[kenberg]

Maybe, but I predict that if y/x (see above) is less than 1/10 then folks, most of them, will grant that CRA had little effect. Of course I am guessing that since Ms. Bair might have used this approach if the numbers supported it, the likely reason for her not doing do is that the numbers don't support it. And if the numbers don't support it, that might be part of an explanation why people don't believe it. Even y/x less than 1/5 would probably be enough to convince many.

[mike777]

I do not have any problem with rating agencies taking or not taking fees. If that makes one not trust the ratings, fair enough, do your own. Also note that most if not all rating agencies do not rate all kinds of risk in an investment. In other words they look at some risks and rate those and do not look at other risks at all.



btw in years past I owned Moody's as well as FNMA. The business models were basically a printing press that prints money with some implied government backing.
I did not make the rules. I got out of FNMA when it started taking on more risk and became a trading company rather than a printing press.


Compare them to the USA car companies where you must invest billions and billions to build plants that rust and hope your smart engineers make better cars than the other smart engineers at the other company

As for CRA, let me try and find some link that explains what it is.
http://www.policylin...RA/default.html

"The Community Reinvestment Act (CRA) was established by Congress in 1977. The Act requires that deposit-taking financial institutions offer equal access to lending, investment and services to all those in an institution's geographic assessment area-at least three to five miles from each branch. In the case of large banks with many branches, the geographic area may encompass an entire county or even a state.

Before the CRA, many bankers excluded low-income neighborhoods and people of color from their lending products, investments, and financial services - a practice known as "redlining". Community activists coined the term when they discovered that the failure of banks to make loans in some low-income neighborhoods was so geographically distinct, that it was easy to draw red lines on maps to delineate the practices.

In the 1970s, activists in Chicago and across the country brought strong pressure on banks to lend equitably to all those in their communities. Since its passage, the CRA has been used across the United States to win tens of billions of dollars in new lending, investments, and services for communities. The National Community Reinvestment Coalition tracks more than $1 trillion dollars in community reinvestment pledges nationally. These pledges are explicit investments in equitable development goals, and finance many tools in this toolkit."


" There are two principal challenges to face when pursuing CRA financing for equitable development practices: the evolution of the banking industry and the difficulty of building an effective coalition.

Evolution of the Industry

Recent conservative federal provisions have increased the consolidation of financial institutions , which has allowed insurance companies and securities institutions to acquire banks without the restrictions of CRA. These provisions have also encouraged the formation of mega-banks, which simply have less local connection and allegiance. The size, distance, and company diversity inherent in these larger institutions may require more investment by CRA advocates in local communities in putting together a coalition with sufficient strength to capture the institution's attention. It may force a coalition to target local banks instead.

Maintaining Coalition

The other main challenge involves maintaining the coalition to achieve reinvestment goals. It is critical that the coalition agree on its goals, structure and process early in the campaign, and stick to the agreement. The leaders need to balance the needs of stakeholders in a manner that keeps everyone moving forward together. "


Example: assume there have been a trillion dollars of CRA loans(assets) created. Assume bottom line that the banking system makes tens and tens of billions in profit from CRA loans. If the capital markets see hundred dollar bills laying around Harlem, South Side of Chicago(my birthplace) and other places why do they need the government to order them to go and pick them up. Banks that operate in the USA are owned by black/brown, and persons of every other skin color. In my opinion the only reason to have CRA is if you assume the government is smarter or less racist than the capital market system. The capital market system would just rather not go and pick up these billions in risk adjusted profits.

[Winstonm]

Ken,

I could be wrong, but it appears you are looking at the wrong parameters about the housing crash. First things first. What happened?

1) Foreclosures - people were being granted loans who could not afford to make the monthly payment on those loans.

CRA did not require bad or even risky loans be made - these risky loans were a choice made by mortgage brokers, mortgage brokers, mortgage companies, ratings agencies, and other buyers of debt - not covered by the CRA.


