The explanation behind the sub-prime mortgage crisis

The government is blaming the banking industry, but it is really government pressure that is responsible for the problems in the industry. It is always amazing to me how government regulation begets more government regulation. Stan Liebowitz has an excellent piece on all this in last week's NY Post:

Most people instinctively understand that such loans are likely to be unsound. But how did the heavily-regulated banking industry end up able to engage in such foolishness?
From the current hand-wringing, you'd think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards - at the behest of community groups and "progressive" political forces.
In the 1980s, groups such as the activists at ACORN began pushing charges of "redlining" - claims that banks discriminated against minorities in mortgage lending. In 1989, sympathetic members of Congress got the Home Mortgage Disclosure Act amended to force banks to collect racial data on mortgage applicants; this allowed various studies to be ginned up that seemed to validate the original accusation.
In fact, minority mortgage applications were rejected more frequently than other applications - but the overwhelming reason wasn't racial discrimination, but simply that minorities tend to have weaker finances.
Yet a "landmark" 1992 study from the Boston Fed concluded that mortgage-lending discrimination was systemic

Here is my piece on the topic.

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Anonymous Anonymous said...

Outstanding analysis! That's why I tune into your blog! I learn.

2/10/2008 8:30 PM  
Blogger John Lott said...

Thanks, Steve. That is nice of you to say.

2/11/2008 10:32 PM  

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