Clint, Carter policies true reason for housing bubble

On Tuesday, in a letter to the editor, a student wrote about the Occupy Wall Street protests, comparing them to the Civil Rights Movement (which it is nothing like) and stating “Wall Street institutions created this economic situation in the first place.” The author of this letter is completely incorrect.

First of all, the housing bubble bursting caused the economic crisis. The reason for this occurrence is not, as many OWS protesters seem to think, “big, evil banks and corporations.” The cause was actually an extraordinary amount of subprime mortgages and rampant speculation in the housing market. But why did this occur, and why were such a vast number of people who could not afford the homes they owned (the reason for the number of subprime mortgages) actually owners of those homes?

The first of the two biggest factors contributing to the housing bubble is the Community Reinvestment Act of 1977, signed by President Jimmy Carter. This legislation’s goal was to eliminate discrimination in giving loans to residents and businesses in low-income areas. An effect of this, of course, was that it encouraged banks to give loans to individuals who could not afford to repay them.

The second of these two large factors was part of President Bill Clinton’s plan to increase home ownership. Clinton directed Secretary of Housing and Urban Development Henry Cisneros to create a plan to do just that. Known as the National Homeownership Strategy, it took fiscally irresponsible steps in order to increase the number of individuals who own homes (the documents can easily be found online). Just so no one feels I’m being partisan, President Bush continued with these policies.

These two things, which put additional regulations on the private sector, are the root cause of the recession. Both are examples of government overregulation. Maybe the OWS protesters should go occupy Bill Clinton and Jimmy Carter’s houses instead of trying to go back to Zucotti Park, especially since their policies are the reason we’re in this mess in the first place.


Adam Rawlins is a junior majoring in political science.

  • Anonymous

    While you’ve certainly made good points and backed them up (a rarity on this page), I wouldn’t go so far as to say financial houses are completely without fault. Through the constant repackaging of loans and securities – to the point where no one could figure out where the original came from – these companies put themselves in even more precarious situations that yielded big rewards as well as big failures. One particular financial house (I wish I could remember the name – there was an article about this in The New York Times a couple of weeks ago) was found guilty by the SEC of giving poor financial advice and then betting against the advice in order to make a profit. 

    The problem has always been striking a balance between overregulation and under-regulation, because it seems every election the general public is violently reacting against whatever the previous administration instituted. 

  • Brad Erthal

    Neither of those acts forced anyone to make any loans. The risky loans were originated by banks and other financial institutions of their own volition. The policies of the federal government which sought to increase home-ownership generally are bad for other reasons, but didn’t cause the recession. You should also be careful to distinguish government policies which prevented discrimination against minority applicants for home loans and those which sought to increase home ownership generally.

    And if you really think that the government first started promoted housing in the suburbs under Carter, it’s because you found your preferred answer and stopped looking. That’s just when they decided to try to make it fair. After the second world war, it was the policy of Housing and Urban Development for many years to subsidize home loans, exclusively for white applicants. Again, this is inefficient for many reasons, but it undeniably helped white people to maintain their unwarranted leads in income and education, among other things. It’s amazing to me that conservatives have concluded that government helping citizens directly is a horrible thing, now that it’s inclusive, and as a result they are forced to simply ignore enormous transfer payments that took place before the time period they arbitrarily choose to examine. 

    It’s also plainly absurd for you to single out a policy from 1977 for a bubble that began around 2000. Housing prices were on a steady upward trend before that (some fluctuation of course), and are actually still roughly in line with that trend.  
    The financial collapse wasn’t caused by falling home prices. It was caused by the repackaging of the mortgages into mortgage-backed securities, and then the repackaging of those mortgage-backed securities into supposedly safe, but truly very risky derivatives. For a good treatment of this, I would recommend Michael Lewis’s book, “The Big Short”. Banks then leveraged their borrowing to the point where for some of them, as small as a 2% decline in their portfolio would leave them in the red.  It’s unclear to me whether it was incompetence or fraud that caused the spread of the contagion of mortgage-backed securities, but it looks like both. This recklessness is what caused the collapse. Bubbles happen. Financial markets speculate. But they don’t always cause general collapse. The difference was that the risks were poorly understood and spread throughout the entire economy. 

