are flat out wrong to claim that it was affordable housing goals that drove Fannie and Freddie’s CEOs’ decisions to purchase loans they knew would cause the firms to fail. That claim doesn’t pass any logic test. One of its unobvious flaws is that no one was making Fannie and Freddie buy liar’s loans. For the reasons I’ve explained, and Pinto admits, Fannie and Freddie actions with respect to liar’s loans were the opposite of what they would have been if they were trying to demonstrate that the loans were made for affordable housing purposes.

The GSEs were deeply irresponsible with their lending and were poorly run, but both were prevalent long before any CRA impact would have been felt. If AEI / Pinto / Wallison had focused on the actual causes of the mortgage / financial crisis instead of trying to blame poor people and Barney Frank, the world would be a lot better off.

http://www.ritholtz.com/blog/2011/02/wallison-is-far-too-kin...

[unclebucknasty]

Please do a serious study of the facts. There's no reason that any thinking person in 2014 should still believe that the CRA was to blame for the 2008 financial crisis. It is supremely ludicrous that anyone ever bought that line.

Just start by comparing the total value of subprime loans at that time with the total value of derivatives, CDOs, etc. built upon them. Then, see where that takes you. It's been covered ad nauseum, so it won't be hard to find.

>Consider the FDIC

I have. Bank runs aren't cool. Neither is depositors losing all of their money.

>it's enabled plenty of new forms of reckless behavior on the part of financial institutions

That's why you regulate with something like Glass-Steagall. It worked pretty well for what it sought to prevent until it was repealed, which really set up the 2008 meltdown. And the S&L crisis? Well, that's why the Fed shouldn't double the interest rate over night. You can't just have actors do any mindless thing, then blame unrelated regulation for not mitigating the consequences. The FDIC didn't have anything to do with creating or escalating that crisis. The eventual scale of that crisis was a product of outright fraud.

In fact, Congress had deregulated the thrifts (S&Ls) just prior to the crisis, which opened the door for that fraud [0]:

>Congress finally acted on deregulating the thrift industry. It passed two laws, the Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn–St. Germain Depository Institutions Act of 1982. The deregulation...significantly expanded [the thrifts'] lending authority and reduced supervision, which invited fraud.[6] These changes were intended to allow S&Ls to "grow" out of their problems...Other changes in thrift oversight included authorizing the use of more lenient accounting rules to report their financial condition, and the elimination of restrictions on the minimum numbers of S&L stockholders. Such policies, combined with an overall decline in regulatory oversight (known as forbearance), would later be cited as factors in the collapse of the thrift industry

>Regulation...should be looked at as a tool of absolute last resort when it comes to addressing market issues.

So, in summary, you believe, for example, that Glass-Steagall has no value and that banks should be able to place ultra-risky market bets on exotic, esoteric derivative products, using their customers' deposits? And, further, that those customers should not have any form of insurance or recourse?

It's stunning that someone could look back at 2008 and conclude that less regulation is the solution.

[0] http://en.wikipedia.org/wiki/Savings_and_loan_crisis#Backgro...