Mounting evidence shows that it was not the Community Reinvestment Act, not Fannie Mae and Freeddie Mac, not really all that much about exotic finance; but more about the pushing of mortgages on anybody and anything to get them out there so that exotic finance could take place.
Here is Krugman on the Irish case:
Ireland had none of the American right’s favorite villains: there was no Community Reinvestment Act, no Fannie Mae or Freddie Mac. More surprising, perhaps, was the unimportance of exotic finance: Ireland’s bust wasn’t a tale of collateralized debt obligations and credit default swaps; it was an old-fashioned, plain-vanilla case of excess, in which banks made big loans to questionable borrowers, and taxpayers ended up holding the bag.
The point is where there are clear strategic incentives to behave in an ever more risky fashion (you can't be the bank that doesn't do the risky assets because your performance will suffer and your share price will plummet) there has to be regulation to take the super-risky options off the table. This is game theory 101. Sadly, efforts to reform the financial sector appear to be dead in the water. So be prepared to replay this record all over again.
1 comment:
Nice post, but I'd also add that the massive bubble in the commerical real estate market tells us that the problems aren't simply about mortgages be pushed onto people who can't afford them, Fannie and Freddie, etc. This was a massive speculative bubble, and commercial real estate appears to have been no less immune that residential housing. Some of the problems in commercial have yet to manifest themselves, but if someone's "theory" about foreclosures cannot explain the commercial real estate bubble equally as well as the residential housing bubble, then it isn't much of a theory in my opinion.
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