Who’s to Blame?

Who’s to Blame? September 24, 2008

The current credit crisis seems to have reversed the old adage that success has a thousand fathers while failure is an orphan, as all across the political spectrum people try to pin the blame for current woes on their political opponents and favorite hobby horses. The following is a partial list of things that have been fingered as a culprit, focusing on specific charges rather than generalized accusations about “greed” or “regulation.” Some may have merit. Most are just silly. Additional items will be added as I come across them.

1. The Community Reinvestment Act.

2. The repeal of Glass-Steagall.

3. Fannie May and Freddie Mac.

4. The Federal Reserve.

5. The Bush Tax cuts.

6. Illegal Immigration.

7. Short selling.

8. The mark-to-market accounting requirements.

9. The capital gains tax exclusion for housing.

10. Chris Cox.

11. Gas prices.

12. Land use restrictions.

13. Zionist conspiracy.

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  • 13. Uranus

  • Main Street is the current right wing meme-repeated by RR Reno, VD Hanson, and others. This is the “everyone is to blame” problem. A style of blaming once roundly derided by WF Buckley, now passionately embraced by his ideologic comrades.

    I note several things are to blame.
    1) Cheap money. Thank you Mr. Greenspan.
    2) In order to sell more debt, subprime markets were penetrated to sell more mortgages. The way to view this is not that banks were doing the society this HUGE service by giving these individuals who so OBVIOUSLY didn’t deserve a mortgage (read with sarcasm), but that, desperate to sell more mortgages, these companies sold riskier and riskier mortgages.
    3) Tilt the economy with the Iraq War and increase inflation in the sub-groups with subprime mortgages. Triple and quadruple gas prices, etc and off the edge some folks go. Foreclosures begin. Then the housing/mortgage market changes, less mortgage products can be sold, houses in foreclosure flood the markets, and then by market rules, housing values fall.
    4) During this time, the mortgage and “credit brokers” were selling out high stakes risky investment products which were bundles of these high risk mortgages. Didn’t have much equity other than the houses to back up all the loans. Drop the value of these houses and BOOM, less than 1% of equity is available for these investment companies to make their obligations.

    By this narrative, a political/economic philosophy can be seen in many of the elements. I call it the Reagan Revolution. Through the foreign policy mishaps, the deregulation, and monetary policy, greed was promoted and discipline was avoided.

    The conservative revolutions culture of accountability is a sham. From government to commerce, incompetence has ruled for decades. Deriding anyone with a good education as elites, competent management was presumed for a group of individuals that was never earned.

    Second, lets go to the activities of the culture warriors. While supporting a society of righteousness that focused on exclusively pelvic discipline, greed was promoted. It was a virtue, as evident in the bizarre philosophies of the over-venerated theocons. If Main Street is to b lame, which is a scapegoating disgrace in my opinion, then where were the culture warriors in promoting a culture of discipline and charity, as opposed to the avarice and excess embraced by Sirico and his like-minded minions.

    Our current state fiscally, militarily, and diplomatically is a product of the Reagan Revolution.

  • It’s my fault and I don’t know how to fix it, else I wouldn’t have let it get so bad. Mea culpa! But excuse me now, for I have to go. My house is worth about half of what it was when I bought it and I found someone to refinance it with an interest only loan and I have to hurry on the remortgage because the company I’ve invested twenty years of my life in is probably going out of business soon. But the refinancing is a win-win thing because Fannie is backing the loan so my first few payments can go toward getting Obama elected and then all will be well.

  • S.B.

    Re: the Community Reinvestment Act, anyone know if this is true?


    1995. While changes to the CRA are credited with helping to increase the amount of loans to small businesses and low- and moderate-income borrowers, Clinton-era revisions to the law also allow investment banks to create securities from CRA loans containing subprime mortgages. Securitization of CRA loans begins in 1997.

  • S.B.

    Here’s a press release not long thereafter:


    October 20, 1997
    First Union Capital Markets Corp., Bear, Stearns & Co. Price Securities Offering Backed By Affordable Mortgages; Unique Transaction To Benefit Underserved Housing Market

    CHARLOTTE – First Union Capital Markets Corp. and Bear, Stearns & Co. Inc. have priced a $384.6 million offering of securities backed by Community Reinvestment Act (CRA) loans – marking the industry’s first public securitization of CRA loans.

    The affordable mortgages were originated or acquired by First Union Corporation and subsidiaries. Customers will experience no impact – they will continue to make payments to and be serviced by First Union Mortgage Corp. CRA loans are loans targeted to low and moderate income borrowers and neighborhoods under the Community Reinvestment Act of 1977.

    That name Bear Stearns seems to ring a bell for some reason.

  • Blaming CRA is the tired old Republican trick-blame minorities: a Willie Horonization, the dirty labelling of “welfare mommas.” Repeating it over and over doesn’t make it the truth. Just lets everyone know what the ingrained style of argument is in the commentator. Its just trickier code.

  • blackadderiv

    The problem with blaming the CRA is that folks like Bear Stearns clearly wanted to make these loans. It wasn’t the case of the government twisting the banks arms to go along. If it had been, it’s likely we’d never have seen a bubble.

