When does the recession become, er, a depression?


lbaron said:
. . . . If I had the space here, I would explain that it was the . . . Congress who created the sub-prime mortgage market. They acted like thugs, threatening banks to lend money to deadbeats. . . .
Thank goodness that someone has heard of the CRA! As one who served in the White House during that period, I well remember the mistaken belief that changes in human nature could be engineered and legislated.

'Too bad that most posters' understandable concern to preserve anonymity likely will prevent our ever learning of your book, lbaron.


Never really understood the motivation behind the apologist argument that financial institutions were powerless to resist the pressures resulting from politically incentivised market conditions.

Perhaps its related to the fervent need to blame liberals.


RWS said:
Thank goodness that someone has heard of the CRA! As one who served in the White House during that period, I well remember the mistaken belief that changes in human nature could be engineered and legislated.
The CRA is not unknown. But it's disingenuous to blame it for sub-prime, just as it's disingenuous to blame sub-prime for the economic situation today: it was merely the catalyst, or to use another metaphor, the spark that ignited the barrel of dynamite. Most serious commentators acknowledge the current crisis has its roots in the policies of the last thirty years, and not feverish sub-prime lending in 2005 and 2006.

But to return to CRA, here is BusinessWeek:

Fresh off the false and politicized attack on Fannie Mae and Freddie Mac, today we’re hearing the know-nothings blame the subprime crisis on the Community Reinvestment Act — a 30-year-old law that was actually weakened by the Bush administration just as the worst lending wave began. This is even more ridiculous than blaming Freddie and Fannie.

The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits. Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly. But it’s even more ridiculous when you consider that most subprime loans were made by firms that aren’t subject to the CRA. University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: “In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.”

Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley (PDF file here).

Finally, keep in mind that the Bush administration has been weakening CRA enforcement and the law’s reach since the day it took office. The CRA was at its strongest in the 1990s, under the Clinton administration, a period when subprime loans performed quite well. It was only after the Bush administration cut back on CRA enforcement that problems arose, a timing issue which should stop those blaming the law dead in their tracks. The Federal Reserve, too, did nothing but encourage the wild west of lending in recent years. It wasn’t until the middle of 2007 that the Fed decided it was time to crack down on abusive practices in the subprime lending market. Oops.

Better targets for blame in government circles might be the 2000 law which ensured that credit default swaps would remain unregulated, the SEC’s puzzling 2004 decision to allow the largest brokerage firms to borrow upwards of 30 times their capital and that same agency’s failure to oversee those brokerage firms in subsequent years as many gorged on subprime debt.
But no, this is all part of a great iiberal conspiracy to cover up all those loans made to deadbeat Mexicans and negroes.:)

For further analysis from Michael Perelman (my favorite economist), there's this piece of elucidation:

But CRA has always had critics... Rhetoric aside, the argument turns on a simple question: In the current mortgage meltdown, did lenders approve bad loans to comply with CRA, or to make money?

The evidence strongly suggests the latter. First, consider timing. CRA was enacted in 1977. The sub-prime lending at the heart of the current crisis exploded a full quarter century later. ... In late 2004, the Bush administration announced plans to sharply weaken CRA regulations... Yet sub-prime lending continued, and even intensified -- at the very time ... the law had weakened.

Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn't even apply to most of the loans that are behind it. ... Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.

Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the "tendency to conflate the current problems in the sub-prime market with CRA-motivated lending." ...
But nope, this is further proof (were any needed) of a vast liberal conspiracy to cover up what really happened.

I do not know why we are discussing this red herring. The true roots of the current global crisis lie elsewhere.


Director speaks out about harrassment while trying to obtain funding for his movie exposing the fraud in the US economic system

I would recommend reading the history of economic booms and busts since the first fiat currency in China some 1000 years ago to any one who holds beliefs that an economy that prints money out of thin air corrects no more violently than an economy that backs its currency with some regulating precious metal.


That the failure of subprime loans (most of which that have failed, I see as a lawyer for the poor in the American Northeast, are indeed the offspring of the CRA -- but my clients are seldom "deadbeats", more often simply overwhelmed) was but the fuse is my understanding, too. The powder keg itself had been under construction not just during the past thirty years but during the past three generations or longer. To continue the metaphor and strike to the source of the present problem, the essential materials for that construction were taken from human nature: among those, greed, laziness, the desire to obtain security and comfort at as low a cost in effort and risk as possible.

I'm no vehement Darwinian (although I remain what many label "liberal"), but no one need be to acknowledge that too much deviation from the self-sustaining aspects of human nature will distort human economy and governance, too.