| theprof00 said: I often wonder who is to blame. Reading vgc, one would think "the administration", but they didn't really pull the trigger, did they? Sure it was the deregulation that gave banks and ARMCs the ability, but noone told those institutions to rape everyone's faces. The policies were designed to increase home buying, not increase bank profits. |
I don't know which administration you're talking about, but hold the presses! Policies have unintended consequences?! Who'd have thunk it?
According to the NBER it all started with the Community Reinvestment Act, and more specifically the activist rejiggering of it in the '90s. It's pretty rare that you see an academic paper answer its premising question ("Did the CRA induce banks to make risky loans?") with an emphatic, "Yes, it did."
The whole point of the CRA was that it was "unfair" that banks didn't want to lend to poor people (many of whom were minorities, so it was also racist) because they wouldn't be able to pay back those loans, so there were all kinds of incentives and assurances offered them to make these bad loans which, predictably, created a tremendous moral hazard that blew up in all of our faces. Anyone who understands this should feel chills when they read in today's Washington Post that:
Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default.
You can't tell the banks that they stand to make tons of money from the loans and will face none of the risks, and then complain that they are just doing things to make money and not to help people... when that's exactly what they're in business to do, and they don't pretend otherwise. This "problem" is easily solved if you quit relieving them of the responsibility when they make bad loans and just generally get over the fact that not everyone can own a house and most people simply don't need to.
