"The First Thing We Do, Let's Kill All the Economists Part II"

I finally read this article. What Krugman and many analysts fail to address is why in the world would banks and mortgage companies make these risky loans? They oft repeated statement is "greed"? This makes absolutly no sense whatever. Why would these companies take such a risk in the name of "greed". Going out of business is never a good strategy. Enter the "robust public response". When it defies logic, there is usually an outside force at work. When it really causes pain and suffering and really defies logic it's probably the government. So here is what really happened (not comprehensive as this is a blog post, but you'll get the idea):

• In 1977 The "Community Reinvesment Act" (CRA) becomes law. CRA initially for many years was a non factor. Interest rates were so high that this dandy piece of legislation had little or no impact and it evolved over the years. The legislation was based on the premise that Home Ownership is a good thing and basically lowered mortgage standards. It was not until the early nineties that regulators started to hold banks accountable to this legislation in serious ways thanks to George H.W. Bush and the Financial Institutions Reform, Recovery and Enforcement Act. Interest rates were still high enough that this did not create huge problems.....yet. In 1994 The Reigle Neil Interstate Banking Branching Efficiency Act opened the door for interstate banking. CRA ratings are one of the criteria used as to allow mergers and acquisitions. The Fed refused to allow a Hartford, CT bank to acquire a New Hampsire Bank based on this critera. This certainly sent a signal that CRA compliance was serious business.
• As the years went by, The Fed kept reducing rates. Refinanacing became more attractive, consumers traded high interest credit for low interest home loans. Speculators also became aware that with the lax leanding standards created by CRA, they could buy bigger homes with low or no money down.  It should be noted that the CRA did not specifically require lower down payments, but it was understood by the banks as to exactly what type of loans would increase their compliance and approval of regulators. If a bank wanted to grow or remain favorable with their governors, they had to make these loans.
• In 1998 Fed Governor Laurance H. Meyer, the banks primary regulator, at a conference praised financial institutions making 100% loan to value loans specifically targeted to low and moderate income earners.
• November of 2000 HUD Secretery Andrew Cuomo announces Fannie and Freddy are committed to purchasing $2 trillion in "affordable housing" mortgages (refresh my memory, doesn't the govenment have something to do with Fannie & Freddy?). This greatly increased the willingnes of financial institutions to make these loans.
• In 2005 under Bush, new rules loosened CRA supervision of banks with under $1billion in assets and increased CRA supervision of banks with over $1billion in assets. Larger banks were allowed to voluntarily reduce regulator scrutiny on investment and services. This put MORE emphasis on making these toxic CRA loans. With interest rates near zero at this time, demand skyrockets, housing values skyrocket. Home ownership increases from 64% to 69%. Politicians are sooooo happy.

We all know what happend next. Politicians are still happy since the majority of people will believe their lies that this is what happens when markets are unregulated. In reality our activist government has had their slimy hands in this one from the start. The same people who caused the pain and problems will grab more power. In an effort to "fix" the problems they will certainly create more (they already are). If this is a "robust public response" I have some places that you can stick your Keynesian Economics.