    • Jeb

      “It’s amazing to me that conservatives have concluded that government
      helping citizens directly is a horrible thing, now that it’s inclusive,
      and as a result they are forced to simply ignore enormous transfer
      payments that took place before the time period they arbitrarily choose
      to examine. ”

      Thats a straw-man argument. Conservatives aren’t opposed to government
      helping citizens because minorities are now being helped. That is
      liberal talking-point BS. Part of the same old conservatives are racist
      and liberals are socialist arguments. I’ve had enough discussions with
      you to know that you are smarter than that. Don’t give in to the
      temptation for a quick jab at the other side. Conservatives are not
      racist just because they opposed government handouts. They believe in
      creating opportunities for people to take advantage of to succeed and
      letting the chips fall where they may. If a person decides to be a junky
      high school drop out that wants to go from lame job to job and smoke
      pot all day, then let them… but we aren’t going to help bring them out
      of poverty. Liberals, on the other hand, believe in giving everybody
      with less wealth, and therefore fewer opportunities, the means to keep
      themselves afloat (redistributed from those with greater means) and
      hopefully even out the opportunities available to everyone. Both are
      worthy goals but neither should be condemned as racist or socialist. It
      is an intellectually lazy argument and appeals to the most ignorant
      voters in the country.

      I personally think it was a combination of the housing bubble finally
      bursting and the derivatives trading. You can’t reasonably dismiss
      either one of those impacts as they both played a significant part. You
      also can’t say that the government didn’t force the banks to make many
      of those risky loans. They most certainly did. They also FORCED the
      banks to accept bailout money, even when the banks told the government
      that they did not want it.

      Encouraging home ownership among the lower income individuals is a noble
      goal and I support the idea, however the amount of money being lent to
      these individuals was way beyond what they had the ability to pay back.
      The government is at fault for once again running a program in the most
      inefficient and bordering on criminal way possible. Banks are
      responsible for not creating a bigger fuss over it if they were truly
      upset at the prospects of having to create these loans. And I’ve got
      enough blame left over for one group of people who never seem to get
      talked about… the individual taking out the loan. You don’t have to
      have a degree in accounting to know that if you are a single parent with
      three kids making $40k a year, you probably can’t afford a $250k home.
      Individuals share some of the responsibility here. Were some of them
      taken advantage of? Yeah, of course… but a lot of people are either
      stupid or thought they could get away with it. You can’t excuse the
      personal responsibility aspect of this either.

      • Brad Erthal

        You’re dead wrong on a wide range of issues here. First, many of the individuals who took out absurd home loans (and the example you give doesn’t even come close to the worst examples) made a sound decision given the information that their bankers gave them. although they may be guilty of credulity. When the bank tells you they’ll finance your purchase of an asset that can’t go down in value, that looks a pretty good deal. Of course, housing is not a perfectly safe asset, as many people knew then, but if bankers get to use it as an excuse, then surely homeowners do. 

        Banks weren’t forced to make risky home loans. For one thing, there is a clause in the CRA that specifically exempts banks from a responsibility to make risky loans. Rather, what the act did was outlaw discriminatory banking practices, such as redlining, which had deeply harmed many minority communities. The government neither invented nor enforced policies to promote, much less mandate, ARM loans, liar’s loans, or any of the methods to repackage risky loans and redistribute them like so many demolition charges through the banking system. The banks did that all on their own, although I’m sure they’d love to say that they had a gun to their head.

        As for forcing the banks to take bailout money, this wasn’t some kind of medieval torture that anyone put the banks through. No bank wanted to admit that it needed help, which could be seen as a sign of weakness, but many of them were, in fact, very short on cash, as evidenced by their unwillingness to engage in any financial activities whatsoever. The solution was to make them take cash to hold, at a 0% interest rate, so that nobody collapsed. It’s really rich to hear anyone complain about having to hold onto cash at a 0% interest rate, because that is generally considered to be a very good thing. It’s sort of like if someone forced me to eat a piece of chocolate cake. I really want to anyway, and the only thing holding me back is peer pressure. 

        And no, my previous point was not a straw-man argument, although would that it were so. I didn’t use such a loaded term as “racism”. You injected that, to inflame the argument and justify yourself in not paying attention to the subtlety of it. My grandfather was educated under the GI bill of the Second World War, and both of my sets of grandparents got loans through HUD programs. Thus, my family owes a substantial part of its material wealth and class station to opportunities not given to other groups of Americans. This doesn’t make me feel bad about my family, but it’s certainly incumbent on me to recognize that this isn’t a simple story of my family pulling itself up by its boot straps, and everybody who didn’t make it being lazy. The author of this letter isn’t making an explicitly racial point, but he is guilty of myopia in his appraisal of American history when he claims that the US government first got involved in home loans under the CRA. It didn’t, and while I don’t know this person’s identity, I would be willing to bet that they have gained at least some of the same advantages I have, and if so, they are certainly failing to recognize the inherent unfairness of criticizing the CRA in particular, as opposed to subsidization of houses in principle. 

