8 ms·

Bubbles are usually preceded by some regulatory or legislative change(s) that fuels them. This legislation usually has good intentions but falls victim of unint

Bubbles are usually preceded by some regulatory or legislative change(s) that fuels them. This legislation usually has good intentions but falls victim of unintended consequences. For example, you can trace the housing bubble to the easing of lending standards through the modifications of the Community Reinvestment Act in the late 90s [1]. Legislation that creates new investments opportunities, coupled with cheap capital is a dangerous combination. I would not be surprised if the new JOBS Act [2] provides the spark and the Fed's loose monetary policy provides the fuel that creates a startup bubble (quickly). Companies like Angel List [3] and Wefunder [4] have been quick to recognize this and take advantage of the new demand pockets the JOBS Act creates. Just check out their home pages. As Sam mentions, there may be some time before it bursts, but it's very tough to figure out when it will be...and early stage company shares are not liquid. [1] http://en.wikipedia.org/wiki/Community_Reinvestment_Act http://en.wikipedia.org/wiki/Community_Reinvestment_Act [2] http://en.wikipedia.org/wiki/JOBS_Act http://en.wikipedia.org/wiki/JOBS_Act [3] https://angel.co/ https://angel.co/ [4] https://wefunder.com/ https://wefunder.com/

bfe 13y ago
Blaming the CRA has been extensively debunked. http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/13/no-marco-rubio-government-did-not-cause-the-housing-crisis/ http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/13/n... http://www.ritholtz.com/blog/2011/11/a-global-view-of-the-housing-bubble/ http://www.ritholtz.com/blog/2011/11/a-global-view-of-the-ho... http://www.cepr.net/index.php/blogs/beat-the-press/the-blame-the-community-reinvestment-act-industry http://www.cepr.net/index.php/blogs/beat-the-press/the-blame...
- the_watcher 13y ago
  Those do not extensively debunk the CRA's influence. At best, they split hairs and show that CRA is not completely at fault and that we should blame Wall Street. I'm on board with blaming Wall Street for a lot of the problems (they went much further beyond rationally using the CRA's policies and instead went whole hog into "lend to everyone!"), but this strikes of "Sure, the legislation created perverse incentives and encouraged risky lending practices (which unsurprisingly spiraled much further out of control than the CRA intended into non-CRA covered loans), but the real problem is the people who acted on these perverse incentives!"
  - jbooth 13y ago
    If you assume that every single CRA loan defaulted, and that every failed loan in the entire housing market was a CRA loan (both assertions are far from true), then the CRA would be responsible for a multiple billion dollar problem. Maybe. Might be well under 1b when you consider that the homes are re-sellable after foreclosure unless they burned without insurance. On Wall St, we wound up with a multiple trillion dollar problem. That's tr-, not b-, as in 1,000X bigger. The CRA thing is ideological bullshit. I seriously do not understand how anyone who passed 3rd grade arithmetic could buy into it.
    - scarmig 13y ago
      Note also that it's a perfectly fine position to have to think the CRA is a bad idea while also recognizing how ridiculous the idea is that it caused the bubble.
      - thecage41 13y ago
        It's a sad commentary that this point needs to be made, though.
- twakefield 13y ago
  I guess I should have been more explicit. I didn't mean to strike a partisan nerve. I didn't mean to say that the CRA was the only cause for the housing bubble. There were a lot of factors that lead to the housing bubble. My point was that the CRA was the beginning of a decade long non-partisan policy shift that signaled to regulators, Wall Street, etc. that owning a home was an unqualified good thing and looser standards for lending against homes should be encouraged. Once the government and regulators signal to Wall Street other investors that they are encouraging the deployment of capital to a new, loosely regulated asset class it creates a dangerous environment.
Steko 13y ago
The idea that the CRA was behind the US housing bubble in the 00's is a huge zombie myth.
quanticle 13y ago
What about the tech. bubble of the 1990s? What was the regulatory influence then?
- mgkimsal 13y ago
  IIRC in ... 96 there was a change in stock holding rules for new stock issues - IPO holders could cash out much faster than before, leading to more turnover and investments. It's a bit hazy, and I'm not a stock guy, but that's my recollection.

bfe 13y ago

Blaming the CRA has been extensively debunked. http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/13/no-marco-rubio-government-did-not-cause-the-housing-crisis/ http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/13/n... http://www.ritholtz.com/blog/2011/11/a-global-view-of-the-housing-bubble/ http://www.ritholtz.com/blog/2011/11/a-global-view-of-the-ho... http://www.cepr.net/index.php/blogs/beat-the-press/the-blame-the-community-reinvestment-act-industry http://www.cepr.net/index.php/blogs/beat-the-press/the-blame...

the_watcher 13y ago
Those do not extensively debunk the CRA's influence. At best, they split hairs and show that CRA is not completely at fault and that we should blame Wall Street. I'm on board with blaming Wall Street for a lot of the problems (they went much further beyond rationally using the CRA's policies and instead went whole hog into "lend to everyone!"), but this strikes of "Sure, the legislation created perverse incentives and encouraged risky lending practices (which unsurprisingly spiraled much further out of control than the CRA intended into non-CRA covered loans), but the real problem is the people who acted on these perverse incentives!"
- jbooth 13y ago
  If you assume that every single CRA loan defaulted, and that every failed loan in the entire housing market was a CRA loan (both assertions are far from true), then the CRA would be responsible for a multiple billion dollar problem. Maybe. Might be well under 1b when you consider that the homes are re-sellable after foreclosure unless they burned without insurance. On Wall St, we wound up with a multiple trillion dollar problem. That's tr-, not b-, as in 1,000X bigger. The CRA thing is ideological bullshit. I seriously do not understand how anyone who passed 3rd grade arithmetic could buy into it.
  - scarmig 13y ago
    Note also that it's a perfectly fine position to have to think the CRA is a bad idea while also recognizing how ridiculous the idea is that it caused the bubble.
    - thecage41 13y ago
      It's a sad commentary that this point needs to be made, though.
twakefield 13y ago
I guess I should have been more explicit. I didn't mean to strike a partisan nerve. I didn't mean to say that the CRA was the only cause for the housing bubble. There were a lot of factors that lead to the housing bubble. My point was that the CRA was the beginning of a decade long non-partisan policy shift that signaled to regulators, Wall Street, etc. that owning a home was an unqualified good thing and looser standards for lending against homes should be encouraged. Once the government and regulators signal to Wall Street other investors that they are encouraging the deployment of capital to a new, loosely regulated asset class it creates a dangerous environment.

Steko 13y ago

The idea that the CRA was behind the US housing bubble in the 00's is a huge zombie myth.

quanticle 13y ago

What about the tech. bubble of the 1990s? What was the regulatory influence then?

mgkimsal 13y ago
IIRC in ... 96 there was a change in stock holding rules for new stock issues - IPO holders could cash out much faster than before, leading to more turnover and investments. It's a bit hazy, and I'm not a stock guy, but that's my recollection.