2) Loan-to-value ratios were raised to non-traditional levels - 100% financing, and even 120% financing was made available to buy a house with no money down.
If the standard requirements for down payments had been kept, much less damage would have occured as fewer bad loans would have been made.

CRA did not require these no down 100% loans - selling these loans was a choice of those hoping to profit - in fact, mortgage companies such as Countrywide pushed these products because they were more profitable for them.

3) The prices of housing artificially increased because of the low rates and no down payments - this asset bubble increased the risk of lending.

The CRA was passed in 1977. The escalation of home prices didn't start in ernest until 2003. Again, the CRA was not responsible for the asset price bubble.

So, in summary, with the cause of the housing crisis being bad loans made with too little down payments on overvalued housing - and the CRA required none of those 3 things - how can the blame be placed on the CRA?

[Winstonm]

Another quick one to try to answer your questions, Ken.

From Sheila Bair:

Quote

The Community Reinvestment Act — or CRA — is a federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.  It has largely been criticized by conservative members of the GOP as promoting predatory lending practices

Quote

“Point in fact,” she said, “only one in four higher-priced first mortgage loans were made by CRA-covered banks during the hey-day years of subprime mortgage lending. The rest were made by private independent mortgage companies and large bank affiliates not covered by CRA rules.”

Quote

Bair said CRA has always recognized there are limitations on the potential volume of lending in lower-income areas due to “safety and soundness” considerations, and that’s why the CRA never set out lending targets or goals. However, the CRA isn’t without imperfections, and now is the time to put more emphasis on the qualitative aspects of lending in CRA examinations, she said.

The last quote sort of nails it - without any lending targets, quotas, or goals that had to be met, how could CRA be "enforced" or cause poor loans to be made?

[Winstonm]

Quote

I do not have any problem with rating agencies taking or not taking fees.

The problem I have is that the ratings agencies were rating bonds created by those who paid them fees to have the ratings done (an inherent conflict of interest).

[kenberg]

Winstonm, on Dec 7 2008, 09:55 PM, said:

Another quick one to try to answer your questions, Ken.

From Sheila Bair:

Quote

The Community Reinvestment Act — or CRA — is a federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.  It has largely been criticized by conservative members of the GOP as promoting predatory lending practices

Quote

“Point in fact,” she said, “only one in four higher-priced first mortgage loans were made by CRA-covered banks during the hey-day years of subprime mortgage lending. The rest were made by private independent mortgage companies and large bank affiliates not covered by CRA rules.”

Quote

Bair said CRA has always recognized there are limitations on the potential volume of lending in lower-income areas due to “safety and soundness” considerations, and that’s why the CRA never set out lending targets or goals. However, the CRA isn’t without imperfections, and now is the time to put more emphasis on the qualitative aspects of lending in CRA examinations, she said.

The last quote sort of nails it - without any lending targets, quotas, or goals that had to be met, how could CRA be "enforced" or cause poor loans to be made?

The above is absolutely the sort of material I have in mind. It is always wise to say "that's the theory, how did it work in practice?" but this, for me, is a good start.

Roughly (and I may never get past roughly) I see responsibility as something like this:

First and foremost, when loans are made someone's signature goes at the bottom and he represents some institution. It seems to me it is a fundamental principle of accountability that the lion's share of the responsibility falls here. In childhood terms, every mother tells her son "It doesn't matter if Johnny told you to throw the rock, you are the one who threw it".

Next: ***** happens. Our elected representatives are supposed to be minding the store and act before a problem becomes a disaster. Holding hearings after the disaster is, or should be, embarrassing to them. I am entitled to be confused about what is going on. Members of the Senate Banking Committee are not.


After these two fundamental groups, we can look at the supporting cast. We might ask Johnny if he did indeed suggest throwing the rock.

The Wikipedia article mentioned powers that go with the CRA relating to such thing as applications to open a new branch. These powers can be used reasonably or they can be used with a heavy hand. I trust that more or less everyone, at work, or in dealing with the gov, or somewhere, has had an experience where we are told something along the lines of "Gee, I wish I could think of some way to get you to do what I want. Let's see... Oh yes, you are applying to open a new branch..." Something like that. Government agencies are given to such things and then they can say "Oh, I never said he had to.." So it all depends on how it actually played out.


