In Tom Woods’ Meltdown, he chides conservatives who try to blame the housing bubble solely on the Community Reinvestment Act and other such particular interventions. Woods argues that only the Federal Reserve could explain the general booms (and hence busts) in market economies, and that without the Fed’s easy policies after the dot-com crash, there couldn’t have been a sustained and massive housing bubble.
Of course Paul Krugman would disagree with Woods’ conclusion, but in this post he also rules out two of the typical fall guys in the conventional “right/left” debate. After displaying a graph showing that the housing and commercial real estate bubbles overlapped very closely, Krugman says:
From my perspective, the CRE bubble is highly significant; it gives the lie both to those who blame Fannie/Freddie/Community Reinvestment for the housing bubble, and those who blame predatory lending. This was a broad-based bubble.
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Paul who?
Tom G. Palmer disagrees though! Apparently we’ve been acting on ‘blind faith’ and we’re all cultists….
Honestly, I’m quite sick of the “libertarians” from Cato.
I most certainly understand I’m biased, hence the name…But, I don’t think I’ve ever seen an intellectual like Palmer misstate the ABCT and then move forward on that false premise…
For all the possible knocks against Woods, that was certainly unwarranted to say the least.
He doesn’t seem to have the acumen to realize that “Meltdown” was also meant as a primer for the layperson, new to the Austrian school of economic thought.
So a thief robs someone and people then spend months and months analyzing the different techniques the thief could have used to rob them. Wonderful.
I’m not sure that anyone has really claimed that CRA caused the business cycle. What’s interesting about CRA is that it rewards bankers for being reckless and punishes prudent lenders – patterns everyone is now condemning in retrospect. CRA critics like DiLorenzo have pointed out that this is the essence of the policy, via a circuitous route. These policies worked to do what they were supposed to do, with predictable results: foreclosures among financially marginal borrowers who probably would not have received mortgages in an unregulated market environment. Also, making commercial loans was another means of CRA compliance; these are not incompatible. CRA was neither necessary nor sufficient but surely it is part of the story here. Perhaps another way to put it is that the credit-fueled boom is what made CRA compliance possible in the first place.
I agree with Woods that the Fed caused the misallocation of resources as a result of credit expansion. However, I believe that the specific nature of that misallocation was more greatly funneled into the housing bubble because of the CRA standards already allowing for high risk loans. The inclusion of high risk commercial loans was an expansion of the same procedure. Without the CRA precedent, the misallocation may have resembled a more generalized boom rather than the bubble. The bust would have resulted in either event.
This is just an attempt by Krugman to justify keeping Fannie Mae, Freddie Mac and the CRA around.
I agree with Russ that Krugman is working off his standard charlatan script
Pete, that’s exactly the argument in Meltdown.
My great (podcast) teacher Walter Block taught me about proximate and ultimate causes. As far as my limited intellect goes, Tom Woods lays out the causes of the boom and bust with unprecedented precision and puts them in the right baskets labeled ‘proximate’ and ‘ultimate’. Krugman’s mind is apparently unable to grasp the right ultimate cause. Come on, how hard can it be?
The Community Reinvestment Act is simply an easy excuse for laying blame on the government. What is amazing with this whole discussion on the housing bubble is that we purport that one of the fundamental principles of the free market is responsibility. Laws may lay a foundation for how loans are granted, but laws do NOT force people to initiate illegal practices. Furthermore, where were the bank risk managers?
The housing bubble was caused by the WILLFUL actions of some executives in the financial system, who also short-circuited risk management oversight. If we really believe in the free market, those who caused the financial meltdown should acknowledge and accept their responsibility for causing this problem and turn in their resignations.
Steve R.,
How can you say that the CRA has nothing to do with this? The bank managers basically had their arms twisted behind their backs until they made the loans the socialists wanted them to. The practices of the banks weren’t illegal; the government itself coerced the banks into making the loans. Because of the CRA law itself, it would have been illegal for them not to make the loans.
After being forced into making loans they knew were financially unviable, it’s no wonder they jumped at the chance to sell the risky debt to Fannie Mae or whatever. And if the evil, greedy capitalists shouldn’t have bought the debt, then it stands to reason that the government shouldn’t have sold it in the first place.
This tired old “blame the evil capitalists” crap just doesn’t cut it anymore. It may still fool the mindless masses, but the people here are more economically literate than that. Give it a rest.
“…those who caused the financial meltdown should acknowledge and accept their responsibility for causing this problem and turn in their resignations.”
This is true, but Barney Frank, Chris Dodd, Barack Obama, etc., will, unfortunately, never be man enough to do that.
The CRA may have have set the stage for what happened, but it was the willful actions of the financial institutions that created this mess. Also not the failure of the risk managers to intervene.
I suspect that we will never agree, but it amazes me that some, when given the freedom to do what they want destroy the system and perpetuate the paranoid myth that the government made me do it!
Go give you my typically bad analogy. You are driving up to a curve in the road, the speed limit is 25 MPH, but you are doing 60MPH and run off the road and wreck your car. You now sue the government claiming that the road was not properly designed (regulated). So when do you take responsibility for your actions?
Steve R.,
You’re right; your analogy is horrible.
Blaming corporate greed for the crash is silly. I’m not saying that greed doesn’t exist; of course it does. But is a desire for profit not there when markets are good? Of course it is. The problem is systemic; easy money encourages people to take excessive risks, and the CRA, etc., not only encourages but forces banks to make risky loans. Fannie Mae, etc., bought up the risky loans, which the banks would have foolish in the extreme not to sell to them. After all, if you sell the loans, you reap the benefit of the loan without incurring the concomitant risk. Then the loans were bundled, derivitized, and sold, without people realizing just how risky they were. But none of this would have been a problem if the risky loans weren’t made in the first place. They were made because the federal government dictated that they be made, and provided the easy money to make it happen.
So, a better analogy would be if the government started a “government-sponsored entity” that sold cheap heroin, and then blamed the resulting rise in heroin addiction on the “willful actions” of its customers.
Russ,
” Blaming corporate greed for the crash is silly. ”
What you said reminded me of something I had read on Capitalism Magazine which I thought was a good analogy – Blaming greed for the present crisis is like blaming gravity for air crashes.
Russ,
Sorry about my English on my previous post. I was in one of those unsympathetic distracting periods; “Come-on lets go, we don’t have all-day”. So I had to go, and I wasn’t really able to finish what I intended to say.
Obviously we will continue to have different viewpoints on this. However, you make look forward to a wealth of really bad analogies!
Bala wrote:
“Blaming greed for the present crisis is like blaming gravity for air crashes.”
I had thought of that one, too. Great minds think alike, I guess. *grin* Surely, greed exists. But so does gravity, and most airplanes manage to fly without crashing anyway. So if an occasional crash does happen, it must be a problem with the airplane, not with gravity in general.
Also, just like gravity, we’re never going to get rid of greed. We might as well focus on something semi-realistic, like getting rid of bad government policies. It’s a shame that people like Steve are fooled by the same old tired socialist “blame the evil capitalist” tropes.
Steve R. wrote:
“Sorry about my English on my previous post.”
Not a problem. I have plenty of typos, editing errors, and just plain blond or senior moments myself.
The analogy relates more appropriately when the speed limit at this curve is posted at 60 mph. Without a posted limit you would probably go 25 mph. but, what the hey, the government says it’s ok!
Or, even better, the posted limit is a *minimum* speed limit, and there is always a cop car (manned with ACORN staff, no doubt) making sure that you go 65 MPH around the corner, even if you’d rather go 25.
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