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If you're referring to the subprime mortgage crises, the problem appeared to be the removal of regulation more than regulation itself. There was a reason there

by mpyne 13y ago

If you're referring to the subprime mortgage crises, the problem appeared to be the removal of regulation more than regulation itself. There was a reason there had used to be laws placing firm lines between banks and securities firms.

bduerst 13y ago
To my knowledge, those lines haven't been put back, have they?
- mpyne 13y ago
  AFAIK you're right. Merely some stronger rules and a couple of new agencies, but nothing as strong as Glass-Steagall.
Aaronontheweb 13y ago
Actually, regulation was part of the problem - specifically the Community Reinvestment Act http://en.wikipedia.org/wiki/Community_Reinvestment_Act http://en.wikipedia.org/wiki/Community_Reinvestment_Act This encouraged banking institutions to increase the number of sub-prime mortgages with the stated goal of increasing home ownership among lower income communities. Changes to this regulation made during the 1990s, specifically the 1992 change to require Fannie Mae and Freddie Mac (USG-sponsored entities) to devote a percentage of their annual budget to securitizing (read: buy the loans made by other banks and bundle them into securities) these sub-prime mortgages. This, among other factors, eliminated a lot of the risk for banks - there was always going to be someone to buy the sub-prime mortgages, thanks to this regulation. And as long as housing prices went up they could afford to keep issuing predictably bad loans, since the assets that would fall under forfeiture would have a greater value than the principle of the loan. When housing prices tanked in the mid-2000s, after a solid 10+ year housing bubble, all of this mania inevitably caught up with reality as home values went under water. So let's not pretend that regulation is some short of magic wizard armor that prevents human stupidity and greed (on all parties: the banks, the Government, the realtors, the home builders, and the consumers who took the loans). Regulation doesn't guarantee anything other than unintended consequences and should be looked at as a tool of absolute last resort when it comes to addressing market issues. Consider the FDIC, often held up as an example of successful financial regulation - it's enabled plenty of new forms of reckless behavior on the part of financial institutions (see the Savings & Loan crisis from the 1980s) and more or less guarantees government bailouts to the depositors. Laws are not magic patches to the fabric of reality and human behavior. They often don't even achieve their stated goals and aren't always so easy to correct.
- ahlatimer 13y ago
  You should consider reading the article you linked. ""However, the Financial Crisis Inquiry Commission formed by the US Congress in 2009 to investigate the causes of the 2008 financial crisis, concluded that "the CRA was not a significant factor in subprime lending or the crisis"."" - http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Reported_relationship_to_the_2008_financial_crisis http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Repo...
  - Aaronontheweb 13y ago
    Maybe read your own citation on my citation? > According to American Enterprise Institute fellow Edward Pinto, Bank of America reported in 2008 that its CRA portfolio, which constituted 7% of its owned residential mortgages, was responsible for 29 percent of its losses. He also charged that "approximately 50 percent of CRA loans for single-family residences ... [had] characteristics that indicated high credit risk," yet, per the standards used by the various government agencies to evaluate CRA performance at the time, were not counted as "subprime" because borrower credit worthiness was not considered.[125][126][127][128] However, economist Paul Krugman argues that Pinto's category of "other high-risk mortgages" incorrectly includes loans that were not high-risk, that instead were like traditional conforming mortgages.[129] Additionally, another CRA critic concedes that "some of this CRA subprime lending might have taken place, even in the absence of CRA. For that reason, the direct impact of CRA on the volume of subprime lending is not certain." So if you're basing your argument on the authoritative application of the label "sub-prime," please feel free to indulge in as much or as little semantic pedantry as you like.
    - mikeyouse 13y ago
      Pinto was pretty much the central figure in CRA-blaming, and the vast majority of his claims have been repeatedly and exhaustively debunked. In a piece deeply critical of Fannie and Freddie, William Black (again of S&L crisis fame) addresses Pinto's attempts to place Fannie and Freddie's terrible risk management on the back of CRA regulation: Pinto estimated that Fannie and Freddie held “34% of all the subprime loans and 60% of all Alt-A loans outstanding” [p. 7]. Pinto seems to have treated subprime loans as non-liar’s loans, but that is clearly incorrect. I cited Credit Suisse’s finding that by 2005 and 2006, half of all subprime loans were also stated income (liar’s loans). The presence of such large amounts of Alt-A loans is one of the demonstrations that Pinto, Wallison, and the Republican Commissioners’ “Primer” are flat out wrong to claim that it was affordable housing goals that drove Fannie and Freddie’s CEOs’ decisions to purchase loans they knew would cause the firms to fail. That claim doesn’t pass any logic test. One of its unobvious flaws is that no one was making Fannie and Freddie buy liar’s loans. For the reasons I’ve explained, and Pinto admits, Fannie and Freddie actions with respect to liar’s loans were the opposite of what they would have been if they were trying to demonstrate that the loans were made for affordable housing purposes. The GSEs were deeply irresponsible with their lending and were poorly run, but both were prevalent long before any CRA impact would have been felt. If AEI / Pinto / Wallison had focused on the actual causes of the mortgage / financial crisis instead of trying to blame poor people and Barney Frank, the world would be a lot better off. http://www.ritholtz.com/blog/2011/02/wallison-is-far-too-kind-to-fannie-and-freddie/ http://www.ritholtz.com/blog/2011/02/wallison-is-far-too-kin...

by mpyne 13y ago

bduerst 13y ago

To my knowledge, those lines haven't been put back, have they?

mpyne 13y ago
AFAIK you're right. Merely some stronger rules and a couple of new agencies, but nothing as strong as Glass-Steagall.

