The Housing Crisis “Who Done It?”

As I listen to discussions about who or what was responsible for our current housing crisis, they seem to invariably disintegrate into arguments about which political party was responsible for the mess we are in. Commenters point to one or more specific milestones as the very reason. I am somewhat as simplistic in that I suggest the overwhelming pull of globalization and the capitalistic opportunity to invest in China that created too much of a temptation for investment banks. As a result, they worked for thirty years to drain America of its capital through any way possible including the housing ponzi. My points include:
•Prior to the Great Depression, mortgage securitizations created excessive speculation
• Laws were passed to attempt to separate loan originations and investments
• China’s opportunity created great capital demand starting in 1978
• Investment banks began extracting capital from America including using mortgage activities
• Investment banks made commercial banks willing accomplices by purchasing liar loans, eliminating commercial bank risks, creating the final capacity for the Great Housing Ponzi

However, trying to point to any one milestone as the culprit is just too simplistic. Trying to deny the culpability of any milestone is just as simplistic. How much blame for the housing crisis should be placed on pooled Ginnie Mae mortgages in 1970? What was the influence of Freddie Mac’s REMICs in 1983? How did banking law amendments in 1982 that encouraged private banking securitization impact the future Ponzi, or the Secondary Mortgage Market Enhancement Act of 1984, that put private banks on equal footing with Fannie and Freddie with securitization, affect the crisis?

We know that the Home Mortgage Disclosure Act of 1975, which outlawed redlining, was a factor in influencing subprime loans and that CRA 1977, which added affirmative action to subprime loans, influenced later lending practices. Yet, are we to say they had no influence in the later scandal?

Some analysts deny the existence of President Clinton’s National Home ownership strategy which, with changes to CRA, set up soft quotas in lending to underserved communities, yet his efforts led to an 80 percent increase in subprime mortgages. Did the addition of this new demand have any influence on the housing Ponzi?

In 1994, Blathe Mathers of J.P. Morgan invented the credit default swap to pass the risk of the Valdez oil spill to EBRD. This instrument, invented to subdue a perceived liability of Exxon was shortly after applied to the mortgage industry. In fact Clinton’s subsequently supported legislation that allowed subprime loans to be securitized in 1995 provided banks with much needed cover to remove these loans from their balance sheets into the investment banks arena. Did either of these milestones not have an impact?

Certainly CRA forced commercial banks to take on risky loans that would never have otherwise been taken. However, with the introduction of resale, securitization, and CDSs, these subprime loans became great money makers for all, so much so that in the three years after 1995, the number of banks in subprime lending increased from 10 to 50.

Did the dot com bubble of the late nineties contribute to an overall wealth effect that caused excessive loans including mortgage refinancing? Seems evident. Did GLBA have an impact on accelerating the globalization of securities and swaps? The data supports that. Did the Fed’s actions of dropping interest rates from over 6 percent to 1 percent in the years 2000 to 2003 contribute to the run up? Um yeah. And what about all the buyers of these securities, they seemed inordinately good deals yet organizations as large as AIG did not seem to understand the complex risks they were taking. Could they have slowed the Ponzi’s pinnacle if only their financial experts understood what risks they were taking? Of course.

When I hear the myopic and tinny ringing of political extremists pointing to one side of the aisle or the other as scapegoats for a debacle decades in the making that included one contribution after another, I sense a slight superiority when I settle back on my simplistic answer of “the investment bankers done it.”