Posted on 10/31/2011 7:23:12 AM PDT by Bigtigermike
No, but it would be the other way around if Newt was high in the polls.
The Republicans went along.
“The Democrats actively led the push to pressure banks and mortgage companies to make bad mortgage loans.”
While this has become a very popular explanation and gets endlessly repeated by Limbaugh and others it is highly misleading.
It provides a useful stick for pounding on Democrats but it has the disadvantage of leading people to believe something that is largely untrue. The Democrat’s CRA affected commercial banks, but commercial banks weren’t the big money involved in the subprime market.
The Community Reinvestment Act regulated depository institutions. That means local banks and S&Ls, places where the public can have a savings or checking account.
Wall Street firms by contrast, i.e. investment banks and hedge funds, are not depository firms. They weren’t regulated by the CRA and they were free to make any sort of loan they wanted to.
What investment banks and hedgies wanted to do was to earn a lot of money and subprime lending looked like just the market for doing exactly that. Wall Street investment houses chose to enter and develop the subprime market strictly because of the returns they could get on their capital. They were under no compulsion to do so.
Not only did they enter the market, they began taking the lending market away from conventional lenders and the securitization market away from Fannie and Freddie.
They invented what we now think of as toxic loans, the No Doc loans, NINJA loans, Option Arms, all the loans that were soon to explode.
They developed derivatives and pyramided them on top of the CDOs built out of their loan portfolios. Derivatives were where the big money was, in the trillions of dollars, and an endless supply of new subprime paper was needed as raw material to create new derivatives. At the top of the bubble the derivative tail was wagging the subprime loan dog.
This was all described in books written by people who covered the subprime market and the derivatives industry for the financial press. The authors of “Chain of Blame” wrote for the National Mortgage News and the OC Register. They knew the subprime industry and all the players. Gillian Tett, author of “Fools Gold”, wrote about derivatives from the time they were being developed by quants in London based banks. Wall Street’s role in the housing debacle is further developed by Yves Smith, a long time Wall Street player, in her book ECONned.
The CRA is a law that can be exploited by the likes of ACORN. And it encouraged lending to those likely to default. But the dollar amount of CRA loans is much too small to have created the bubble. By contrast the amount of money that Wall Street poured into the subprime market was huge, and it was done entirely free from government compulsion. We shouldn’t grab onto explanations just because they are politically convenient. They need to fit all the facts of the case as well.
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