Aaronontheweb 13y ago

Actually, regulation was part of the problem - specifically the Community Reinvestment Act http://en.wikipedia.org/wiki/Community_Reinvestment_Act http://en.wikipedia.org/wiki/Community_Reinvestment_Act This encouraged banking institutions to increase the number of sub-prime mortgages with the stated goal of increasing home ownership among lower income communities. Changes to this regulation made during the 1990s, specifically the 1992 change to require Fannie Mae and Freddie Mac (USG-sponsored entities) to devote a percentage of their annual budget to securitizing (read: buy the loans made by other banks and bundle them into securities) these sub-prime mortgages. This, among other factors, eliminated a lot of the risk for banks - there was always going to be someone to buy the sub-prime mortgages, thanks to this regulation. And as long as housing prices went up they could afford to keep issuing predictably bad loans, since the assets that would fall under forfeiture would have a greater value than the principle of the loan. When housing prices tanked in the mid-2000s, after a solid 10+ year housing bubble, all of this mania inevitably caught up with reality as home values went under water. So let's not pretend that regulation is some short of magic wizard armor that prevents human stupidity and greed (on all parties: the banks, the Government, the realtors, the home builders, and the consumers who took the loans). Regulation doesn't guarantee anything other than unintended consequences and should be looked at as a tool of absolute last resort when it comes to addressing market issues. Consider the FDIC, often held up as an example of successful financial regulation - it's enabled plenty of new forms of reckless behavior on the part of financial institutions (see the Savings & Loan crisis from the 1980s) and more or less guarantees government bailouts to the depositors. Laws are not magic patches to the fabric of reality and human behavior. They often don't even achieve their stated goals and aren't always so easy to correct.

ahlatimer 13y ago
You should consider reading the article you linked. ""However, the Financial Crisis Inquiry Commission formed by the US Congress in 2009 to investigate the causes of the 2008 financial crisis, concluded that "the CRA was not a significant factor in subprime lending or the crisis"."" - http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Reported_relationship_to_the_2008_financial_crisis http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Repo...
- Aaronontheweb 13y ago
  Maybe read your own citation on my citation? > According to American Enterprise Institute fellow Edward Pinto, Bank of America reported in 2008 that its CRA portfolio, which constituted 7% of its owned residential mortgages, was responsible for 29 percent of its losses. He also charged that "approximately 50 percent of CRA loans for single-family residences ... [had] characteristics that indicated high credit risk," yet, per the standards used by the various government agencies to evaluate CRA performance at the time, were not counted as "subprime" because borrower credit worthiness was not considered.[125][126][127][128] However, economist Paul Krugman argues that Pinto's category of "other high-risk mortgages" incorrectly includes loans that were not high-risk, that instead were like traditional conforming mortgages.[129] Additionally, another CRA critic concedes that "some of this CRA subprime lending might have taken place, even in the absence of CRA. For that reason, the direct impact of CRA on the volume of subprime lending is not certain." So if you're basing your argument on the authoritative application of the label "sub-prime," please feel free to indulge in as much or as little semantic pedantry as you like.
  - mikeyouse 13y ago
    Pinto was pretty much the central figure in CRA-blaming, and the vast majority of his claims have been repeatedly and exhaustively debunked. In a piece deeply critical of Fannie and Freddie, William Black (again of S&L crisis fame) addresses Pinto's attempts to place Fannie and Freddie's terrible risk management on the back of CRA regulation: Pinto estimated that Fannie and Freddie held “34% of all the subprime loans and 60% of all Alt-A loans outstanding” [p. 7]. Pinto seems to have treated subprime loans as non-liar’s loans, but that is clearly incorrect. I cited Credit Suisse’s finding that by 2005 and 2006, half of all subprime loans were also stated income (liar’s loans). The presence of such large amounts of Alt-A loans is one of the demonstrations that Pinto, Wallison, and the Republican Commissioners’ “Primer” are flat out wrong to claim that it was affordable housing goals that drove Fannie and Freddie’s CEOs’ decisions to purchase loans they knew would cause the firms to fail. That claim doesn’t pass any logic test. One of its unobvious flaws is that no one was making Fannie and Freddie buy liar’s loans. For the reasons I’ve explained, and Pinto admits, Fannie and Freddie actions with respect to liar’s loans were the opposite of what they would have been if they were trying to demonstrate that the loans were made for affordable housing purposes. The GSEs were deeply irresponsible with their lending and were poorly run, but both were prevalent long before any CRA impact would have been felt. If AEI / Pinto / Wallison had focused on the actual causes of the mortgage / financial crisis instead of trying to blame poor people and Barney Frank, the world would be a lot better off. http://www.ritholtz.com/blog/2011/02/wallison-is-far-too-kind-to-fannie-and-freddie/ http://www.ritholtz.com/blog/2011/02/wallison-is-far-too-kin...