Submitted by Ben White (not verified) on January 6, 2009 - 10:13pm.
The fact that the crisis occurred five or six years later illustrates the opposite of the point you make. The subprime crisis didn't happen as a result of bad loans that were originated in 2006. They came as a result of cumulative bad loans originated years before, that had pushed the aggregate prices higher and since the price rise was unsustainable, the underlying assets of the loans (the property) was devalued to a more sustainable level based on sustainable demand. This is what caused the subprime crisis: derivative implosion. One thing that led to this implosion was an unsustainable buying frenzy. One thing that led to this buying frenzy was easy money policy at the Fed, and another thing that led to it was easy qualification made possible by the combination of the CRA and the implicit gov't guarantee of Fannie/Freddie.
It takes a few years to correct a market distorted by poorly conceived legislation. Just look at the rise in home prices before 77 and after 77. If you create more demand (i.e. expanding the market to buyers who were previously unable to buy because of bad credit/low income/etc.), you see less supply. If there is less supply, people step in to increase that supply to meet the demand(i.e. building/flipping houses). This will eventually equalize, as is obvious to anyone who has the most basic understanding of economics. If, however, that increased demand is unsustainable because it is coming from people who cannot pay (it was) then as soon as they start defaulting, the market will implode.
To say the CRA caused the subprime crisis is only incorrect because there were other factors. To say the the CRA was bad legislation that helped us down the path we were on is totally correct. Subsidized/affordable housing legislation of any kind increases demand and pushes prices up, which makes it even harder to purchase for people who were having a hard time already. This kind of legislation is intervening and meddlesome, and is enacted by people who just don't get it.
The fact that the crisis
The fact that the crisis occurred five or six years later illustrates the opposite of the point you make. The subprime crisis didn't happen as a result of bad loans that were originated in 2006. They came as a result of cumulative bad loans originated years before, that had pushed the aggregate prices higher and since the price rise was unsustainable, the underlying assets of the loans (the property) was devalued to a more sustainable level based on sustainable demand. This is what caused the subprime crisis: derivative implosion. One thing that led to this implosion was an unsustainable buying frenzy. One thing that led to this buying frenzy was easy money policy at the Fed, and another thing that led to it was easy qualification made possible by the combination of the CRA and the implicit gov't guarantee of Fannie/Freddie.
It takes a few years to correct a market distorted by poorly conceived legislation. Just look at the rise in home prices before 77 and after 77. If you create more demand (i.e. expanding the market to buyers who were previously unable to buy because of bad credit/low income/etc.), you see less supply. If there is less supply, people step in to increase that supply to meet the demand(i.e. building/flipping houses). This will eventually equalize, as is obvious to anyone who has the most basic understanding of economics. If, however, that increased demand is unsustainable because it is coming from people who cannot pay (it was) then as soon as they start defaulting, the market will implode.
To say the CRA caused the subprime crisis is only incorrect because there were other factors. To say the the CRA was bad legislation that helped us down the path we were on is totally correct. Subsidized/affordable housing legislation of any kind increases demand and pushes prices up, which makes it even harder to purchase for people who were having a hard time already. This kind of legislation is intervening and meddlesome, and is enacted by people who just don't get it.