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Blame wrongly apportioned Print E-mail
Written by Eamonn Butler   
Friday, 10 October 2008

Here's an excellent piece by Thomas J DiLorenzo on who really got us into the credit mess – American politicians and regulators.

The Community Reinvestment Act 1977 didn't just force lenders to make bad loans to 'sub-prime' borrowers. It stopped banks making any business decisions that would prejudice this shaky market. The Act also funded 'community' – that is, advocacy – groups to make sure that the banks knuckled under. The lenders knew it was all daft, so to spread the risk, lenders like Freddie Mac 'securitized' their loans in a big way – spreading the infection around the planet.

In 1995 the authorities 'streamlined' the working of the Act by pressuring the banks to carry on making bad loans – telling them not to pay too much attention to tradition creditworthiness tests, and ruling that a borrower's participation on a credit-counselling was proof enough that they could repay a mortgage, which the banks then had to give.

Rising house prices and economic prosperity, fuelled by low interest rates (Federal Reserve again), disguised this craziness for years. But now all those sub-prime borrowers are defaulting big time. And politicians are blaming the bankers!

Comments (6)Add Comment
Spelling?
written by Mark Wadsworth, October 10, 2008
"apportioned", surely?
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written by Blog Administrator, October 10, 2008
Thanks, Mark. Will change.
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written by PWG, October 10, 2008
I wish you people would acknowledge that in the UK, a lot of irresponsible lending took place, predicated on rising house prices, and it was the banks themselves that did it. No-one forced them to. Look at the example described here.
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written by Thomas Clougherty, October 10, 2008
PWG –

No-one is denying that the banks acted irresponsibly in lending loads of money to people who would not be able to afford repayments. Nor are we denying that this was to a great extent driven by the idea that house prices could only go up.

But the point is that government fueled this (the irresponsible lending and the ever-growing house prices), primarily by pumping liquidity into the economy (over and over again) in an attempt to create an illusion of never-ending growth and cover up their dodgy fiscal policies (tax, borrow, spend, repeat). Gordon Brown had the hubris to claim that he had ended the economic cycle, when really he was just storing up trouble. In the US, Greenspan fell prey to the same delusion.

Don't absolve the banks of responsibility (although that's just what bailing them out is), but don't let government dodge its share of the blame either. Personally, I think it's been sickening to see how smug Gordon Brown has become in the face of the crisis – he may chide the "age of irresponsibility", but he was its architect and people shouldn't be allowed to forget it.

Tom
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written by MH, October 10, 2008
If it is true, as Eamonn and Tom argue, that governments are the primary cause of the crisis due to their "pressuring" banks to make bad loans, why did I not hear banks complaining that their businesses were being ruined by this? If it was clear to the banks that they were bad loans, and if government decisions were forcing them to put their businesses at risk, they should have screamed. But they didn't, as far as I'm aware.
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written by Rob, October 12, 2008
In 1995 the authorities 'streamlined' the working of the Act by pressuring the banks to carry on making bad loans – telling them not to pay too much attention to tradition creditworthiness tests, and ruling that a borrower's participation on a credit-counselling was proof enough that they could repay a mortgage, which the banks then had to give.

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