Did Deregulation Cause the Subprime Crisis ?
Posted March 24th, 2008 by Da King
The short answer is…yes, it did. It made the mortgage banking industry much more speculative than it was under the former Depression-era banking regulations. The Depression-era banking regulations were designed to, not surprisingly, protect against severe economic recessions and depressions (like maybe what we are moving into now ?)
Deregulation also resulted in record levels of home ownership for lower and moderate income persons, so the news hasn't always been bad. There are two sides to that coin, and the fact is, to a large extent the government pushed the banking industry into what it has become.
While watching Chris Wallace's sunday morning show last week, I heard Senator Chuck Schumer (D-NY) talking about the economy, which he referred to as the "Bush-McCain economy". Good old Chucky, ever the partisan. Schumer, an Obama supporter, must not have received the message that Obama is beyond partisanship and into unity.
But regarding financial deregulation, is Schumer correct ? Is this the "Bush-McCain economy" ??? It's certainly not McCain's, at least not any more than it's Schumer's. And for the most part, it's only Bush's in the sense that Bush didn't reverse deregulation, which has been going on for 30 years. In fact, Deregulation was a done deal by the time Bush took office. The last vestige of the Depression-era banking regulations was thrown off in 1999, when Bill Clinton signed the Gramm-Leach-Bliley Act into law, which repealed the Glass-Steagall Act of 1933. Repeal of Glass-Steagall allowed commercial & investment banks to consolidate, a move that contributed to the 2007 subprime mortgage crisis. The effects of these regulation changes aren't felt the next day, they are felt years later.
Banking deregulation really started with the 1977 Community Reinvestment Act (CRA) during the Carter era. The CRA was designed to meet the credit needs of low and moderate income neighborhoods. It required banks to offer credit throughout their entire marketing area, rather than only in the wealthier areas (a practice known as 'redlining'). The bankers were almost unanimously opposed, but the measure was put through to increase home ownership and loans to small business. In 1995, Clinton updated the CRA, and the revisions were credited with helping to substantially increase the amount of loans to small businesses and to low to moderate income home loan borrowers. A large part of the increase in home loans was due to secondary mortgage market loans. The revisions also allowed the "securitization" of CRA loans containing subprime mortgages. Public securitization of CRA loans started in 1997. These are the roots of the subprime mortgage situation. So if you ever hear Hillary on the campaign trail blaming it all on Bush (and you surely will), know that she is not being honest with you.
Deregulation resulted in the huge increases in home ownership that we have today, by allowing low and moderate income people to purchase their own homes. This has been a great boon to lower income people for the most part. It also in turn drove up the price of housing (supply and demand). Bankers became more and more creative with these mortgages due to the government mandates, and they also became, as I said before, more and more speculative, and far less conservative than they were under the Depression-era regulations. Now, pols like Chuck Schumer are looking to pass the buck when the dark side of deregulation rears it's head (and there definitely is a dark side. The subprime crisis isn't the first time. Maybe you're old enough to remember the S&L crisis of the 80's that followed Reagan era deregulation manuevers). Guys like Schumer think the public is too stupid to figure out the truth, and the truth is, deregulation is not all bad. Neither is it all good, and both political parties have been involved in it.
But since politicians are politicians, some Democrats will just blame it all on Bush, knowing they are lying the entire time, especially the ones like Chuck Schumer who have been around for a long time. Bush has a lot to answer for, economically speaking, but deregulation isn't really on him. I suppose you can blame Bush for not reregulating the deregulated financial industry, he IS the president after all and he could have tried to do that, but I wonder what guys like Chuck Schumer would be saying when home ownership opportunities for lower and moderate income people dried up following such a move. Never mind, I already know the answer.
March 24th, 2008 at 6:17 am
King,
Freedom is a two edge sword. It opens up great possibilities but it takes its toll on the stupid, the reckless, the unlucky.
Liberals [leftists] use the relatively few who fall by the wayside of the road of freedom as an excuse to enslave everyone else on their plantation of government dependency.
You see, to the sick liberal mind, the nanny state is required so NOBODY gets hurt. And of course, such a totalitarian enterprise as the nanny liberal state must be run by enlighten ones such as themselves.
Sorry, no sale.
