Three weeks ago the St Louis Fed published a research paper. That´s how it went:
Question (Title): Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?
Short answer (abstract):
No. In this paper we use a regression discontinuity approach to investigate whether affordable housing policies influenced origination or affected prices of subprime mortgages. We use merged loan-level data on non-prime securitized mortgages with individual and neighborhood-level data for California and Florida. We find no evidence that lenders increased subprime originations or altered pricing around the discrete eligibility cutoffs for the Government Sponsored Enterprises (GSEs) affordable housing goals or the Community Reinvestment Act. Our results indicate that the extensive purchases of risky private-label mortgage-backed securities by the GSEs were not due to affordable housing mandates.
Today John Carney came out “blazing”:
Ever since the subprime mortgage market began to implode, people have been trying to exonerate the government policies that contributed to the mess.
In some sense, the attempt is just absurd. It just is not plausible to claim that decades of government intervention in the housing market—especially the campaign to expand mortgage lending and home ownership that began in earnest in the mid-1990s—had nothing to do with the housing boom and bust.
But the attempts just keep coming…
And ends with a great twist:
… In short, in order to make enough affordable housing policy loans to ward off regulators, banks had to lower their standards on all loans.
The Fed study assumes this fact out of existence. It simply asserts—without any argument or evidence—that if mortgages were being made because of policy or if lending standards were being changed to make policy-friendly mortgages, the effects would be confined to the small subset of mortgages that actually qualified.
Imagine a bar that wants to attract pretty women to drink at its bar. It declares that Thursday nights will be “ladies night” with half-priced drinks for women. But ladies night attracts not just pretty women—it attracts women of all sorts. If you ran a regression discontinuity analysis on the prices paid by women, you’d conclude that the attempt to attract pretty women had nothing to do with the price of drinks. The dataset would show you that all the women drank at the same price.
That’s exactly what the fellas from the St. Louis Fed have done here.
As soon as a macroeconomic problem surfaces, my “default suspect” is the government. Only then will I check to see if other groups were involved. That´s why, back in 2008 I wrote this piece for Economonitor with the title (alluding to Rebecca de Mornay´s flick): “The hand that rocks the craddle”:
In the old English crime novels, the butler was always the prime suspect. In the present crisis, the “butler” is deregulation, assisted by other sleazy characters such as “cheap money”, “Asian savings”, “excessive liberalism and laissez-faire” and, according to presidential candidate John McCain, “wild greed” manifested in rampant speculative activities that created the house price bubble.
How blame is allocated is an important task because it will determine the characteristics of the long term “solutions”. The list of suspects aligned above is comprised of “vague” and “intangible” characters (although many have tried to go behind “cheap money” to point the finger at Greenspan), and so cannot provide a solid foundation for the design of good rules and institutions to improve the system.
So yes, once again the government led the band!