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CRA sandpit

December 26th, 2010

A special sandpit for debate on the Republican Party claim that the global financial crisis was caused by some combination of the Community Reinvestment Act, Fannie/Freddie, and the stranglehold on US political power held by the Clintons in the early 2000s. I guess I’ve made my views on this clear enough, and I don’t propose to engage in further discussion.

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  1. December 26th, 2010 at 16:15 | #1

    As Krugman said recently, “Yep. It was all Fannie and Freddie, which somehow managed to cause housing bubbles in Ireland, Iceland, Latvia, and Spain as well as the United States.”

  2. sdfc
    December 26th, 2010 at 20:20 | #2

    Dave

    As far as I know Krugman doesn’t put the blame on loose monetary policy either. On this point I think he is wrong.

  3. Alice
    December 26th, 2010 at 22:29 | #3

    Its not going to be a very long thread Prof

  4. Tim Dymond
    December 27th, 2010 at 07:50 | #4

    The Republican position really doesn’t have any rational basis, so it is hard to see how to ‘debate’ it. How do you reasonably evaluate the super evilness of the Clintons? I know from bitter experience of trying to debate with La Rouchites that there are some ideas that are just impervious to rationality. But I suppose your broader point is that contemporary Republican ideas are a just a mass of crank claims and conspiracy mongering.

  5. Ikonoclast
    December 27th, 2010 at 10:40 | #5

    The Republicans, Plutocrats and Dem-Repubs rule the USA. Democrats are just Republicans in drag with tiny social conscience fig-leafs.

    US politics is so corrupt and so far removed from physical, environmental and financial reality that one shudders for the future of the USA. Many of the states are bankrupt and cannot pay pensions, wages or bills. Many infrastructure projects are being cancelled.

    2011 will very likely see the USA crash into a great depression… or 2012 at the latest. This is going to be very ugly for the whole world.

    The USA is so corrupt and dysfunctional on so many levels, it will go into a long and terminal decline. They are declining from a high base so it will take 30 or 40 years until complete disintegration.

  6. Alice
    December 27th, 2010 at 12:36 | #6

    Wouldnt surprise me at all Ikono. They dont know the meaning of governance in the US any longer. They attacked it and gave all power to a donations run political system, and powerful financial interests on Wall St and now Wall street has bankrupted the entire nation and decreed poverty on millions of people there.
    The worst thing is they also have a lot of guns. The best thing other countries could do is to close their doors and keep them locked when the US implodes.

  7. matt
    December 27th, 2010 at 13:40 | #7

    Ikonoklast: care to provide some concrete (rdrr) examples of infrastructure spending decreasing, pensions not being funded etc. It’s not that I necessarily disagree with your assessment of the US – for the most part- but it looks specious without some justification. What makes you think the US will go in to major depression in 2011 or 2012?

  8. BilB
    December 27th, 2010 at 14:49 | #8

    Well here is an article from a democrat paper

    http://www.nytimes.com/2010/12/26/opinion/26rich.html?_r=1&nl=todaysheadlines&emc=a212

    Its the comments that shed some light on views of the US psychie. Take note of the “recommended” number.

  9. Freelander
    December 27th, 2010 at 15:49 | #9

    None of the above.

    The Global Financial Crisis was precipitated by the market forming the rational expectation of an Obama presidency. As soon as the market knew that Sarah Palin would not be vice-president the market knew we were all doomed. Luckily, a month or two later, the market foresaw the ascendency of the Tea Party, thus complete disaster was narrowly averted. And that was the start of the recovery…

  10. Alice
    December 27th, 2010 at 16:51 | #10

    @matt
    Ill help you with the concrete examples of infrastructure spending decreasing, state overnments that cant pay their bills in the US
    happy reading

    http://www.cbsnews.com/stories/2010/12/19/60minutes/main7166220.shtml

    http://www.businessinsider.com/20-cities-where-the-recovery-still-hasnt-arrived-2010-10#

    There are some pretty compelling reasons why the US will go into a major depression in 2011 or 2012 and for longer than that.

  11. Alice
    December 27th, 2010 at 16:56 | #11

    @Freelander
    Recovery in the US Freelander? Ill show you the twenty cities that have supposedly “recovered” and you tell me why it is that home prices are still falling in every one lof them?
    http://www.businessinsider.com/20-cities-that-are-having-an-awesome-recovery-2010-3#now-for-the-bad-news-21

    Not that Im sceptical but the bad news from the US is outweighing the recovery news.

  12. Alice
    December 27th, 2010 at 17:00 | #12

    @Freelander
    Oh Freelander – welcome back – how could I have missed your joke – Sarah Palin saves the US economy LOL… a vision of Palin leading a moose, trapped by the glare of a hunters truck lights, back to safety in the dark woods…..

