The Hosuing Bubble Economic Causes?

ecublloyd posted on Thu, Feb 25 2010 11:30 AM

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I bring the debate to you I am having with a hard core Keynesian. This one claims that the Austrian view is not accurate in its assertion that the Fed, Government, GSE's and CRA  are the cause of the bubble and economic collapse.

"Why don't we stick with the notion that the CRA and the GSE's fueled the sub-prime crisis. That's the part of your post that you bolded.

And, normally how this works is that the person making the assertion provides the evidence. I cannot of course prove a negative so it would be incumbant on you to show support for your assertions.

Now, with regard to CRA, it seems to me that you would have to address several important questions such as:

• Why did it take the CRA almost 30 years to precipitate the subprime crisis?
• Why were lenders in the business of originating subprime loans complying with a law that the vast majority of them were not subject to?
• Where in the CRA legislation does it require lenders to make unsafe loans?
• How would McMansions in Northern Virginia, beachfront condominiums in Miami, and $500,000 houses in suburban Los Angeles qualify as CRA credit for a lending institution?

You might also explain how paper's such as this one can get written on the origins of subprime loans without even mentioning CRA.

Now, understanding the GSE's role in all this requires a thourough understanding of the evolution of the MBS market over the last 20-25 years or so, including the role the Basel Accords played in incentivizing (is that a word?) banks to hold mortgage debt to begin with. Then you have to explain how, if the GSE's fueled the subprime crisis, how is it that when the subprime market really started to expand, the GSE's were cutting back on lending.

You might start with these two blog posts (make sure you follow the links to the academic papers cited) to give you a good overview of the whole timing problem with the GSE's being blamed for the subprime crisis.

Now it does appear to be true that by the subprime crisis ended, Fannie was out in the marketplace buying all sorts of lousy debt. But, this did not take place until the subprime bubble was well formed, and it appears that Fannie's decision in this regard was about self-preservation. i.e. if they didn't do it someone else would have and that would have meant business disaster.

Note that I am not defending the notion of having these implied government backed companies, and I am also not saying that they weren't horribly mismanaged. All I'm saying is that if you are looking for the culprits in the subprime crisis (not the overall financial crisis but the subprime crisis) you should look elsewhere."