The 1 in 4 number (so x/y is around 0.25) also is very useful. It is some reason to say the impact of the CRA was not huge.


All subject to fact checking.


Here is an incident from fifteen or twenty years ago the, in retrospect, seems like the beginning of trouble. My bank had a sign up that an investment representative would be there at such and such an hour. I went. As often happens, it was crap. A young woman who perhaps was good at selling things but who had no discernible knowledge about finance attempted to get our business. She explained, for example, that common stocks were the ones everyone knew about and preferred stocks were the ones people liked better. My bank lent its lobby and its prestige to this event. Not good. That particular bank is out of business but it seems it was just ahead of its time.

[kenberg]

Winstonm, on Dec 7 2008, 10:06 PM, said:

Quote

I do not have any problem with rating agencies taking or not taking fees.

The problem I have is that the ratings agencies were rating bonds created by those who paid them fees to have the ratings done (an inherent conflict of interest).

There are various groups who have seen their reputation plummet as this unfolds. Bankers, obviously. Certainly these rating services must be one of them as well. We are of course used to a level of bullshit in our lives. If I go to the bookstore I can read a jacket and see a quote from author X of related fiction saying that the book in question is a marvelous read filled with memorable characters. Often the blurb was written by a publicist and the quoted author never saw the book he recommends, much less read it.

Perhaps if the rating agencies put in prominent placement a statement: "This report bought and paid for by the entity we are rating. Contact us at www.glowingreport.com if you are issuing bonds" then we could all rest easy.

[jtfanclub]

Quote

Fact: CRA was an act ideologically motivated to pressure banks to extend loans to people who previously would have been considered unacceptible risks. Noncomplying banks were to be threatened with loss of FDIC backing.

This is true. Note that unacceptable risks often had nothing to do with their credit rating. Unacceptable risks included:

-Skin color
-Age
-Religion

Certainly some people, Obama among them, used the CRA to pressure banks to lend to people trying to buy homes in black neighborhoods even if they didn't have a sufficient credit rating. Banks probably lost a small amount of money on these pressure loans. I consider these small losses for the good of the city to be a tax, same as if the city had charged the bank.

Quote

Fact: Consequently

This is the one I gotta hear. Yes, the government required that few people get small mortgages in the inner city. Consequently, banks just started giving out $500K mortgages in California for houses worth half that? Consequently, they started committing fraud?

How in the world is there consequence here? What about the CRA forced banks to lie? Why would the bank want to lie about a CRA loan? ACORN and others are happy when a middle class black man can get a mortgage. Why would the bank want to lie to make his income appear higher? Then the bank wouldn't be given credit for giving out loans to middle class black men.

The Consequently is the horrifying word in this post. "On 9/11/1977, we decided to have the crosswalks repainted. Consequently, on 9/11/01 two planes were crashed into the Twin Towers in New York. We have decided to never have the crosswalks repainted again and sent apologies to all victims of the 9/11 attacks".

Quote

Fact: the government- executive, legislature and bureaucracy
(including the FDIC)- looked the other way while standards were
being jettisoned: mortgage lending became de facto an unregulated
industry.

Yes, the laws were deliberately slacked in 2003, and the agencies didn't regulate the industry. Changing the bankrupcy laws also made it profitable for banks to drive people into bankrupcy (or so some people in the banking industry throught). This is, you know, TWENTY FIVE YEARS after the CRA passed. I mean, you have an event that occurred in 2006. Do you think maybe the Consequently is more likely to apply to the bankrupcy laws and the deregulation that occurred in 2003 and 2004 than a 30 year old bill which, for its first 25 years of its life, did exactly what it was intended to do?

Quote

But is was CRA which opened the floodgates, and we are now reaping
the whirlpool, with no end in sight.

Yes, those floodgates opened in 1977. And nothing came through them.