        • Jeb

          Not enough time to hit every point you made, but I wanted to respond to one thing in particular. While some people may claim ignorance and that they were duped by bankers, I still call BS. When I bought my house 5 years ago at the peak of the market, just before the crash in home values, I had just graduated college. The bank told me they would lend me (a brand new engineer) and my wife (a fairly new nurse) enough to finance a $450k mortgage. Now, I’m not an idiot and I can run the numbers myself. So can anybody with half a brain. If people simply didn’t do the math, then they were irresponsible, lazy, and/or stupid… not tricked by evil bankers. I ended up taking far less than half of what they were going to offer me because I didn’t want to be house poor and if things went south with my job, I wanted to be able to afford to make cuts in my lifestyle to honor my commitment to pay the bills I owe. Would I like to live in a $450k home? Sure, and maybe one day I will… but I plan to save money, make sound investments, and work my way there. And it is a good thing I took this path because with the bubble burst, any plans for using my house as an investment tool went out the window. I’d be lucky to get out of it what I bought it for and I’ve made significant improvements since then.

          “It’s amazing to me that conservatives have concluded that government  helping citizens directly is a horrible thing, now that it’s inclusive, ”

          Okay, so you didn’t use the word racist to describe conservatives but you implied it when you said they were against government assistance now that it is inclusive. Since “inclusive” means that we are including a group of people that were formerly not included and that group in recent history is lower income minorities, then it is not unreasonable to extrapolate an assumption. How was I supposed to know you were going all the way back to WWII and claiming that conservatives are against helping veterans of that war (an argument, by the way, that I have never heard before)? I’m not one to throw bombs to inflame an argument and I was simply chiding you for the appearance of doing so. 

          • Brad Erthal

            Good for you for making smart housing decisions. So did my parents. You’ll get no argument from me that people didn’t do their homework. But these were people being told that for no money down, they could buy an asset that would perpetually increase in value at a faster rate than their interest payments. It’s not a simple matter of running the numbers. One also has to get the right numbers in the first place. We bailed out bankers for the same mistake, although in their case I’m not sure that I buy that they were ignorant of the bubble.  

            You have now continued your initial mistake, and added a second. I’m not claiming that conservatives are against helping WWII veterans. White people got government help through these programs after WWII, and black people didn’t. That includes black WWII veterans. My observation is that conservatives whose families have materially benefited from pro-white government redistribution of wealth are crying foul now that they aren’t the major beneficiaries. My conclusion is that this is due to a lack of historical perspective, not that its germ is in a racial view of politics. But if that’s the only conclusion that you think follows, I may not be able to argue conclusively that you’re wrong. 

            “How was i supposed to know you were going all the way back to WWII…?”

            Because I wrote about HUD policies post-WWII in the first post. You ignored it, and alleged that I was accusing conservatives of racism instead. And so what if I were? The time periods fit that, so you’d have to actually make a subtle argument, rather than just take umbrage. Your own distaste for an idea is simply not an argument. Fortunately, it wasn’t my allegation. 

  • Dan Ryan

    Adam Rollins is another proponent of the Big Lie.  The fact of the matter is the boom and bust was a world wide event.  Did the run up in prices have one set of reasons world wide and another set here?

    Similarly Clinton and Carter policies such as the Community Reinvestment Act of 1977 targeted poor neighborhoods.  The worst of the bubble took place in the suburbs.  Last time I was drove by the corner of Broad and St. Ann in New Orleans it looked the same as it always has.  There’s been no boom and bust, it’s always been busted.

    The third point is that as the housing boom grew, the percentage of Frannie and Freddie Mac Loans decreased.  The major damage was done by private unregulated underwriters.  These are the loans that were packaged and sold.

  • GPassmore

    Mr. Rawlins,
    The legislation may have built the gun, but the legislation didn’t pull the trigger.  Greed in the form of banking activities created the problem, pulling the trigger to continue the analogy.

    • Dar Win

      Maybe if the left was consistent in their thinking this example should fit right into their “gun control” policies.