In a sense, the answer is yes. Were we currently living in a state of anarchy, it is unlikely that the U.S. (or, I should say, the geographical area that now comprises the U.S.) would be experiencing the aftereffects of a bad housing bubble right now. Most people who blame the government for the current crisis, however, don’t have it mind government protection of property and contract rights. Rather, focus have tended to, well, focus on the government’s efforts to boost homeownership, as exemplified by the Carter-era Community Reinvestment Act. The CRA, according to an increasingly popular (and populist) telling, forced banks to lend to people with bad credit and low incomes, and when it turned out (unsurprisingly) that they were unable to pay back the money lent, this set off a chain reaction that led straight to the current mess.
The “CRA did it” explanation is, as I said, increasingly popular among conservative commentators and free market proponents. Among those more familiar with the details of the crisis, by contrast, the theory has less adherents. This goes even for those experts who are generally quite market-friendly. I was listening to my favorite talk radio host interview a conservative economist. The talk show host was convinced that the credit crisis was the result of “government lowering lending standards,” and seemed quite taken aback when his guest declined to endorse the view.
To see what’s wrong with the “CRA did it” line of reasoning, consider a parallel case: a city government, in order to promote affordable housing, decides to place a ceiling on the amount that can be charged for renting an apartment. According to the “CRA did it” line of reasoning, the result of such a law ought to be an explosion in the number of renters in that city, as many more people than before are able to afford apartments at the cheaper rent. In practice, however, just the opposite occurs. When the price of renting an apartment is kept artificially low, property owners respond by renting less, which leads not to a rental bubble, but to a rental shortage.
Nor would the situation change if, instead of placing direct limits on the price that can be charged in rent, government were to limit the ability of landlords to check the credit history’s of potential tenants, or to demand such things as a security deposit or first and last months rent at the beginning of a lease. People typically rent out property in order to make money. If they believe that a given potential tenant is unlikely to pay the rent he owes, they will be unlikely to rent to him unless they can receive some assurance (say, in the form of a security deposit, or advance rent) that they won’t lose out financially by renting to him. If the law prohibits them from taking such precautions, they will respond not by becoming more promiscuous in renting out their property, but by being even more cautious when doing so.
The same is true for banks and lending. If the government tries to make banks lend money to people to whom they ordinarily wouldn’t want to lend in certain areas, the expected result would be not a great expansion in lending but a contraction, as banks simply declined to operate in areas covered by the CRA, or tightened standards elsewhere to compensate for the increase in risky loans mandated by the CRA. In either case, the overall effect would be to make banks less likely to extend credit to people, not more.
Suppose, however, after rent control was established in a particular city, rental prices were to fall due to some independent cause, such that the market price for renting an apartment in the city was largely below the rent ceiling established by city regulations. In such a case, the number of rental units in the city might well expand rapidly, and it might appear to the untrained eye that this was due to the rent control law. The reality, though, would be that the increase in rental units would occur regardless of the rent control law, not because of it.
Likewise, if bankers were to get it into their heads that renting to people with poor credit histories and low incomes was a profitable venture (on the theory, for example, that housing prices will always go up), then they might very well lower lending standards, and to the untrained eye it might appear as if this loosening of standards was caused by the government mandates, rather than being incidental to it. The truth, however, would be that the loosening of standards would have occurred even if the government have never gotten into the business of promoting affordable housing. Indeed, lending institutions that were exempt from the CRA seem to have expanded risky lending during recent years just as much as those lenders subject to the act. So while I can sympathize with folks who want to find a government scapegoat for current troubles, blaming the Community Reinvestment Act is just bad economics.
October 16, 2008 at 1:28 am
If the CRA is responsible, so is Bush. http://www.whitehouse.gov/news/releases/2002/06/20020617.html
October 16, 2008 at 8:52 am
It also utterly fails to include the chief villain in the financial panic – the development, marketing and non-regulation of a novel way to securitize default risk (as opposed to securitizing interest rate risk, which was a development of a prior generation): credit default swaps. CDSs were not a creature of Congress. investment banks had to hire outside mathematical geniuses to create (flawed) models to do this. The fundamental problem with these instruments is that we learned the hard way) that they cannot effectively model valuation in a panicked market for the non-commoditized collateral underlying them.
Oh, Congress did have one role in this. While the country was transfixed by the Bush-Gore election nightmare in December 2000, Phil Gramm slipped the Commodity Futures Modernization Act into an appropriations bill with the support of a GOP-controlled Congress. That prevented the regulation of CDSs, among other things.
October 16, 2008 at 8:58 am
What does this scapegoating say about the people who are using it? Or. more directly, why is it “the minorities, the poor did it” coming from people who can’t really afford to have such fallacies be part of their image again?
Or is it ok that scapegoating these folks are part of the image of conservative commentators, and then what does this say about their audience?
These are the points to ponder.
October 16, 2008 at 9:23 am
Why do you “sympathize with folks who want to find a government scapegoat”? Why does your ideology automatically presuppose the goverrnment is responsible, and refuse to blame the private banking and quasi-banking system? “Good economics” first and foremost faces the facts.
October 16, 2008 at 9:34 am
Why do you “sympathize with folks who want to find a government scapegoat”?
I’m a sympathetic kind of guy.
October 16, 2008 at 9:46 am
There’s ideology on all sides . . . some conservatives have the instinct to blame government and excuse the private market, and some liberals (e.g., MM) have the instinct to blame the market and exonerate anything that government ever did. Perhaps if one takes the average of those ideological beliefs, it would be a closer approximation to the truth.
By the way, this is highly misleading:
That particular act was not “slipped” into anything, which implies some sort of secrecy. It was publicly debated and then strongly supported by Democrats.
October 16, 2008 at 11:34 am
Based on Wikipedia, it appears that the Commodity Futures Modernization Act was not publicly debated, though it was signed into law by President Clinton (the sponsor of the bill, fwiw, was Senator Luger; Gramm was a cosponsor).
In any event, it’s not clear to me that derivatives really were what’s to blame for current troubles. Robert Shiller, at least, thinks not. Nor is it clear, even to the extent that they were a problem, that congress can be held responsible for not second-guessing the mathematical models developed to calculate risk. That, I think, would be asking too much of mere mortals.
October 24, 2008 at 10:24 pm
[...] About Fannie and Freddie? Aside from the Community Reinvestment Act, the main culprits fingered by conservatives in their attempts to acquit the free market from [...]
October 24, 2008 at 10:25 pm
[...] About Fannie and Freddie? Aside from the Community Reinvestment Act, the main culprits fingered by conservatives in their attempts to acquit the free market from [...]
October 30, 2008 at 8:27 am
[...] the popular press. There have been plenty of attempts to prove that some government action, such as the CRA or the backing of Fannie and Freddie, was behind the housing bubble. But fed policy, if it’s [...]
October 30, 2008 at 8:30 am
[...] the popular press. There have been plenty of attempts to prove that some government action, such as the CRA or the backing of Fannie and Freddie, was behind the housing bubble. But fed policy, if it’s [...]
January 21, 2009 at 11:19 pm
Nothing seems to be easier than seeing someone whom you can help but not helping.
I suggest we start giving it a try. Give love to the ones that need it.
God will appreciate it.
March 1, 2009 at 6:06 am
everything you said was hypothetical