Subprime mortgages have been about 4% of all mortgages, since the 50s. In 2004, they skyrocketed to 21% of all mortgages. But you seriously think it was a law written in 1977 that 'opened the floodgates'?

Come on. Do you actually believe this stuff?

[Winstonm]

Quote

This is true. Note that unacceptable risks often had nothing to do with their credit rating. Unacceptable risks included:

-Skin color
-Age
-Religion

You may have said this differently and I missed it but...

I take a minor exception to this as it is my understanding that the CRA was not about requiring unacceptable risk be taken but to prevent a bank from taking deposits from some place like South Chicago but only lending in Manhatttan.

In other words, it was not to force risk taking but to avoid de facto discrimination.

As you point out, though, the difference seems to be in how you define unacceptable risk. I believe the original poster believed the CRA required subprime lending to bad credit risks - which is not true.

[Al_U_Card]

Kind of equal opportunity credit?

[kenberg]

Winstonm, on Dec 8 2008, 06:34 PM, said:

Quote

This is true. Note that unacceptable risks often had nothing to do with their credit rating. Unacceptable risks included:

-Skin color
-Age
-Religion

You may have said this dirrerently and I missed it but...

I take a minor exception to this as it is my understanding that the CRA was not about requiring unacceptable risk be taken but to prevent a bank from taking deposits from some place like South Chicago but only lending in Manhatttan.

In other words, it was not to force risk taking but to avoid de facto discrimination.

As you point out, though, the difference seems to be in how you define unacceptable risk. I believe the original poster believed the CRA required subprime lending to bad credit risks - which is not true.

Some of this, and perhaps I am repeating myself, comes down to how trustful or distrustful you are of government agencies. No one writes a law requiring people to make bad loans. And I doubt anyone (or at least very few) dispute that banks took shortcuts in defining good loans so that skin color had a strong effect on your ability to get a loan. The CRA, something I had not known of, was passed as I now understand it to correct abuses. Good intentions, at times, have bad side effects. Did they here? I would not be too quick to conclude either way although you make a reasonable but not airtight case for it being unlikely.

Years back, the stereotype of a banker was that he was a very boring person. If you are putting money in a bank, boring is good. If you want excitement, buy some stocks. Or maybe pig bellies. Banks are supposed to be boring. The banking industry has definitely become less boring of late. The cause of this could be debated.

[y66]

Quote

What causes ideology to trump facts?

Maybe it's the same thing that causes addicts to deny facts. Who doesn't prefer their own reality?

[mike777]

"Banks are supposed to be boring. The banking industry has definitely become less boring of late. The cause of this could be debated."


Disintermediation.

Basically competition was opened up and the banks had to learn to compete for your business. When I was a child we had nowhere else to go for a savings or checking account or loans.


Up until 1980 or so if you wanted a loan for a house or a car or a business you went to the bank. If you wanted a savings account or a checking account you went to the bank.

After 1980 you could get loans cheaper, faster without a bank. I never bought a house or a car with a bank loan and I worked for banks. The years I did not work for a bank I did not have a bank checking or savings account. I used my brokerage account.

Today banks basically have one advantage over other institutions and that is the checking account. The FDIC insurance provides a competitive advantage with a source of cheap funds to loan out. Keep in mind this makes everyone want to be a bank with FDIC insurance and have access to cheap funds. For the investment banks they needed access to the Discount Window when they found out they could no longer stop a run on their source of funds. These are investment banks that survived the Great Depression and WWII.

Changing the Depression era laws allowed banks to trade for their own accounts and become investment banks which also made for more risk.

[kenberg]

Mike's description certainly matches, and at least partly explains, my experiences as described earlier.

1970: I bough my first house (townhouse, actually). I borrowed money from a bank. I sat in the office of the bank, working with the bank's loan officer, while we closed the deal. The bank held the mortgage until it was paid. No bundling or passing it off to anyone. The interest rate did not go down (not quite accurate, there was a mortgage insurance add-on for the first couple of years while equity was built up). The interest rate also did not go up.


