Re: [asa] Deregulation Madness was Re: Ben Stein on Sub Prime Mortage Crisis...

From: Clarke Morledge <>
Date: Mon Dec 08 2008 - 11:25:56 EST

On Mon, 8 Dec 2008, Rich Blinne wrote:

>> President Clinton also got HUD involved in the issue as they issued new
>> rules for Fannie and Freddie. First, Fannie and Freddie could now buy huge
>> amounts of subprime loans. In 1995, Fannie Mae bought an estimated $18.6
>> billion in subprime loans from banks and this number grew exponentially
>> over time.
> Non sequiter. There is little to no connection between subprime mortgages and
> CRA.
> 1. More than 84 percent of the subprime mortgages in 2006 were issued by
> private lending institutions.
> 2. Private firms, that is firms that are not eligible for CRA, made nearly 83
> percent of the subprime loans to low- and moderate-income borrowers that
> year.
> 3. Only one of the top 25 subprime lenders in 2006 was directly subject to
> CRA.


I am trying to get a better handle on your argument defending the CRA.
What I am not getting is why the increase in subprime lending really took
off during the recent period, which is fairly close in time to the
expansion of the CRA? In other words, what prevented a "subprime
crisis" from happening in earlier decades? Why now?

You would probably agree that greed among the subprime lenders was a
significant (if the not the leading) cause of the crise. But hasn't greed
always been there? Is the recent relaxation of lending standards
sufficient to account for ALL that has happened?

Is it not reasonable to think that the advance in the subprime market was
an effort by lenders to compete with CRA-type loans offered by folks
backed by Freddie Mae and Fannie Mac, which had implicit backing by the
government? If a CRA lender is going to offer low interest loans with
little or no down payment, is it not reasonable for a non-CRA lender to
offer similar loans with similar qualifications? Otherwise, how could a
non-CRA lender compete with a CRA lender?

Is there a problem in my logic here? Can you offer any constructive

From my understanding, the Austrian school of economics (Hayek, Mises, and
our modern day Peter Schiff, etc) has argued that while CRA is not
completely to blame, it did encourage a number of people to do the wrong
thing. It helped to create a type of "moral hazard" environment whereby
folks took advantage of what was otherwise a well-intended law. The
Austrian economists do concede that the CRA was a minor player. The
bigger culprit was the lowering of interest rates by the Fed.

Don't get me wrong. CRA was meant to stop the practice of "redlining",
and that's a good thing. But on the other hand, did the expansion of the
CRA result in some unintended, negative consequences?

I'd like to accept your argument, but so far the Austrian economists have
been the only ones to have correctly predicted this crisis (Google for
Peter Schiff's YouTube videos over the past few years, for example).

Clarke Morledge
College of William and Mary
Information Technology - Network Engineering
Jones Hall (Room 18)
Williamsburg VA 23187

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Received on Mon, 8 Dec 2008 11:25:56 -0500 (EST)

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