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How the Federal Reserve Under Greenspan and Bernanke Caused the Housing Bubble and the Recession
Raymond Richman, 8/26/2012

Every administration from Jimmie Carter to GW Bush contributed to the housing bubble and the recession that followed its collapse. So did every Chairman of the Federal Reserve Board particularly Chairmen Greenspan and Bernanke. They were responsible for the housing bubble that caused the long-lasting recession when it burst. As we have noted on this site more than once, their support of the Community Reinvestment Act of 1977 was the principal cause of the housing bubble and the recession that followed when the bubble burst. Greenspan by his policy of low interest rates and both by their administration of the CRA. 

CRA examinations are conducted by the Fed, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. But the Fed is clearly the dominant administrator. The law does not require the banks to make high-risk loans and in fact recites that they should require banks to make loans in a safe and sound manner. As the number of subprime loans and the number of defaults and foreclosures clearly show, the supervisory institutions actually condoned making loans that violated customary good banking practices.

The CRA was based on a widely believed myth that banks were denying blacks mortgage loans because of their race. There was no evidence of that. It was a conclusion drawn from the fact that fewer mortgage loans were being made in poor neighborhoods where in fact there were a smaller percentage of qualified borrowers than in richer neighborhoods. The relaxed standards that followed for making loans resulted in a huge number of subprime mortgages and encouraged speculation in building houses that caused the housing bubble. When the bubble burst, it caused a world-wide financial crisis and ushered in the recession. An unintended consequence was that it made communist and other left-wing organizations like ACORN rich by enabling them to blackmail banks and force the banks to hire them as mortgage agents.

Had the banks resisted the policy forced on them to make mortgage loans to unqualified applicants, we would not have experienced the unemployment of millions of construction workers. So ACORN and other left-wing neighborhood NGOs caused immense harm to millions of workers they pretended to represent. The rate of unemployment of blacks is nearly double that of whites with half of the blacks in the labor force being unemployed. The unemployment rate for white men and women in July, 2012 was 7.4 percent, for blacks, nearly double 14.1 percent. (BLS) The percentage of blacks who lost their homes is likewise much greater than the percentage of whites, 6.8percent for whites compared to 14.2 perecent for blacks. (Center for Responsible Lending) 

Bernanke is reported as saying that in at least in some instances, "the CRA has served as a catalyst, inducing banks to enter underserved markets that they might otherwise have ignored". In a 2007 speech, Federal Reserve Chair Ben Bernanke is reported as saying that, "managers of financial institutions found that these loan portfolios, if properly underwritten and managed, could be profitable" and that the loans "usually did not involve disproportionately higher levels of default". He was really using a clouded crystal ball. In our opinion, he was simply naïve.

Why did the Fed accept the responsibility for administering the CRA whose purpose was to force banks to make bad loans in poor neighborhoods?  The list of Chairmen who accepted this responsibility included such reputable chairmen as Volcker, Greenspan, and Bernanke. They allowed the Fed, which under the law that created it was intended to stabilize the supply of money and credit, to administer a program which destabilized and bankrupted a large number of banks and which had to bail out nearly every bank with the $800 million TARP program and  additional hundreds of billions to bail out Fannie Mae and Freddie Mac, supposedly independent private corporations. They surely must have been aware that its administration of the CRA constituted a conflict of interest. Instead they expanded the system. Each of the twelve Federal Reserve banks established a Community Affairs Office to implement the CRA. They are charged with working “with banking institutions and the public in identifying credit needs within the community and ways to address those needs.” FIRREA, the Financial Institutions Reform and Recovery and Enforcement Act of 1989, created under Pres. GHW Bush, required an annual evaluation of each bank’s record in meeting the CRA’s objectives and the rating of the bank’s CRA performance level and for open public hearings. As we pointed outs in a previous blog, this enabled the radical neighborhood groups to blackmail the banks. Chairman Bernanke naively reported that “advocacy groups”, more accurately radical neighborhood groups, increasingly protested bank applications for mergers. He failed to recognize the banks’ actions as responses to blackmail.  

In 2007, on the 30th anniversary of the CRA, he urged Fannie Mae and Freddie Mac to securitize the banks’ CRA-related mortgages.  Further, he is quoted as stating that, "managers of financial institutions found that these loan portfolios, if properly underwritten and managed, could be profitable" and that the loans "usually did not involve disproportionately higher levels of default".  He never recanted even after the bubble burst.

To his shame, the CRA is still the law and the Fed is still administering the act.  With both major parties agreedon reducing the budget deficit, what is the excuse for maintaining this wasteful and  harmful bureaucracy. The Fed ought to have recused itself from managing the CRA right from the beginning. It would have saved us from the housing bubble and possibly from the recession.  

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Comment by Tom Brown, 8/28/2012:

Boy I feel so sorry for all those poor poor bankers, forced at the barrel of a gun to make millions of no-doc negative equity loans with 5% down. Greenspan and the feds (weird because Greenspan did everything he could to undermine any kind of regulation) and their jackbooted army of regulators forcing bankers to fraudulently inflate their balance sheets and gets 10s of millions in bonuses for committing fraud on a massive scale! Poor poor bankers! Then they were bailed out so they wouldn't lose their bonuses or jobs. And nobody ever prosecuted them for any of it. Read anything by ex-prosecutor William K. Black to swell your heart with sympathy for the abused multi-millionaire bankers.


Comment by Ray Edwards, 9/9/2012:

I owned a car dealership back when Clinton wanted everyone to have a home and forced or let this happen under his watch.He wanted poor folks to be able to qualify using only 50% of what it should have taken.  We saw a lot of deregulation and was almost forced to get into buy here pay here or be run over by our competion. Yes Clinton had us in glory days back then and I could tell right from the start that it was going to come down on us. When my daughte and her husband came to tell us that they just purchased a home. We asked where they got the money. Surprize, they didn't need any. They qualified under the new guide lines and they even got them a down payment loan. It  took me a lot of work to get them to see what happened to them. They know now.


Comment by Ray Edwards, 9/9/2012:

I owned a car dealership back when Clinton wanted everyone to have a home and forced or let this happen under his watch.He wanted poor folks to be able to qualify using only 50% of what it should have taken.  We saw a lot of deregulation and was almost forced to get into buy here pay here or be run over by our competion. Yes Clinton had us in glory days back then and I could tell right from the start that it was going to come down on us. When my daughte and her husband came to tell us that they just purchased a home. We asked where they got the money. Surprize, they didn't need any. They qualified under the new guide lines and they even got them a down payment loan. It  took me a lot of work to get them to see what happened to them. They know now.


Comment by Jeff Paetkau, 10/9/2012:

[Good-intentioned?] Liberals would have harmed, and will continue to harm, our economy (trade, housing, employment, etc.), one way or another.


Comment by Marc Herlands, JD, LL.M., 4/21/2014:

This is a very politically motivated piece of propaganda, very simple and simplified, that has nothing to do with the financial structures that were created and abused by Wall Street, pensions, trustsm European and Asian banksm , including the creation of super banks by the repeal of Glass-Steagall and the abdication of adequate supervision by all of the financial regualtory agencies including the FED, the Comptroller of the Currency, the FDIC, Fannie Mae and Freddie Mac and the states' banking regulators.  Furthermore, you blame the poor and powerless while exonnerating the rich and the powerful.  Rather silly analysis.  




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