  13. Fran Barlow
    December 27th, 2010 at 17:35 | #13

    @Freelander

    Fabulous parody Freelander! You’ve got those rightwing nongs from Fox and the astroturfer movements down pat.

    If I’d written that, it wouldn’t have been as funny.

    I loved the reification of “the market” by the way. I’m saving this one for next time I need to explain the term.

  14. Alice
    December 27th, 2010 at 19:28 | #14

    Well Fran, energy and public education issues aside, we are in agreement on one thing. Freelander is a funny guy!
    I just love his sense of the parody! Freelander you are worth your weight in gold – every time I nearly take you seriously I have t stop myself and just laugh!!

  15. December 27th, 2010 at 22:52 | #15

    Pr Q said:

    A special sandpit for debate on the Republican Party claim that the global financial crisis was caused by some combination of the Community Reinvestment Act, Fannie/Freddie, and the stranglehold on US political power held by the Clintons in the early 2000s.

    Ha Ha, the crack about the Clinton is to laugh. Its not as if the Clinton’s (and the Bush’s) ever indulged in bi-partisan policy making, when it suited them. Remember Clinton pioneered “regime change” too, on a small scale in Kosovo. As Mencken said, the moment Congress comes to a consensus is when you should really watch your pocketbook.

    Its no joke that the GSE’s employed perps on both sides of the aisle. Have a look at the staff rosters, absolutely plum sinecures and a rich source of payola for both parties. The WaPo has dug the dirt:

    the tentacles of the government-sponsored enterprises reach into both campaigns.

    the list of Republican Fannie and Freddie lobbyists includes some of its most notable rogues — including Tony Rudy, Edwin Buckham, Kevin Ring and David H. Safavian, all of whom were linked to the Jack Abramoff lobbying scandal — as well as some of its leading power brokers, …has lobbied for Fannie Mae,…former Montana governor Marc Racicot and tax-cut advocate Grover Norquist.

    Obama also has ties to the firms. James A. Johnson, the former head of his vice presidential vetting panel, was a chief executive of Fannie Mae, as was Franklin D. Raines, who said this week that he has been consulting with the campaign on housing issues.

    That payroll has cost Fannie and Freddie nearly $200 million in lobbying and campaign contributions over the past decade, according to lobbying reports and Federal Election Commission disclosures. It has also won them plenty of protection from calls for greater regulation, less federal protection, and even nationalization.

    Is it any wonder that there is little congressional stomach for an investigation into the GSE’s with so many political skeletons are rattling in their closets? Bite meet hand that fed ye.

    Of course Bush always made a bad situation ten times worse. Early in his administration he made it his explicit aim to increase minority (mainly Hispanic) home ownership, mainly to bolster the REPs poor political performance amongst non-white voters. Its worth quoting extensively from the NYT post-mortem on this policy, since the owner of this blog seems reluctanct to confront inconvenient truths:

    the story of how we got here is partly one of Mr. Bush’s own making…
    the story of a well-intentioned policy gone awry…according to a review of his tenure that included interviews with dozens of current and former administration officials.

    He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.

    It was June 17, 2002, a day Mr. West recalls as “the highlight of my life.” Mr. Bush, in Atlanta to unveil a plan to increase the number of minority homeowners by 5.5 million,

    Advocating homeownership is hardly novel; the Clinton administration did it, too. For Mr. Bush, it was part of his vision of an “ownership society,”… It was also good politics, a way to court black and Hispanic voters.

    So Mr. Bush had to, in his words, “use the mighty muscle of the federal government” to meet his goal. He proposed affordable housing tax incentives. He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending.

    To my knowledge neither Krugman or Gordon or any other economists critical of the Rajan thesis have referenced this review, which is the smoking gun of the Bush presidency. Which tells me all I need to know about how honest they are about getting to the bottom of the crisis.

    Bush turbo-charged the Clinton policy using the full faith and credit of the FRB and his executive power over GSE appointments and SEC approvals to push sub-prime mortgages to the max. The FRB provided the cheap finance and the GSE’s made it safe for shadow banks to lower the bar. Finally, a whole-of-government program that worked seamlessly!

    Also, a quibble with the “CRA” title of this blog. Most pundits, both DEM and REP, are content to talk about CRA since it tends to suit partisan purposes, not to mention pocketbooks. REPs like to talk about this program since it takes the heat off the Bush administration. Whilst DEMs like to talk about it since it seems so distant in time and modest in scope that it could hardly be blamed for the current crisis.

