Fact checking

I watched a little bit of the debate last night and caught an exchange about the origins of the housing bubble and crash. I feel obliged to state the facts for the record, though I fear people's views are by now hardwired. The Community Reinvestment Act (the law requiring banks to make a certain number of loans to underserved communities) had nothing to do with the housing bubble. The Federal Reserve deserves some of the blame for not enforcing laws against predatory lending and for keeping interest rates low for too long in the 2000s. Fannie Mae and Freddie Mac were irresponsible and poorly managed agencies operating with an implicit government guarantee, but they only began loading up on subprime mortgages around 2005, well after the housing bubble was underway. The main cause of the housing bubble was excessive lending by private mortgage lenders, prodded on by private investment banks. The main reason the housing crash led to a financial market crash was excessive borrowing and speculation by private financial institutions which were insufficiently regulated by government. The single worst government decision: in 2004 the Securities and Exchange Commission agreed to lift leverage restrictions on the largest investment banks (Lehman Brothers and its ilk). Immediately thereafter these institutions increased their borrowing from around 12 times the value of their assets to 30-50 times the value of their assets. Runner up for worst regulatory decision: the decision in 1999 or so not to regulate credit default swaps.