2005: I moved (there were several moves in between). My needs were simple and everything worked fine. But compared to 1970 there were many players and I found the set-up a bit wild. I planned to pay off the mortgage in relatively short order so I didn't much care about the arrangements as long as they were honest and there were no prepayment penalties. So: Confusing but OK.

I'm not so sure this new approach is an improvement in life. I am not very interested in financial things but I believe I am better informed, and possibly even a little smarter, and definitely considerably older, than many people who buy houses. It's good if we can understand what is going on without first taking a year course at the local community college. I can readily see how a young, inexperienced, and not too bright buyer might get a little flummoxed. Even without the predator lurking in the woods. And they are never far away.

Well, the world evolves. Adapt or die.

[Winstonm]

Quote

Changing the Depression era laws allowing banks to trade for their own accounts and become investment banks which also made for more risk.

Mike, what would you say were the benefits and detriments of the repeal of Glass-Steagall?

[USViking]

[quote name='Winstonm']
USViking

Fact: Your facts are crap.
Let's see what you claim as "fact".

CRA was an act ideologically motivated (you have proof or are you simply repeating unverifiable spin?) [/quote]
The ideology I refer to is ever-increasing US Federal government
efforts to reduce povery. Is there any doubt that ideology as been
ascendant since the 1930s? Is there any doubt that CRA is a manifestation
of that ideology?

The effort has after three generations never come anywhere near
solving the problem, so there is ground for contending that even
if the ideology is sound, attempts to put it into practice have been
mismanaged, and need overhaul.

To be completely fair about it CRA is also a manifestation of a less
contentious ideology, that of Federal government efforts to reduce
discrimination. The two ideological motives are often coupled in one act.

Here is Ben Bernacke speaking of CRA on 3/30/07:

[url="http://www.federalreserve.gov/newsevents/speech/Bernanke20070330a.htm"]http://www.federalreserve.gov/newsevents/s...ke20070330a.htm[/url]
[quote]...Public and congressional concerns about the deteriorating condition of America's cities, particularly lower-income and minority neighborhoods, led to the enactment of the Community Reinvestment Act. In the view of many, urban decay was partly a consequence of limited credit availability, which encouraged urban flight and inhibited the rehabilitation of declining neighborhoods. Some critics pinned the blame for the lack of credit availability on mainstream financial institutions, which they characterized as willing to accept deposits from households and small businesses in lower-income neighborhoods but unwilling to lend or invest in those same neighborhoods despite the presence of creditworthy borrowers...[/quote]
If Bernacke is not talking about ideology, then what is he talking about?



[quote name='Winstonm']
to pressurebanks (again, an unverifiable allegation - not to be confused with data.) [/quote]
Here is Bernacke again, from the same link:
(emphasis added)[quote] The CRA reaffirmed the long-standing principle that financial institutions must serve "the convenience and needs," including credit needs, of the communities in which they are chartered. The obligation of financial institutions to serve their communities was seen as a [u]quid pro quo[/u] for privileges such as the protection afforded by federal deposit insurance and access to the Federal Reserve's discount window (FFIEC, 1992). Indeed, the Bank Holding Company Act, passed in 1956, had already required the Federal Reserve Board, when ruling on proposed acquisitions by banks or bank holding companies, to evaluate how well the institutions involved were meeting community needs, consistent with the requirements of safety and soundness. [/quote]
"Quid pro quo"?- that expression hovering over the issue from
the mouth of an authority such as Bernacke sounds like pressure
to me, what does it sound like to you?



[quote name='Winstonm']
to extend loans to people who previously would have been considered unacceptible risks. (Nowhere in the CRA does it require banks to increase or take unacceptable risk. Show us the data instead of spinning a tall tale.) [/quote]
That is very nice of CRA, but the fact is that CRA's reason for
being was to promote increased lending where the banks themselves
showed no sign of willingness to take initiative, correct?

Why the banks' reluctance other than their perception that the risk
was not worth it?



