Eventually, under Clinton, the CRA was renewed and, not surprisingly, made more punitive. Banks were required to make Subprime mortgage loans now too, or else suffer a low CRA rating and be punished accordingly. The Fed played it’s part. The Home Mortgage Disclosure rules created an unfunded mandate for banks to track and publicly disclose the race and gender of it’s mortgage clients. Now the shakedown artists had an easy source of complaints and a club with which to beat the banks into submission. The bankers complied and the Subprime mortgagage market was born.
But the bad paper remained principally on the balance sheets of the originating banks for a couple of years. The banks and their shareholders were directly hurt, but not the general public, at least in the beginning, that is until the bank regulators once again intervened and encouraged banks to push the paper out to unsuspecting investors.
Really was there ever any doubt that the whole thing was the fault of the government. Now they want to bail out the banking industry while at the same time taking even more power to regulate them and control our economy.
What happened is that the government started by showing concern that minorities were being denied mortgages even if their credit wasn’t up to standards. They forced banks to loan to them. Then they forced the banks to package the loans with good notes and sell them off on the open market. They did this by upping the reserve requirements for the shaky loans they were forced to make.
This is how the ‘toxic waste’ of bad debt was pumped out into the world. This is why credit markets are now having trouble clearing. This is why banks are taking massive write-downs of the loans which still exist on their books. This is why foreign investors don’t want to buy US mortgages, or bank stocks, and consequently don’t want to buy the dollars in which they are denominated either. If you add to this a Security and Exchange Commission ruling which compels banks to ‘mark to market’, which means they are forced to show large losses in times of market panic, you give a legal mandate for short-term thinking. You create a more serious crisis for the system and a fatal blow to the weaker banks.
This is what happens when you allow the government to regulate what they are too stupid to understand. Shame on Congress!