Greenspan: Government Pushing the Community Reinvest Act Caused Failure

As much as I hate to say I -- and countless others -- told you so, we told you so.

(Greenspan) pointed out that the Fed had warned about subprime lending and low-down-payment mortgages in 1999, and again in 2001. And he argued that if the Fed had tried to damp the housing market amid a “fairly broad consensus” about encouraging homeownership, “the Congress would have clamped down on us.”

Back in September 2008, in my epic three-part analysis of the financial meltdown, I wrote:

In 1977, Congress passed the Community Reinvestment Act. One of the basic principles of the CRA is that "regulated financial institutions are required by law to demonstrate that their deposit facilities serve the convenience and needs of the communities." (Sec. 802.a.1)

(Lenders' mortgage) evaluation process "should accommodate an institution's individual circumstances."

To support these initiatives, the government assured lenders that, though it's Freddie Mac and Fannie Mae vehicles, these loans would be bought, principle and interest, if the loans were not repaid (paragraph 8).

It was from the urging of the federal government to push mortgages onto people who could not pay them back came the sub-prime mortgage. When a mortgage requires 20% down, it became difficult or impossible for people come up with the down payment when prices exploded -- and points and fees are often tied to the size of the mortgage. Even at the low interest rates of the day, low-income buyers could not afford the payments, down payments, and fees.

Thus was born the 0 down, 0 points programs, with below-market interest rates that adjusted. Making the problem worse were the banks, who -- in a highly de-regulated environment -- "gambled" with these mortgages, knowing that the federal government would back them.

In addition to the subprime markets, financial institutions were drastically deregulated in many other areas. Most importantly, perhaps, was in the area of leverage ratios. Typically, banks are allowed to loan out $12 for every $1 in deposit. Lenders, investment banks, Fannie and Freddie, and subprime lenders started leveraging upwards of $30 to $40 per $1 in captial.

The financial meltdown of September 2008 was a problem of government. Too much government in some areas; too little government in others.

Several witnesses... (a)ll acknowledged a sharp deterioration in lending standards that kept the housing market aloft and Wall Street’s loan-packaging machines humming.

Government invented the problem that people who could not afford houses should have them; they created the solution (the CRA) for the problem they invented; and they promised to back-up any lender who would help them implement this solution, without question. Human nature took advantage of the rules the government put in place in order to make more money.

Or, as Ronald Reagan said:

"In this present crisis, government is not the solution to our problem; government is the problem."