It Wasn't Fannie, Freddie, or the CRA

I've written the CRA and Fannie/Freddie rebuttals so many times over the last few years, e.g. see here and here, and it just came up here, that it seems repetitive to take it up yet again. But it doesn't seem to want to go away, so one more time, with gusto:

The Sarah Palinization of the financial crisis, by Edmund L. Andrews: Of all the canards that have been offered about the financial crisis, few are more repellant than the claim that the “real cause’’ of the mortgage meltdown was blacks and Hispanics.

Oh, excuse me -- did I just accuse someone of racism? Sorry. Proponents of the above actually blame the crisis on “government policy’’ to boost home-ownership among low-income families, who just happened to be disproportionately non-white and immigrant. Specifically, the Community Reinvestment Act “forced’’ banks to make bad loans to irresponsible borrowers, while Fannie Mae and Freddie Mac provided the financial torque by purchasing billions worth of subprime paper.

The argument has been discredited time and again, shriveling up almost as soon as it’s exposed to sunlight. But it keeps coming back, mainly because the anti-government narrative gives Republicans a way to deflect allegations that de-regulation allowed Wall Street to run wild. It’s the financial version of Sarah Palin’s new line that “extreme environmentalists” caused the BP oil spill. ...

But far more outrageous is this working paper, which Bruce Bartlett brought to my attention, published last month by no less an authority than the World Bank. What galls me ... is that the World Bank would cloak a piece of political drivel with fixings of a serious economic analysis. Written by David G. Tarr,... the paper says Wall Street and the banks were led by the government like lambs to the slaughter. ...

But none of the devil-made-me-do-it arguments is new, and none of them is true. The Federal Reserve analyzed the Community Reinvestment Act in 2008, and emphatically concluded that it had nothing to do with the explosion of hallucinogenic mortgage lending. ...

What makes this smear so repellent is that it blames poor people – mostly minorities – for bringing on the crisis. But what makes it so maddening is that it’s so demonstrably false. We have reams of evidence that banks and mortgage lenders actively targeted blacks, Hispanics and other immigrant groups for reckless loans. The lenders weren’t forced. They were making a fortune.

An almost equally unforgivable lie is that Fannie and Freddie caused the subprime meltdown. ... Fannie and Freddie weren’t driving the market. They were scrambling to keep up with private mortgage securitizers.

As Krugman shows, Fannie and Freddie were largely sidelined during the heyday of the subprime market, partly because they were doing penance for their prior accounting scandals. Fannie and Freddie’s market share in securitizations slumped from 2004 until 2007. By contrast, the market share of private issuers soared. ... Fannie and Freddie ... pushing their private sector rivals to roll the dice. They were late to the craps table and desperately trying to make up for lost time.