    This is all more or less strawman bashing or at least misdirection. Rajan, Sailer and others have pointedly downplayed the role of CRA black-letter law in promoting low-income minority housing precisely. It was the federal government’s green light to shadow banks to pursue CRA-type goals, the meeting of low income loan commitments as a condition for mergers and acquisitions and the GSE’s guarantee to buy up junk securities that did the most financial damage.

    But one has to read between the lines to figure this out, too much like hard work in these days of 30 second sound bites and blog sniping.

    it is the mark of fools to analyse social and political systems on the basis of their formal constitutions.

    Knopfelmacher via Marx

  16. December 27th, 2010 at 23:14 | #16

    Dave @ #1 said:

    As Krugman said recently, “Yep. It was all Fannie and Freddie, which somehow managed to cause housing bubbles in Ireland, Iceland, Latvia, and Spain as well as the United States.”

    You will get no argument from me that the underlying cause of the GFC was financial institutions running amok, as the Baby Boomers dismantled all the post-Depression controls on reckless credit provision. But finance can commit a multitude of sins on both demand and supply sides – hence the diversity of solvency crises manifesting across the OECD. And that is where interventionist political agencies come into the equation.

    The analysis of the GFC goes round the partisan merry-go-round with each side trying to pin the blame on their favourite bogeyman. The Left-DEMs try to put it all on Wall Street bankers. The Right-REPs want to blame Washington agencies and regulations. Of course neither side considers that there might be some truth in both stories – that would mean conceding ground to the opposition!

    In reality the sub-prime crisis was a perfect synthesis of New Liberalism – the New Right’s aim of liberalising Wall Street’s provision of credit complemented the New Left’s aim of liberalising Main Street’s access to credit. So the villain of the piece is liberalisation, but we Baby Boomer don’t want to hear conservative strictures against our new-won freedoms.

    I am not all that impressed by the repeated references to housing bubbles in “Iceland, Ireland and Latvia” and all the other emerging markets of the North Atlantic. These are small countries with unsophisticated credit markets were ripe targets for the transitional woes that have beset post-Soviet economies. The little fish are “outliers” for most purposes. We need to look at the big fish hit by the GFC, large mature economies like the US, UK together with Spain and Italy.

    The GFC, like dynamite, was a complex compound. But dynamite does not blow without someone lighting the fuse. And the fuse that lit the US housing bubble was the Federal governments programs and policies to promote housing ownership amongst low-income minority households. The light was provided jointly by Washington and Wall Street, through their bastard hybrid off-springs – the FRB and GSEs.

    To explain the GFC we need a revision of the general theory of financial crises. Economic crises have traditionally started with a shock or “blockage” in the real industrial economy and then been amplified by the nominal financial economy. But the GFC reversed that process with a pure financial play feeding back into the real economy.

    To do this we need to get the narrative story correct. The first part of the US housing market to boil over and go into default was the sub-prime sector, largely low-income minority households. Then came other parts of the US housing markets, residential and commercial property investment and HVI mansions.

    The fact that there were bubbles in markets not regulated by low-income minority housing goals is neither here nor there. Once bubbles start in one part of the market they inevitably spill over to other parts. Here is a contemporary analysis of the way that commercial property bubble succeeded the residential property bubble. I know because I was in Las Vegas in 2006 and saw how the switch was made with residential condos being made-over into time shares.

    Property bubbles normally inflate from the top-down usually in commercial investment property, not bottom-up through residential owner-occupieds. Yet the sub-prime sector of the US housing market came to be the most, rather least, over valued, as is normally the case. Remember “trickle down” booms? Whats up with “trickle up” busts?

    Likewise the US was the first and biggest of the dominoes to fall, and it has fallen the furtherest. The PIIGS and the Baltic property bubbles came afterwards. So there is every chance that the US property bubble conditioned, or at least dangerously amplified, property bubbles in other countries. Certainly the subsequent crash of the big US banks caused a global credit crisis which undermined risky property investments in other countries.

    To sum up, its possible that the GFC might have occurred in the absence of the US governments policy of allowing sub-prime lending in order to promote low-income minority housing. But its a counter-factual that we have no way of testing since such credit practices were critical in pushing the US housing market into default. And once the US went over it took most of the G7 with it.

    One might as well ask if the Japanese had not bombed Pearl Harbour would the US have entered WWII. Maybe, maybe not or not decisively, as in WWI. We have to deal with what actually occurred.

    .

  17. Alice
    December 28th, 2010 at 06:53 | #17

    @Jack Strocchi
    says “Remember “trickle down” booms? Whats up with “trickle up” busts?”
    Nothing except that trickle down isnt what happened in the boom.
    Somehow the trickle defied the law of gravity and flowed up and out to tax havens.