March 24th, 2008 at 10:38 am
This story was right on. I've been in the mortgage banking business for 20 years. The indusrty is currently "self regulating".
March 24th, 2008 at 12:58 pm
"Deregulation resulted in the huge increases in home ownership that we have today, by allowing low and moderate income people to purchase their own homes."
Home ownership, currently, is below 1993 numbers. Not sure whether "huge increases" is actually appropriate but with your post primarily pointing out that Democrats are the deregulating champions of today's financial industry, honest attempts at accuracy, I suppose, are unwarranted.
March 24th, 2008 at 2:17 pm
Schumer is probably my least favorite Democratic Senator.
March 24th, 2008 at 2:59 pm
Selfserving politicans from both sides of the aisle are culprits. Many of the Reps. and Dems were pushing and threating the lenders unless they opened the piggybank to those that were at high risk. Yes, the greed overcame the system but libs were able to feel so smug in their claims of elimainating discriminatroy practices and Bush constantly used the increase in home ownership as a sign of his stewardship. The politicans now use this as a tool to blame one another but neither will take any responsiblity. Countryside the darling of the feel good mortgage era won every groups lender of the year award throughout this debacle. The very type of company they lauded as breaking through the barriers of discrmination is now one of the evil corporations. There is only one group that will not suffer from this fiasco and that is the a-holes that run our country and be assured that some of them will profit from the decisions they make concerning the attempts to bolster the markets.
March 24th, 2008 at 8:31 pm
Rev,
Congrats, you got everything wrong. Home ownership has risen steadily and peaked at the end of 2004. 2007 is still above 1993 levels.
http://www.census.gov/hhes/www/housing/hvs/historic/histt14.html
And I did not blame deregulation primarily on Democrats. I don't even know where you got that idea from. Both parties have done it. I expect you are just miffed that Democrats were involved, as I'm sure you'd rather blame it all on Republicans, even though that would be a lie. Sorry, but the truth is the truth. Next time you accuse me of inaccuracy, it might be helpful if you bring some evidence of it.
March 24th, 2008 at 8:41 pm
angryc,
I heard Hillary blame the whole thing on Bush today, and never once did she mention that it was her husband who helped pave the way for the subprime crisis in 1995 and 1999. What a shocker, eh ? I don't know how these pols keep a straight face when they speak.
You have it right. Both parties are to blame. Both rode the housing bubble wave and bragged about how great they were.
This mess makes me wonder if anybody really understands the economy. The government reaction thus far seems to be to try anything and everything in the hope that something works.
March 25th, 2008 at 5:18 pm
This is definitely an area out of my realm of "expertise", but I'll give it a common-sense whirl and I think Vince started it out well. While it would be nice to follow the American "dream" of home ownership, it is not a birthright………….more so it is a responsibility. In this materialistic society, many attempt to keep up with the Jones' and never really examine their "means". I campaign for a smaller government, but it's quite obvious that others aren't responsible enough to go it on their own. Deregulation gave many the benefit of the doubt and allowed them to dig themselves into a deep ditch. As sad as it may seem, some people will never be capable of home ownership, sustaining a job, or leading an independent existence without "big brother" holding one's hand. Brings to mind a favorite movie, "Falling Down", when Michael Douglas was told that he was no longer "economically viable". We have a vast segment of the population which is so. They continue to bite off more than they can chew and, at the same time, bought into the fallacy that their "perfect" job would always exist. Heaven forbid a conservative approach that considered in a parachute strategy!
Should one fall into financial woes, it is not our governments responsibility to provide life support. This merely weakens the grid and unfairly places the burden upon the viable. We're in desperate need of re-regulation and, until that happens, foreclosures will be proportional to a roll of the dice.
March 26th, 2008 at 2:12 am
I think it ties in with the entitlement mentality too. It's the idea that one deserves everything and deserves it all right away. Then you have the government actually encouraging irresponsible financial behavior, such as the economic stimulus package, where Bush tells everyone to go spend their stimulus checks, keep shopping, etc. Now with the Fed's action to keep the economy from tanking, it will probably result in a higher inflationary cycle.
John McCain made the same point as you today, when he said it wasn't the government's job to rescue speculators. It's about time somebody said that. This idea that everything is supposed to be risk free and subsidized is pretty inane when you think about it.