Phrozenbot wrote:
Concerning the housing bubble, the government forced banks to make shoddy loans with the community reinvestment act. GSE's like Fannie and Freddie were supposed to create 'affordable' housing, yet they were guaranteeing half of all mortgages where most subprime borrowers couldn't even make pay on the interest, let alone the principle. Is it really no surprise that on the case-shiller S&P index, home prices (inflation adjusted) on a national average doubled for the first time since...ever? And who provided the money? I remember interest rates being ridiculously low, thanks to the Federal Reserve.
Ok, but your point about MBS, derivatives and such. No, the government didn't force anyone to partake in such reckless behavior. Those were negative credit schemes to find a sucker willing to buy something that doesn't benefit the economy at all, but the government did spike the punch bowl. Do you think the banks who made all these terrible decisions would have done the same thing, if they knew they wouldn't be bailed out?
Actually there is decent evidence that a majority of CRA loans increased responsible lending.
http://www.frbsf.org/news/speeches/2008/0331.htmlThere has been a tendency to conflate the current problems in the subprime market with CRA-motivated lending, or with lending to low-income families in general. I believe it is very important to make a distinction between the two. Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans,16 and studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households.
An analysis by attorneys Traiger and Hinckley concluded that CRA banks were less likely to sell risky mortgages onto the secondary market, and likely mitigated the effect of subprime crisis.
Perhaps the most notable change, however, is that in the last 25 years, consumer credit markets have shifted dramatically, moving from a credit rationing approach to a risk-based pricing system. In other words, today, far fewer applicants are denied credit—rather, they are offered credit at higher prices intended to reflect the greater risk posed by these loans.1 This shift, coupled with other innovations in the financial markets, has significantly increased access to credit, with both positive and negative effects.
However, speculation did artificially drive up housing costs to the tune of doubling the home prices, and many speculators and others that purchased high-priced home loans
did default and have defaulted. People getting CRA loans weren't taking $500k loans and defaulting. Everyday people and investors alike were trying to cash in on the housing bubble. That (speculation) had a far greater impact on the devaluation of homes, real-estate portfolios tanking, reduced liquidity of banks. So no, I don't buy for one second that this particular regulation (the CRA) was a major cause to the financial crisis. However, you can find evidence that a lack of regulation of borrowers (by the underwriters themselves) and of brokers (by the mortgage industry and maybe government) did have a fairly large impact in making the snowball bigger.
I'm not necessarily for or against regulation. There are glaring examples where regulation is needed, brought forth recently by such examples as Enron, S&L scandal, and recently the mortgage debacle we are discussing. On the flip side there are prime examples of regulation needlessly inflating cost of goods and services. I think it's entirely ignorant to say "regulation is bad" at least from a practical, realistic standpoint, because people are fallible, and even moreso, when vast sums of money are at risk the incentive of corruption increases.
As far as the banks knowing they were going to be bailed out - money runs this country. Whoever has the most money can buy the most power. Banks have money - banks bought power and protection. Our country is ruled by a private bank. Whether or not I personally think the banks would have made the same shady decisions to bundle toxic assets is irrelevant. The banks were never going to be the losers. They knew this and still know this. The consumer (everyday people like you and me and the rest of the forum) will always bear the brunt of the loss because concentrated capital controls the government, not the people. We are playing craps with loaded dice.