Digging for causes

Ezra Klein has this piece on “Clinton and the housing boom“::

 “This got me wondering what exactly happened around 1995 to cause that jump,” Dylan wrote to me. “Correlation isn’t causation, but I dug up this document, the National Homeownership Strategy, which HUD Secretary Henry Cisneros and Bill Clinton announced in 1995. The strategy involved lowering standards for homeownership: reducing years of income first-time buyers needed to demonstrate, letting them tap retirement savings, letting mortgage sellers to use their own appraisers, etc. Here are a couple of articles interrogating its role in the subprime crisis. So here’s the graph again, with the National Homeownership Strategy added.”

Clinton and housing boom

Interesting because I thought this was ‘common knowledge’. I myself had written on it almost five years ago and it´s included in the first part of Chapter 6 in my book with Benjamin Cole.

The best summary was given by Russell Roberts of GMU in an October 2008 WSJ op-ed aptly entitled: “How Government Stoked the Mania”.

The relevant point:

The Community Reinvestment Act (CRA) did the same thing with traditional banks. It encouraged banks to serve two masters — their bottom line and the so-called common good. First passed in 1977, the CRA was “strengthened” in 1995, causing an increase of 80% in the number of bank loans going to low- and moderate-income families.

It was certainly not due to Greenspan´s notoriously famous “rates too low for too long” seven years later! Not to leave any doubts, my view is that monetary policy in 2001-03 was ‘too tight‘.

4 thoughts on “Digging for causes

  1. Excellent blogging, and I all say again that arcs Nunes is not only the best analyst of UDA economics, but the best USA economics historian—and Nunes lives in Brazil. Oh well, so what? Brazil has better women, movies, dancers, carnivals and economists. We still have the better economy—for now.

  2. Marcus, Benjamin and Bonnie,

    The problem here is when the WSJ editorial board, Wall St. lobbyists, etc. highlight Fannie and Freddie as the only moral hazard problems and don’t argue the need for reining in FDIC, the mortgage interest deduction, etc.

    See what Scott Sumner had to say about Fannie and Freddie here: http://www.themoneyillusion.com/?p=19333

    Sumner’s bottom line: it’s politically impossible to remove substantial moral hazard from the financial sector. Therefore, we should try the more politically-realistic approach of emulating Canada’s approach to financial sector regulation.

    Sumner and I are not enthusiastic fans of making our financial system look like Canada’s. However, we recognize that if we did that, it would be a substantial improvement over the status quo.

    Think practical, here, people! Channel Milton.

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