The Roots of the Financial Crisis: First Housing, then Banking

The principal agents who run US Policy Metrics along with AEI in Washington D.C. have performed well in launching monographs to the great ‘unwashed’ who seek policy guidance on how the ‘Great Recession’ started.

The entire mess began with Clinton.

How did private lenders, whose job it was to assess credit risk, make such miserable financial decisions.  Why did an army of regulators with massive enforcement power allow 28 million high risk loans to be made.  Let’s start there.

If we look at failed public investment schemes that began under Clinton we’ll find the thought that underwrote disastrous liberal policy.

Remember Robert Reich, Clinton’s Secretary of Labor.  He developed a failed scheme where pension funds and unions would give money to politically hired managers to effect “social, ancillary economic benefits.”  In the end, the Clinton administration lost the battle to fund low housing with public/private (hybrid) entities.

How is this significant?

Because this was the first step in how Andrew Cuomo (current governor of New Yawk, and then acting Secretary of Housing) to secure, entice, in effect DRAFT Fannie Mae, Freddie Mac and several commercial banks to begin the affordable housing effort!  (Sound familiar)

They exploited a minor provision in a 1977 housing bill, the Community Reinvestment Act, which warranted that banks meet local credit needs.  Bank regulators pressured banks to make subprime loans.  Guidelines became mandates!!  Each bank was assigned a CRA grade.  Banks couldn’t open ATM’s or branches without a credible, passing CRA grade.  How does one get a passing CRA grade?  Meet the needs of locals who aspire for a home.

Quota’s began in 1992 and were raised annually.  By the year 2000, 50% of all housing was mandated to be cleared through the politically allocated credit machine of the CRA through Fannie/Freddie.

We should note that Professor Ed Pinto has well documented that previous administrations faired well when credit allocation was deferred to local banks with stringent standards like 20% or more down, documented work history and decent credit.

We should also note that in 1990, very few homes were securitized.  By 2007 almost every home WAS.

Everything appeared to work, as long as overt accommodative monetary policy, capital inflows from developing countries continued, along with a profligate credit driven mania in Congress. . . .

Peter Wallison from AEI calculates that 28 Million homes defaulted!  Staggering.

Answers:  the very same people who destroyed lending standards by driving subprime lending, have blamed banks, regulators and/or deregulation for causing THIS financial crisis.

BUT A REVIEW OF POLICY SHOWS WHO THE REAL CULPRIT IS.

Every principal involved in the housing market DEFERRED to governments affordable housing goals.  Policy goals.  In a word:  policy.

Opaque, politically instigated credit/capital allocation created this mess.  Conflicted laws created conflicted regulations.  Affordable housing goals only quickened the rate, pace of lending.

Government policy tried to make private wealth serve both government and private purposes.

Who won?  In my view the dominant liberal nostrum.

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About William Holland

Systematic Theologian/International Relations
This entry was posted in Housing Crisis and tagged , , , , . Bookmark the permalink.

One Response to The Roots of the Financial Crisis: First Housing, then Banking

  1. Excellent research and concise reporting, but won’t change the minds of generations of voters believing a steady stream of propaganda and the DC power struggles.

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