CRA was not the only factor, but it along with other government interventions in promoting “affordable” housing and home ownership in general, by browbeating banks and using relaxed underwriting standards on the part of HUD, Fannie Mae, Freddie Mac, etc. definitely were major players in the crisis. And yes so were the quants with their theories and models on how to price risk, which they obviously got very wrong. And of crucial importance were the rating agencies. If they had rated the risks correctly, none of this would have happened, because the demand for junk would have never risen to the level that it did.
I found this entry in Wikipedia fairly balanced and quite thorough in summarizing the various takes on the causes. Not surprisingly, it contains a lot of political axe grinding on both sides.
http://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis
” CRA was not the only factor, but it along with other government interventions in promoting “affordable” housing and home ownership in general, by browbeating banks and using relaxed underwriting standards on the part of HUD, Fannie Mae, Freddie Mac, etc. definitely were major players in the crisis.”
Until you recognize the difference between “banks” and “investment banks” you will never understand what went on.
CRA and the rest of this regulation covered retail banks and S&Ls. Banks that raise their money from depositors. The corner banks that we all use. What we normally think of with the word ‘banks’. These banks were not the major players in the housing bubble.
In contrast investment banks and hedge funds are Wall Street firms. They raise their money from investors. They do not take deposits. They were not covered by the CRA or much of anything else. They had spent the 80s lobbying Congress to have Glass Steagall scrapped so that they could get back into the retail business. They got CFMA2000 passed to keep derivatives unregulated.
Investment banks and hedgies did exactly as they damn well pleased during the bubble. The government couldn’t browbeat them because they were not depository institutions and they had paid good money to keep themselves regulation free.
If they funded high risk subprime paper, and they did exactly that to a staggering degree, it was entirely because they wanted to. IBs and hedgies funded loan brokers, loan brokers wrote high risk paper, the IBs and hedgies bundled those loans and sold both the CDO bundles and a trillion in derivatives and swaps based upon them.
It was a very, very profitable business while it lasted. It had the unfortunate side effect of blowing up and sending a tsunami throughout the world economy. But the speculative nature of investment banking has long been known and was the reason that Glass Steagall was passed in 1933 in the first place. That previous generation figured out that investment banking needed to be walled off so that its periodic implosions would be limited. Our generation of geniuses decided that markets could regulate themselves and stodgy old laws like the 1933 Banking Act were holding back progress. We found out what ‘progress’ means around 2008.