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All Da King's Men

Did Deregulation Cause the Subprime Crisis ?

By Da King Published: March 24, 2008

housing

The short answer is...yes, it did. It made the mortgage banking industry much more speculative than it was under the former Depression-era banking regulations. The Depression-era banking regulations were designed to, not surprisingly, protect against severe economic recessions and depressions (like maybe what we are moving into now ?)

Deregulation also resulted in record levels of home ownership for lower and moderate income persons, so the news hasn't always been bad. There are two sides to that coin, and the fact is, to a large extent the government pushed the banking industry into what it has become.

While watching Chris Wallace's sunday morning show last week, I heard Senator Chuck Schumer (D-NY) talking about the economy, which he referred to as the "Bush-McCain economy". Good old Chucky, ever the partisan. Schumer, an Obama supporter, must not have received the message that Obama is beyond partisanship and into unity.

But regarding financial deregulation, is Schumer correct ? Is this the "Bush-McCain economy" ??? It's certainly not McCain's, at least not any more than it's Schumer's. And for the most part, it's only Bush's in the sense that Bush didn't reverse deregulation, which has been going on for 30 years. In fact, Deregulation was a done deal by the time Bush took office. The last vestige of the Depression-era banking regulations was thrown off in 1999, when Bill Clinton signed the Gramm-Leach-Bliley Act into law, which repealed the Glass-Steagall Act of 1933. Repeal of Glass-Steagall allowed commercial & investment banks to consolidate, a move that contributed to the 2007 subprime mortgage crisis. The effects of these regulation changes aren't felt the next day, they are felt years later.

Banking deregulation really started with the 1977 Community Reinvestment Act (CRA) during the Carter era. The CRA was designed to meet the credit needs of low and moderate income neighborhoods. It required banks to offer credit throughout their entire marketing area, rather than only in the wealthier areas (a practice known as 'redlining'). The bankers were almost unanimously opposed, but the measure was put through to increase home ownership and loans to small business. In 1995, Clinton updated the CRA, and the revisions were credited with helping to substantially increase the amount of loans to small businesses and to low to moderate income home loan borrowers. A large part of the increase in home loans was due to secondary mortgage market loans. The revisions also allowed the "securitization" of CRA loans containing subprime mortgages. Public securitization of CRA loans started in 1997. These are the roots of the subprime mortgage situation. So if you ever hear Hillary on the campaign trail blaming it all on Bush (and you surely will), know that she is not being honest with you.

Deregulation resulted in the huge increases in home ownership that we have today, by allowing low and moderate income people to purchase their own homes. This has been a great boon to lower income people for the most part. It also in turn drove up the price of housing (supply and demand). Bankers became more and more creative with these mortgages due to the government mandates, and they also became, as I said before, more and more speculative, and far less conservative than they were under the Depression-era regulations. Now, pols like Chuck Schumer are looking to pass the buck when the dark side of deregulation rears it's head (and there definitely is a dark side. The subprime crisis isn't the first time. Maybe you're old enough to remember the S&L crisis of the 80's that followed Reagan era deregulation manuevers). Guys like Schumer think the public is too stupid to figure out the truth, and the truth is, deregulation is not all bad. Neither is it all good, and both political parties have been involved in it.

But since politicians are politicians, some Democrats will just blame it all on Bush, knowing they are lying the entire time, especially the ones like Chuck Schumer who have been around for a long time. Bush has a lot to answer for, economically speaking, but deregulation isn't really on him. I suppose you can blame Bush for not reregulating the deregulated financial industry, he IS the president after all and he could have tried to do that, but I wonder what guys like Chuck Schumer would be saying when home ownership opportunities for lower and moderate income people dried up following such a move. Never mind, I already know the answer.

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