1. Narrative: Subprime mortgages were a consumer protection failure. Thus, we need the Consumer Financial Protection Bureau.
Reality: By a strict definition, predatory lending is when the loan is made with the intent of going to foreclosure and allow the lender to take possession of the house. This was not a factor in the subprime boom, which was fueled by the originate-to-distribute model. In the originate-to-distribute value chain, there is no one whose goal is to take the house from the borrower.
I think you could accuse loan originators of Ponzi lending. That is, lending to borrowers who could only avoid defaulting on the loan by taking out a new loan. Taking out a new loan in turn required continual increase in home prices, so that the borrower could use the equity in the house as collateral. But I would say that the biggest pushers of Ponzi lending were the “affordable housing” lobby, and I think that the last thing we will ever see is the CFPB take on the affordable housing lobby.
2. Narrative: The 1980s deregulation in banking was driven by the free-market ideology of Reagan and Greenspan.
Reality: The three main regulations that were dropped were the restrictions against banks paying market rates for deposits, the restrictions on interstate banking, and the restrictions on combining commercial banking with investment banking. I do not recall any pushback by the left on any of these–until 2008, when they made the retroactive claim that getting rid of Glass-Steagall caused the financial crisis.
In fact, these three regulatory boats had started sinking in the 1960s. The legislation that was passed in the 1980s and 1990s was simply the final order to abandon ship.
In the 1970s and 1980s, the big fight in bank regulation was not left vs. right, or deregulation vs. regulation. It was interest groups battling it out. Wall Street, big banks, savings and loans, and small banks had divergent interests, and that caused gridlock in Congress until things unraveled so much that Congress had no choice but to act.
If you want a parallel today, look at the battles between Amazon and the book publishers, or between Verizon and Google. You aren’t seeing legislators line up on ideological lines in those contests.
3. Free-market economists wanted to turn bankers loose to take whatever risks they wanted, and they got their wish.
Reality: Free-market economists were the strongest proponents of higher bank capital regulations and the biggest skeptics of the Basel risk-based capital regulations. We see the same thing today, with free-market economists skeptical of Dodd-Frank, and mainstream, establishment types like Stan Fischer saying things like
The United States is making significant progress in strengthening the financial system and reducing the probability of future financial crises.
In other words, this time will be different. Pointer from Timothy Taylor.
1. The biggest backers of Ponzi financing were the investment banks and their record shows it. Eventually they were running short of buyers and had to promote the GSEs into buying schlock on that basis.
2. Was about doubling down to avoid smaller losses now in favor of larger losses later.
3. Did Greenspan ever make this point? Or at least other than about the GSEs?
Anecdote is not data, but my uncle, who was a bank regulator (and also lived in California during the financial crisis), said that a lot of loans were made on the basis that the bank would not lose money in the event of a foreclosure; i.e., there was no downside to the loan: either the loan paid off or the bank took the house and was made whole by the foreclosure sale. He said if he had had the power, he would have reclassified many loans in the banks portfolio from loans to equity investments in housing, since the chance of repayment in many instances was quite low.
Wow! “By a strict definition, predatory lending is when the loan is made with the intent of going to foreclosure and allow the lender to take possession of the house.” Whoda thought we could get rid of the problem by defining it out of existence.
Those fools at the National Association of Consumer Advocates just don’t get it when they assert that “Predatory lending comes in a number of different forms. In each instance, however, a financial institution takes unfair advantage of a consumer’s financial needs by charging high interest rates and other unconscionable fees and charges.” I guess they just aren’t smart enough to know that it isn’t “predatory” if the lender only wants to profit from the fees and passes the mortgage on to a securitizer who passes it on to someone else who doesn’t want to take over the property.
If those idiots at NACA had just gotten their definitions right we could have avoided the whole financial crisis mess we are in today. It’s obviously all their fault!
“The three main regulations that were dropped were the restrictions against banks paying market rates for deposits, the restrictions on interstate banking, and the restrictions on combining commercial banking with investment banking. I do not recall any pushback by the left on any of these–until 2008, when they made the retroactive claim that getting rid of Glass-Steagall caused the financial crisis.”
This is a very good point, though it does ignore the Financial Services Modernization Act that passed in 1999. (See: http://video.pbs.org/video/1302794657/ ) It also ignores the fact that there is virtually no one on the “left” today and there hasn’t been since the 1980s.
Who are those people on the left out there? While a majority of the Senate Democrats opposed FSMA and probably would have opposed CFMA if there had been a separate vote on this bill rather than having been included in an omnibus emergency appropriations bill, 75% of the House Democrats voted for FSMA. At the same time, the Republicans were virtually unanimous in their support of these two bills, and a Democratic president signed them into law. They were virtually all free-marketeers back then, and they are virtually all the same today.
I don’t see wanting to repeal Dodd-Frank as being the same thing as supporting stricter financial regulation. Where are the freemarketeers who are calling for stricter financial regulation. See:
http://www.rweconomics.com/WD/Ch_0P.htm
and
http://www.rweconomics.com/LTLGAD.htm