  18. Salient Green
    December 28th, 2010 at 16:49 | #18

    I like the ‘dynamite’ analagy but it was high oil prices which sparked the flame of unemployment and financial hardship which lit the fuse of everything else Jack said.

  19. sdfc
    December 28th, 2010 at 19:24 | #19

    Jack

    There was nothing unsophisticated about how Ireland and Iceland got themselves into trouble. Rampant bank income chasing on the back of easy money. In essence it is no different to the US situation.

    Ireland’s big mistake was joining the euro.

    Fannie and Freddie’s share of the market fell between 2004 and 2007 (being lazy, might have the dates slightly wrong). The problem was the increase in private sector mortgage funding and the resulting deterioration in financial assets. In short, who did the GSEs send bust?

    There is no might about the possibility of the GFC happening without the GSEs. Easy money will do it every time.

  20. THR
    December 29th, 2010 at 10:06 | #20

    There have been at least two waves of the propaganda campaign that is was the gummint wot did it.

    Very quickly ater the GFC had set in, pro-GOP hacks pushed the line that it was the CRA that caused the GFC. Obviously, this was such a flimsy argument that it didn’t last long.

    More recently (and I’ve argued this several times over at Catallaxy), right-leaning economists have blamed anti-redlining suits for the GFC, claiming that banks were forced to lend recklessly on the off chance a black person might sue for discrimination. Again, it’s a flimsy argument (slightly less so than that of the GOP hacks), but certain right-leaning economists cannot admit, under any circumstances, that markets can get things wrong, or that a lack of regulation can lead to disaster, or that capitalism is inherently prone to crises.

  21. sdfc
    December 29th, 2010 at 13:02 | #21

    THR

    I don’t think there can be much doubt that a financially driven capitalist economy is inherently unstable. However the ramifications of this instability are largely determined by the amount of leverage that is allowed to build up in the system during the lead up to any crisis.

    I don’t think there is much doubt that years of asymmetric policy has been a driving force behind the problems the global economy and financial system continue to face. So yes governments do bear some responsibility.

    Persistent fiscal deficits and loose monetary policy promote instability by encouraging private sector actors to engage in ever riskier behaviour as the memory of a past crises fade into the background (in other words, this time is always different).

    The hallmark of this increasing confidence that the good times will roll on forever is the build up in private sector debt which as it grows ever larger becomes a time bomb ready to go off.

    This is not a phenomenon confined to the US but is evident across the developed world, Australia included. Even the RBA seems to now acknowledge interest rates were kept too low for too long earlier in the decade. That era of inappropriately low interest rates directly contributed to the build up in household debt which remains the economy’s biggest Achilles heel.

  22. may
    December 29th, 2010 at 13:03 | #22

    in Australia

    Go hard
    Go households
    Go early

    and

    every low income household,just before Christmas had enough money so small businesses who rely on that seasonal boost to their cashflow to could stay in business for the rest of the year.

    the big banks got formal Government backing which happened to be a nice earner for the Government.

    other actions JQ could elucidate.

    the house had flames almost out of control
    water,flame retardent and everything else possible was used too put it out.

    now we have a scenario of “minji blow hard”, whinging at max decibels about the water damage to the carpets and the smoke stains on the ceiling.

  23. sdfc
    December 29th, 2010 at 13:33 | #23

    May

    If that’s directed at me you are going to be a little more coherent.

  24. sdfc
    December 29th, 2010 at 13:35 | #24

    Talk about being coherent.

    That should read, you are going to “have to” be a little more coherent.

  25. Alice
    December 29th, 2010 at 15:53 | #25

    @THR
    You bet THR – you dont find right wing economists even examining the past in any depth Economic history is not their thing – revision is rarely their thing. Mad incomprehensibly designed models embedding and cementing their particular delusions about how the world works are more up their alley. Nor do they like to examine the flaws of their own models (when in doubt there is always a government to blame), let alone even contemplating their own navels. Its ever onward, talking upward, and completely ignore economies spiralling downward.

    Oh the fame and glory that comes with an economic model financial institutions just love….

  26. paul walter
    December 29th, 2010 at 19:55 | #26

    25, history, like parliamentary inquiries into privatisation of utilities, turns up too many anomalies and contradictions.
    Better to ignore or “prorogue” the whole lot, lest the truth get in the way of a good story, or reaity challenges fondly nurtured personal delusions.