[quote name='Winstonm']
Noncomplying banks were to be threatened with loss of FDIC backing. (There was no provision for penalty in CRA).[/quote]
You may be correct and I in error here.

I have not been able to locate texts of all legislative changes
to the original act, and I was relying on links which described
CRA penalties without sourcing the information.

However, CRA does not need to have penalty provisions of its own:
in a "quid pro quo" environment noncompliance is certain to trigger
penalizing governent reaction, whether in the form of new legislation
or new bureaucratic regulation.



[quote name='Winstonm']
Your statement shows more about your prejudices than about any actual fact. But I press on, anyway, hoping an open minded individual will miraculously emerge. [/quote]
So far I think I have been on solid factual ground
with the narrow exception of the CRA penalty question.



[quote name='Winstonm']
This entire "fact" you claim is simply a series of non-verifiable allegations that comprise a single talking point made from inferior logic - (1) the CRA was designed to help the poor obtain credit; (2) subprime loans caused the crisis; (3) therefore, the CRA is at fault.
What a bastardization of logic and what total crap!
[/quote]
(1) is true, (2) is true: no runaway foreclosures and no
toxic Wall Street securities tanking for a trillion dollars
absent subprime lending (3) would be true if CRA was
the prime initiating motive force behind (1) and (2).

However, to be completely fair I agree I probably overstate
my case by singling out CRA. There has been much other
mismanagement by federal government act and omission
and many citizens who have taken unscrupulous advantage.



[quote name='Winstonm']
You quote this from The Big Picture, as some kind of proof of CRA culbability???[/quote]
No, I quote it in support of my observation that lending standards
did not exist.



[quote name='Winstonm']
Listen again - the CRA only appled to depository institutions. It DID NOT apply to mortgage brokers and other middlemen. It did not require 120% LTV ratios. It did not require AAA ratings on subprime CDOs. [/quote]
I explicitly drew attention to "other actors", but you are right
to emphasize a critical part of the problem that I mentioned
only in passing.



[quote name='Winstonm']
Fact: You are doing exactly what my post implies is done - spouting ideological talking points with no statistical evidence to verify the claim. Interesting.[/quote]
Ideology exists as fact of politics and statistical data
is not needed to prove so.

Acts of Congress such as CRA provide evidence for the
legislative and executive branches' ideologies.




[quote name='Winstonm']By the way, Barry Ritholtz of The Big Picture has been adamant that CRA is not responsible for the crisis. Here is what Barry Ritholtz has to say: (emphasis added)[/quote]
CRA is part of the problem whether Ritholtz and others
reaize it or not: Well intentioned US Federal Government
acts are returning grossly less value than they consume,
and CRA an example.

If the individual states were left to their own devices I believe
we would be in better shape than now.

Unfortunately, the spirit of true Federalism is dead, and all states
now plead for all dollars Federal in a never-ending circle jerk
of loads my money, and yours, to Washington DC and then back
to the state capital nearest you, but not back to you and me,
unless you are a Federal Dollar beneficiary of some kind (I am not).

Acts like CRA then suggest strongly how we use the dollar largesse,
and we take the path of least resistence, and obey.



[quote name='Winstonm']
The purpose of the exercise is to figure out what worked, what didn't work, and then fix the problems so they won't again occur - apolitically. Unfortunately, the WingNuts turn this exercise into spin to defend ideology.[/quote]
We know what happened: (1) subprime lending, (2) zero regulation,
and (3) promiscuous mortgage securitization

cast us into the the whirlpool we now reap.

I haven't heard a peep from our government about what it intends
to do except pour money into the problem.

Typical, huh?

In my opinion (1) subprime lending should be returned to the
0.5 - 1.0% or so level where it apparently was throughout
the entire history of our banking system prior to the 1990s,
(2) rigorous mortgage qualification standards should imposed
by the goverment (government must play some role) on all lending
institutions, and (3) other standards should be imposed the
Wall Street securities hogs.



