Discussion with Paul Volcker; video

[sniglet]

The repeal of Glass-Steagall really wasn't all that much of a factor in spawning the credit bubble. And neither was lax regulation. In fact, it was government intervention itself which was the primary cause of the bubble.

The GSEs have been subsidizing mortgages, encouraging greater spending on homes. The government even encouraged the GSEs to lend to a greater number of people with poor credit in order to broaden the ranks of home-ownership. The mortgage tax deduction is perhaps the BIGGEST evil, which heavily encourages mal-investment on housing.

Deposit insurance is another of the pillars upon which the bubble rests, by encouraging savers to be irresponsible, only choosing their banks based on service and interest rates rather than prudent risk management.The super-low interest rates maintained by the central banks were just icing on the cake.

The government encouraged mal-investments in real-estate and lulled everyone into thinking that everything was "safe", since the government would bail them out if anything bad happened. I fail to see how even MORE government involvement is going to make things better.

[deejayoh]

[TJ_98370]

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Good article, DJO.
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I too have read that the Community Reinvestment Act (CRA) "...legalized the idea that lending institutions could not make loan decisions based solely on criteria such as income and ability to pay the loan back....". I would guess the anti-regulation folks are pushing that falsehood.
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Sniglet –
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Did you know that the CRA only applied to commercial banks and thrifts? Investment banks didn't have to play by those rules, yet Bear Stearns was one of the first to go down.
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[jon]

Even though a particular loan is not issued through a bank that is subject to CRA, it still was affected. With the CRA bringing in unqualified buyers to the market, it drives up comps and so the other lenders are lending more money for houses than they would without the CRA, even though it is not subject to the CRA. So the real metric is how much did the CRA drive up prices.

And no one is saying it was only the CRA. The FMs where pressured into taking lots of subprime mortgages, which they each did in many tens of billions of dollars.

[TJ_98370]

...So the real metric is how much did the CRA drive up prices....
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Given that the CRA was enacted in 1977 and the current bubble occurred much later, I would guess it had little or no effect on prices.

[jon]

[deejayoh]

[deejayoh]

[sniglet]

[deejayoh]

[jon]

[sniglet]

[rose-colored-coolaid]

[perfectfire]

There should be restrictions on where FDIC insured money can be invested. Or they should charge much higher premiums for money invested in risky assets. Or do they already do that?

[deejayoh]