  • Try:

    *A bubble mentality, the belief that house prices would rise forever.
    *A central bank asleep at the wheel or even actively supporting the bubble.
    * A global savings glut from China and the oil exporters leading to cheap and easy liquidity, usually recycled into US assets.
    * The ability of mortgage originators to package and sell loans, thus eliminating any incentive to safeguard loan quality.
    * Dubious and non-transparent schemes like the creation of off-balance sheet conduits to hide risk.
    * Ineffective regulation, and too many regulators.
    * The rise of a shadow banking system, usually light regulated or not regulated at all.
    * Too much reliance on the credit rating agency “magisterium”!

  • S.B.

    Repeating it over and over doesn’t make it the truth.

    And making nasty and baseless accusations of racism — simply as a convenient tool for dismissing arguments you don’t like — doesn’t bring you closer to the truth either.

  • S.B.

    So far, I haven’t been able to confirm outright how the 1995 regulatory revisions caused subprime securitization directly. Nonetheless, this economist’s paper suggests a mechanism by which the CRA encouraged an undue amount of securitization:


    Due to limited supply of qualified investments but increased demand by lending institutions to fulfill CRA requirements, qualified investments carry a premium which can be as much as one full point. This premium might have induced Wall Street opportunists to exploit CRA ‘gold mine’ that has nothing to do with LMI [low and moderate income] credit. “The current investment test has led to many qualified investments that merely recycle existing loans with no new underlying LMI loans being created. One loan may be bought and sold many times and then securitized and then repeatedly traded as an LMI MBS. Since it is defined as a qualified CRA investment, many banks get CRA credit for but one underlying LMI loan42 (Thomas 2003).” Indeed, interviews with several national lenders in the Ford Foundation study reveal “this practice, by which the loans pass through the hands of an additional owner on their way to the secondary market, is clearly uneconomic. Lenders appear to treat it as a cost of doing business and one that is preferable to risking a rating below satisfactory that hurts their competitive standing [Ford Foundation 2002].”

    The Thomas 2003 paper quoted is here: http://www.levy.org/pubs/wp346.pdf By the way, Daniel, that paper points out why your “racism” theory is so silly:

    Another CRA urban legend is that the law’s main benefactors are minorities, particularly African Americans and inner city communities. Since CRA is an LMI income-based law, there is no race card, which explains why this 1977 law has supporters on both sides of the aisle. In fact, 60% of LMI individuals are non–Hispanic white (Thomas, 1998).

    So it’s rather misinformed for you to claim that any mention of the CRA is due to racism.

  • David Nickol

    Are the critiques of capitalism by John Paul II and Benedict XVI relevant here, if at all?

  • Bemused

    The ability to package and sell loans is a huge liability I think, MM. Mortgage originators can make any crap loan they want and then find someone to take it off their hands. No risk/100% profit. Insane.

  • blackadderiv

    The ability to package and sell loans is a huge liability I think, MM. Mortgage originators can make any crap loan they want and then find someone to take it off their hands.

    Except that you have to find someone willing to take it off your hands. That’ll only happen if people are operating under people faulty ideas about where the market is going to go (e.g. housing prices always go up). People will engage in all sorts of retrospectively crazy practices when there is a bubble. The real question is what caused the bubble.

  • “The problem with blaming the CRA is that folks like Bear Stearns clearly wanted to make these loans.”

    Which is why I think the need to “open new markets” was quite a drive to produce these loans.

    I’ve seen this phenomenon before. In the local health care system high stakes competition in Philly in the 1990’s (a game that sank one medical school and nearly left Penn and Jefferson Medical Shools in bankrupcty) the lucrative suburban markets were staked out and little change would have erupted over these markets. Then the medical schools took on the far more marginal competition of seeking out and cometing for inner city markets. These markets and hospital purchases were poor investment moves, but it was the suburban debt that was the most burdensome arrangement-the inner city hospital purchases being just the final straws on the camel’s backs.

    “Opening new markets” drove the subprime mess. This is a “sale” end phenomenon not “buy” end problem.

  • I am thrilled to see you have my idea ranked just above flying monkeys. At least you didn’t rank it lower.

  • G Alkon

    From Jonathan Schwarz at tinyrevolution.com :

    “The New York Times explains here how Sweden dealt with the early nineties collapse of a real estate bubble very similar to ours, but wonders why we’re not following their advice:

    ‘Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing.

    Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government…

    The tumultuous events of the last few weeks have produced a lot of tight-lipped nods in Stockholm. Mr. Lundgren even made the rounds in New York in early September, explaining what the country did in the early 1990s.

    A few American commentators have proposed that the United States government extract equity from banks as a price for their rescue. But it does not seem to be under serious consideration yet in the Bush administration or Congress.

    The reason is not quite clear.’

    The reason is actually very clear: Sweden is a first world democracy, where the people at the top feel a sense of responsibility to the rest of society, and the rest of society has the power to hold them accountable. The United States is more and more like a third world kleptocracy, where the people in charge have no interest other than looting the country, and no one has the power to stop them.

  • blackadderiv


    The ranking was not in terms of plausibility, but (roughly) in order of when I heard the ideas. Trust me, if I had to rank possible causes of the bubble/bust in terms of plausibility, land use restrictions would come before illegal immigration.

  • Zak

    G Alkon,
    Isn’t Dodd’s proposal to do what Sweden did?

  • jonathanjones02

    Liebowitz has an article on the 1989 amendment of data collection to HDMA and how that was subsequently used:


  • MM’s list is spot on. Especially the toxic combination of securitized loans and ultramontanism with respect to the credit rating agencies, without which the others would not have been able to get so much traction.