It’s disappointing to learn that the act apparently causes lending that is marginally riskier than it otherwise would be. However, the study doesn’t suggest that the act contributed to a financial crisis that happened 30 years after it was enacted.
It’s relatively easy to agree that only Homo sapiens can speak about things that don’t really exist, and believe six impossible things before breakfast. You could never convince a monkey to give you a banana by promising him limitless bananas after death in monkey heaven.
Anyone who thinks that the Community Reinvestment Act caused the financial crisis should ask themselves:
If the loans were SO bad, why were they getting great ratings from the Standard & Poors, Moody's, et al? What government policies caused the ratings agencies to so universally misjudge the risk of these loans?
What did the Community Reinvestment Act have to do with the bankruptcy of AIG?
People like to say that Americans are addicted to debt, and there is some truth to that. But the American Financial Services Industry was making hundreds of billions of dollars from servicing that debt, repackaging the debt and selling it as financial 'securities'. They were only too happy to make risky loans, because they were repacking the loans as collateralized debt obligations, and taking side bets on the loans failing by doing credit default swaps with AIG.
If Glass-Steagel hadn't been overturned, if credit default swaps had been regulated, and if brokers didn't make more money selling sub-prime mortgages....
This crisis was precipitated by a disconnect between risk and reward. Not ENOUGH regulation was the problem.
Last edited by Guest on Tue Jan 15, 2013 8:42 am, edited 1 time in total.
"The great problem of any civilization is how to rejuvenate itself without rebarbarization." - Will Durant "We've kept more promises than we've even made" - Donald Trump "Of what meaning is the world without mind? The question cannot exist." - Edwin Land
MeDotOrg wrote:Anyone who thinks that the Community Reinvestment Act caused the financial crisis should ask themselves:
If the loans were SO bad, why were they getting great ratings from the Standard & Poors, Moody's, et al? What government policies caused the ratings agencies to so universally misjudge the risk of these loans?
What did the Community Reinvestment Act have to do with the bankruptcy of AIG?
People like to say that Americans are addicted to debt, and there is some truth to that. But the American Financial Services Industry was making hundreds of billions of dollars from servicing that debt, repackaging the debt and selling it as financial 'securities'. They were only too happy to make risky loans, because they were repacking the loans as collateralized debt obligations, and taking side bets on the loans failing by doing credit default swaps with AIG.
If Glass-Steagel hadn't been overturned, if credit default swaps had been regulated, and if brokers didn't make more money selling sub-prime mortgages....
This crisis was precipitated by a disconnect between risk and reward. Not ENOUGH regulation was the problem.
I agree with this, but I would add that in addition to there being a disconnect between risk and reward, the folks on the back end systematically had a bad assumption in their models--specifically, they assumed that housing prices wouldn't go down. Housing prices going down was a "black swan"--an event their models weren't calibrated for because it hadn't happened in the past (well, in the recent past within the United States, which is what they were using to calibrate their models).
That black swan was so widely unseen I'm not sure that more regulation alone would have fixed it.
For those who believe in a free market and think that businesses should be allowed to fail I propose the following rule: “Financial institutions that are too big to fail are too big to exist.” Big banks shouldn’t have an implicit government guarantee—they should be broken up.
It’s relatively easy to agree that only Homo sapiens can speak about things that don’t really exist, and believe six impossible things before breakfast. You could never convince a monkey to give you a banana by promising him limitless bananas after death in monkey heaven.