[quote name='Winstonm']
And they don't let facts stand in the way of a good scapegoat.
Why is it so difficult for the WingNut to say: You know what. I may have been wrong?[/quote]
Simmer down.

I have made a few concessions. Perhaps you might consider
tightening a few nuts of your own.

Namely: You yourself should accept that even if CRA is not
the whole problem, then it is part of the problem, and that
the problem is ideological.

I do not know about you, but 40 years of my taxes have supported
the ideology of Federal Government intervention on behalf of the poor.

These efforts did result in pressure to expand mortgage credit to them,
and did play a part in today's crisis.

BTW I am aware of the fact that a significant amount of subprime debt
is carried by consumers who are definitley not poor, but who wanted
to buy more house than they could reasonably afford, so they can be
added to the cast of irresponsible actors in this fiasco.

It has reached the point where the numerous irresponsble actors might
make ME poor, not that I have ever been remotely close to wealthy.

When there are so many people upon whom to vent my fury
why should I pick only on poor little CRA?

[Winstonm]

Quote

Simmer down.

I have made a few concessions. Perhaps you might consider
tightening a few nuts of your own.

You are right. Thank you and I apologize.

I am probably picking on you unfairly as representative of those who push the idea that the CRA was totally at fault AND their own ideology was blameless.

Again, it is not fair to place you in this category as you did not make that claim. Sorry for being so touchy.

[Winstonm]

Nice timing - this just popped up. Nobel prizewinner Joseph Siglitz:

Quote

You’ll hear some on the right point to certain actions by the government itself—such as the Community Reinvestment Act, which requires banks to make mortgage money available in low-income neighborhoods. (Defaults on C.R.A. lending were actually much lower than on other lending.) There has been much finger-pointing at Fannie Mae and Freddie Mac, the two huge mortgage lenders, which were originally government-owned. But in fact they came late to the subprime game, and their problem was similar to that of the private sector: their C.E.O.’s had the same perverse incentive to indulge in gambling.

The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. The embrace by America—and much of the rest of the world—of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.

[goobers]

http://www.federalreserve.gov/newsevents/s...er20081203a.htm

They lent money to people who would not have been considered before, which is not equivalent to saying they took excessive risks. They simply used a different method of evaluation. As someone else already pointed out in the thread, their rate of default is low.

[mike777]

Winstonm, on Dec 9 2008, 08:50 PM, said:

Nice timing - this just popped up.  Nobel prizewinner Joseph Siglitz:

Quote

You’ll hear some on the right point to certain actions by the government itself—such as the Community Reinvestment Act, which requires banks to make mortgage money available in low-income neighborhoods. (Defaults on C.R.A. lending were actually much lower than on other lending.) There has been much finger-pointing at Fannie Mae and Freddie Mac, the two huge mortgage lenders, which were originally government-owned. But in fact they came late to the subprime game, and their problem was similar to that of the private sector: their C.E.O.’s had the same perverse incentive to indulge in gambling.

The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. The embrace by America—and much of the rest of the world—of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.

Yes, I would phrase this as I did in earlier posts. Are free capital markets smarter than the central government, in the long run, in risk management and capital allocation decisions? If they are then this is the role and issue that owners should be, should be, holding the feet of the CEO to the fire. Some will fail and others should win resulting in "creative destruction".

The purpose of the free capital markets is to allow them to find the winning decisions of risk management and capital allocation. OTOH if the Utility, the banking system, keeps needing a central government bail out what does that mean? After all central governments, even in our lifetime, have been destroyed.


Just a thought here but perhaps what needs to be done is a way to allow important companies to fail without the entire system failing? To put it in otherwords:
1) shareholder equity in car companies and banks should be allowed to be wipedout/destroyed?
2) debt holders take control of the company and become new owners?
3) debt holders write down debt to a lower sustainable level?
4) company rises as a Phoenix from the ashes? Or for example companies that make typewriters and carbon paper vanish or recreate themselves? Anyone remember IBM select typwriters? Kodak analog cameras?rotary telephones?