>Government shares a significant portion of the blame for this crisis.
Agreed, I think the sheer size of the crisis relates back to deliberate policies to support sub-prime lending. The idea was to help people to afford homes even though they would not normally be considered a good risk.
But opening this up created a vast new market, like adding a wider bottom tier to an already giant pyramid. Along with the vast size came even higher risk, since all these people would be more liable to default if the economy tanked.
Even still because we are accepting more sub-prime liability, it goes beyond poor people to others with better incomes but are buying into a more expensive neighborhood. Now people of all incomes are getting sub-prime loans, and this feed into rising housing prices.
This talking point has been debunked for years. It's a special favorite of Barry Ritholtz at 'The Big Picture' blog. He observes, empirically, that most sub-prime lending during the crisis was done by banks that weren't required to do so.
EDIT: To substantiate and cite, "Nearly $3 of every $4 in subprime loans made from 2004 through 2007 came from lenders who were exempt from the law (CRA)." [0]
This was a vast potential market and Fannie Mae proved you could get away with serving it, the sky didn't fall for a number of years.
So other banks jumped on board. Are you saying they would have taken on this risk if the federal government hadn't moved first? I think there is a clear cause and affect.
If they'd taken the same risks that Fannie and Freddie took, they'd have had similar results, and the market may well have gone on functioning as it had before. "Similarly, the total credit losses incurred by the GSEs are about one-fourth those incurred about by private label mortgage securitizations, which are packaged and sold by Wall Street." [0]
The private banks took greater risks and wound up with worse performance.
You, along with very many other people, are assuming the banks were convinced by the government to do something they didn't want to do. You mustn't forget that giving loans to people you know won't be able to pay them back, and lying about their ability to do so, is an absolutely classic form of fraud. Bankers lie their asses off, make big bucks in bonuses, and their banks in the long run are fucked, or not (perhaps the taxpayer will bear the burden). The disgustingly simple explanation is that bonus money doesn't get clawed back. If these poor little bankers were getting bullied by the government into doing something against their interests, why the hell did they lie their asses off about their borrowers' financial prospects. Why wouldn't they say, 'sorry guv, you gotta look at these numbers, the black and brown folk coming to us for house loans simply aren't viable'
It was Fannie Mae, the large semi-government housing lender, that was strong-armed into supporting sub-prime lending in a big way. Again for good reasons. This normalized sub-prime lending for others.
Not everything has an evil agenda behind it. Sometimes the reasons are fairly ordinary and boring.
In saying that the government shares the blame you overlook the fact that it was a cabal across both banks and government, separated only by a revolving door, that both created then coordinated the response to the crisis. Allocation of blame in this scenario is difficult.
Agreed, I think the sheer size of the crisis relates back to deliberate policies to support sub-prime lending. The idea was to help people to afford homes even though they would not normally be considered a good risk.
But opening this up created a vast new market, like adding a wider bottom tier to an already giant pyramid. Along with the vast size came even higher risk, since all these people would be more liable to default if the economy tanked.
Even still because we are accepting more sub-prime liability, it goes beyond poor people to others with better incomes but are buying into a more expensive neighborhood. Now people of all incomes are getting sub-prime loans, and this feed into rising housing prices.