  27. Charlie
    December 29th, 2010 at 21:14 | #27

    Alice, why did you imply when saying “I’ll show you the twenty cities that have supposedly “recovered” [and] that home prices are still falling in every one of them?” that falling house prices are a Bad Thing for everybody? We own our house and have no intention of selling, so why should I care, while for all potential new buyers, falling house prices are a Good Thing, are they not?

    Previously you contested my remarks about underground rail systems in London etc.

    The London Underground has NOT been privatised, and vast sums have been poured into extending the network ever further in all directions (eg Picadillly Line to Heathrow plus new lines, Victoria, Jubilee, etc etc). The problem is the massive immigration from all corners of the globe, almost all concentrating in and around London (Greater London now extends de facto to Oxford, Cambridge, Brighton etc). When I lived and worked in London one could get a seat in offpeak times, mid-morning and so on. Now, never, or so my daughter tells me.

    I forget who here linked to the Green Party’s Policy on Sustainable Planning and Transport. Unlike UK, it calls for reducing Australian Settlement (send us all back to whence we came, faute de mieux, at #3). Of the 40 items, most are repeated at least 3-4 times. What I found very funny is that the Greens (sic) think we should all be housed in high rise apartments in CBDs in order to reduce reliance on cars. Away with gardens on 1/4 acre plots, a few pot plants on balconies are much greener! (See #8,9,10,11,12,14,15,17,21,26).

    This document reminds me of seeing Green policies in practice in the Prague, Warsaw, and Kiev, that I knew during or soon after the Brezhnev era: everybody (apart from the apparatchiks with their dachas) duly housed in hideous apartment blocks with not even balconies, and no private cars other than those of the apparatchicks. Such bliss! yet oddly all the economists and IT specialists I had dealings with could not wait to crawl under the Berlin Wall. Alice and Fran and the rest here, do relieve us of your ecological footprints here and head for Byeloruss, where flats with total living spce less than that of your present living rooms (like that of my mate at Warsaw Uni in the 1970s) are still all the rage, and with zero private enterprise of any description to sully the view from your miniscule windows. Enjoy!

  28. Alice
    December 30th, 2010 at 06:06 | #28

    @Charlie
    Id like to see some evidence of your population statistics for “greater london” Charlie
    This is what I have.
    http://www.demographia.com/dm-lon31.htm
    Comparing 1911 or 1939 to 2001 – I dont see much eveidence at all of massive population increases in Greater London
    So perhaps you need to proceed on a different point eg that usage has risen without any massive increase in population. There are stats to 2009 also – I found them yesterday and I also see no evidence of “massive population increases” there.
    As regards privatisation of the London Underground (in particular maintenance of…)

    “In January 2003 the Underground began operating as a Public-Private Partnership (PPP), whereby the infrastructure and rolling stock were maintained by two private companies (Metronet and Tube Lines) under 30-year contracts, while London Underground Limited remained publicly owned and operated by TfL.”

    http://en.wikipedia.org/wiki/London_Underground#Public_Private_Partnership

    Now Charlie…as I see it a major problem with such PPS is that the private firms usually prove only to happy to wallow in the revenue but when it comes to maintenance of infastructure they often claim bankruptcy, then sue governments, before they will part with a penny.

    and public spending on maintenance of infrastructure is what is not happening in many nations (the US, the UK, even Australia) because of silly people who want to shrink government investment on the grounds that the “private sector” does things so much better.. (better doesnt mean quality and better can mean faster at getting away with taxpayers money ).

    That “private better than public” line is a complete crock Charlie.

  29. Alice
    December 30th, 2010 at 06:16 | #29

    Your argument of “crowded trains” may have been better pursued not along massive increases in population numbers, which dont exist, but on the nature of peoples work and where it is located…and where they have to travel to get to work.

    Has the great neoliberal dream killed off small businesses in outer regions of London, and concentrated production and employment in the hands of only larger more affluent employers (one can imagine the gleaming multistorey towers of the financial districts at this point).

    I could argue that globalisation and failed free market neoliberal policies has concentrated work in inner cities Charlie and that may be what is crowding your trains.

  30. Bayardo
    December 31st, 2010 at 10:05 | #30

    The “global financial crisis was caused by some combination of the Community Reinvestment Act, Fannie/Freddie, and the stranglehold on US political power held by the Clintons in the early 2000s.”

    This was also the line pushed by Laurence Fisher at the Macquarie course I just did on macro policy. All DSGE. Time set aside especially to pour derision on Steve Keen.

  31. Alice
    December 31st, 2010 at 10:23 | #31

    @Bayardo
    Macquarie – what would you expect?. Zombie training school now.

  32. David C
    December 31st, 2010 at 13:15 | #32

    As is usual William Black does a superb job in describing the real cause of the crisis.

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