While I want to believe in such simple truths as the government always gets it wrong, plain old statistics wouldn’t support me. Even the government could theoretically get something right…by chance.

The latest libertarian leaning criticism of government is blaming the government for the subprime crisis, particularly, the Community Reinvestment Act of 1977. Sounds reasonable at first glance:

But to earn high ratings, banks were forced to make increasingly risky loans to borrowers who wouldn’t qualify for a mortgage under normal standards of creditworthiness. The Community Reinvestment Act, made even more stringent during the Clinton administration, trapped lenders in a Catch-22.

But perhaps this is exaggerated to lay blame on the government when in fact it’s much more complicated than that.

Most analysts see the sub-prime crisis as a market failure. Believing the bubble would never pop, lenders approved risky adjustable-rate mortgages, often without considering whether borrowers could afford them; families took on those loans; investors bought them in securitized form; and, all the while, regulators sat on their hands.

Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn’t even apply to most of the loans that are behind it. As the University of Michigan’s Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.

This entry was posted on Thursday, April 10th, 2008 at 2:43 am and is filed under government, politics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.