Deregulation Or Government Meddling: What Triggered The Great Recession?

The Huffington Post reported the emergence of the website, which looks to counter claims made by the George W. Bush Presidential Library about President Bush’s legacy. Fair enough; I presume most presidential libraries put a less-than-truthful spin on their namesakes’ legacies. Unfortunately, the website’s take on the financial crisis of 2008 is flawed:

The library’s presentation of the financial crisis is similarly rosy, as it denies the failure of Bush’s anti-regulation, “free-market” philosophy and gives the impression that Bush solved the problem before leaving office.

Scholars from rival libertarian think tanks agree on one thing: Bush was no free-market adherent. Even President Bush himself admitted this, in a way only Bush could. As for “anti-regulation” policy during the Bush years, the number of economically significant regulations increased 70%.

So this begs the question: was the financial crisis triggered by deregulation, or government meddling? Consider the following:

-Adherence to the Community Reinvestment Act led to riskier lending by banks. Per a study from the National Bureau of Economic Research, banks under CRA scrutiny increased their lending by 5%, which was coupled with a 15% increase in defaults. Also, from 2001-07, nearly half of CRA loans were purchased by Fannie Mae and Freddie Mac. Per the link, these loans contained “subprime features.”

Per David Hogberg, mortgage-backed securities became “loaded” with subprime loans thanks to a Department of Housing and Urban Development mandate that 40% of the loans financed by Fannie and Freddie had to be for borrowers with below-median incomes (another source says the quota was 42%), and eventually 50% of the loans by 2000. This mandate helped trigger the GSE issuance of MBS products by 116% from 1997 to 1998 alone. The mandate played a large role in banks lowering their lending standards, since the GSEs would purchase those loans and bundle them as MBS products.

Just how “loaded” were mortgage-backed securities with subprime loans? Per Lawrence White, nonprime mortgages were less than 10% of all mortgages in 2001; by 2006 they accounted for 23% of all mortgages, and 34% of new mortgages. One study states that by 2006, 75% of subprime mortgages were securitized. During the critical years of the housing bubble, most MBSs were issued by the GSEs.

In an era of rampant government manipulation, the argument that “deregulation” caused the financial crisis rings hollow. But if the “deregulation caused the crisis” argument wins the day, history is sure to repeat itself.


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