NBER Reports That The Housing Bubble Was Government’s Fault

Since the financial collapse brought on by the housing bubble and the casino playing Too Big To Fail banks in 2008, many of us in the blogosphere put the blame government policies, which pumped air into the sub-prime mortgage market. The government of Barak Obama, of course, put the blame entirely on the Wall Street bankers and the unfunded wars of Bush II. Now, nearly five years later, the National Bureau of Economic Research (NBER) finished their review of what happened and puts the blame squarely on the Community Redevelopment Act (CRA). You are unlikely to hear about the NBER report from the MSM because it doesn’t fit with their liberal feel good agenda. But, paul Sperry at Investors.Com shares the news:

Democrats and the media insist the Community Reinvestment Act, the anti-redlining law beefed up by President Clinton, had nothing to do with the subprime mortgage crisis and recession.

But a new study by the respected National Bureau of Economic Research finds, “Yes, it did. We find that adherence to that act led to riskier lending by banks.”

The Community Redevelopment Act was the brain child of Mr. Feel Good himself, President Jimmy Carter. But, like most things associated with Carter, nothing much happened. Presidents Reagan and Bush I also managed to keep a lid on CRA; but unfortunately, they didn’t kill it. Then came Mr. I Feel Your Pain, President Bill Clinton, and he with the help of the likes of Barney Frank had Fanny and Freddy put the CRA on steroids. Take a look at this graph:

And then there is this:

The strongest link between CRA lending and defaults took place in the runup to the crisis — 2004 to 2006 — when banks rapidly sold CRA mortgages for securitization by Fannie Mae and Freddie Mac and Wall Street.

CRA regulations are at the core of Fannie’s and Freddie’s so-called affordable housing mission. In the early 1990s, a Democrat Congress gave HUD the authority to set and enforce (through fines) CRA-grade loan quotas at Fannie and Freddie.

It passed a law requiring the government-backed agencies to “assist insured depository institutions to meet their obligations under the (CRA).” The goal was to help banks meet lending quotas by buying their CRA loans.

But they had to loosen underwriting standards to do it. And that’s what they did.

“We want your CRA loans because they help us meet our housing goals,” Fannie Vice Chair Jamie Gorelick beseeched lenders gathered at a banking conference in 2000, just after HUD hiked the mortgage giant’s affordable housing quotas to 50% and pressed it to buy more CRA-eligible loans to help meet those new targets. “We will buy them from your portfolios or package them into securities.”


Housing analysts say the CRA is the central thread running through the subprime scandal — from banks and subprime lenders to Fannie and Freddie to even Wall Street firms that took most of the heat for the crisis.

And, this little tid bit is interesting:

Banks that didn’t meet Clinton’s tough new numerical lending targets were denied merger plans, among other penalties. CRA shakedown groups like Acorn held hostage the merger plans of banks like Citibank and Washington Mutual until they pledged more loans to credit-poor minorities.

Even if Obama and friends refuse to admit the role of CRA in the Great Recession, one would think they would be very prudent about continuing to push for more sub-prime mortgages. One would be wrong!

Obama officials, who are cracking the CRA whip anew against banks, insist the law played no role in the mortgage meltdown.

“CRA loans performed substantially better than subprime loans, and the CRA has been around for decades,” argued senior Justice Department official Thomas Perez.

Yes, the same Thomas Perez that is now Obama’s nomination for Secretary of Labor.

It truly is an asylum in which we live. Reagan was right. Government isn’t the solution; it is the problem.

Well, that’s what I’m thinking. What are your  thoughts?

26 thoughts on “NBER Reports That The Housing Bubble Was Government’s Fault

  1. ….and to think in the news today mentions that President Obama is going to “pressure” banks to offer home loans to those with weak credit.

    Yep. Nothing to see here people. Move along.

  2. NBER is right, government laws are at the heart of the Great Recession… but only has part of the story.

    The Community Reinvestment Act did contribute to lowering loan qualifications standards for low income Americans to meet President Clinton’s policy goal to increase home ownership from 60% to 70%. Those loans to unqualified low income Americans helped create the housing bubble that burst when they then started defaulting in large numbers.

    But, BY FAR, the biggest contributor to the Great Recession was passage of the Gramm-Leach-Bliley Act that was signed into law by President Clinton in 1999. It repealed the part of the Glass-Steagell Act of 1933 that prevented banks from becoming investment houses.

    Gretchen Morgenson wrote an excellent book – “Reckless Endangerment” – explaining in intimate detail what brought down the economy. It covers both causes. It should be required reading in every introductory economics class.

  3. Belated but welcome report.
    You are right, Prof, the main stream media will ignore it. We have discussed in multiple posts in the past that the CRA act to be the main culprit for the Housing bubble, specially as amended and expanded by the Clinton Administration in 1995 and later defended and protected by the democratic senate in 2006 from Bush’s efforts to restrain it, specially in relation to the mandated obligations of the banks to meet low income quotas.

    Allow me to point out that we have another housing Fannie Mae and Freddie Mac bankruptcy crisis coming – this time is called FHA.

  4. Did anyone who reads this blog not already know that the CRA was the problem? The amazing thing is that it took this long for some study to confirm it.

    Something else I found interesting… the name Jamie Gorelick comes up a lot when something is totally screwed up by government. She was up to her neck in Fanny and Freddie, and walked away from Fannie with a massive bonus after helping to set the stage for the crash of the economy. She is also the same person who was on the 911 investigation committee, despite being a person who should’ve been being investigated by that committee after writing the famous memo that (as I recall) codified the “Gorelick Wall” between intelligence gathering agencies, keeping them from sharing information that may have led to dots being connected to prevent terror attacks such as 911. SAME Democrat operative… who managed to be very involved in, yet walk away without a scratch from both a major terrorist attack and a major economic collapse. Actually, she walked away a very wealthy woman.

    From Slate Magazine (http://www.slate.com/articles/news_and_politics/press_box/2008/09/fannie_mae_and_the_vast_bipartisan_conspiracy.html):

    “Next up is Jamie S. Gorelick, whose official résumé describes her as “one of the longest serving Deputy Attorneys General of the United States,” a position she held during the Clinton administration. Although Gorelick had no background in finance, she joined Fannie Mae in 1997 as vice chair and departed in 2003. For her trouble, Gorelick collected a staggering $26.4 million in total compensation, including bonuses. Federal investigators (PDF) would later say that “Fannie Mae’s management directed employees to manipulate accounting and earnings to trigger maximum bonuses for senior executives from 1998 to 2003.” The New York Times would call the manipulations an “$11 billion accounting scandal.” Gorelick, it should be noted, has never been charged with any wrongdoing.”

    Interesting, huh?

  5. By the way, Prof, you and I recently published pieces about “Bitcoins”. At the time they were trading at around $70. Well, they are trading at $140 today – a 100% gain in a couple of weeks.

  6. Many of us knew this all along, didn’t we? Yet this report will go unnoticed by the MSM and Obama will be allowed to continue his propaganda campaign and we will fall into the same trap again.

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