Simon Johnson: The Poor Did Not Cause the Crisis
I've made this point again and again, the poor did not cause the crisis. But since the myth that government support of housing for the poor caused the crisis validates the preconceptions of those who believe government is the problem -- the government's use of their hard-earned money to support the 'unworthy' poor in particular -- it's a falsehood that just won't go away:
Did the Poor Cause the Crisis?, by Simon Johnson, Commentary, Project Syndicate: The United States continues to be riven by heated debate about the causes of the 2007-2009 financial crisis. Is government to blame for what went wrong, and, if so, in what sense?
In December, the Republican minority on the Financial Crisis Inquiry Commission (FCIC), weighed in with a preemptive dissenting narrative. According to this group, misguided government policies, aimed at increasing homeownership among relatively poor people, pushed too many into taking out subprime mortgages that they could not afford.
This narrative has the potential to gain a great deal of support, particularly in the Republican-controlled House of Representatives and in the run-up to the 2012 presidential election. But ... do they have any evidence to back up their assertions? Are poor people in the US responsible for causing the most severe global crisis in more than a generation?
Not according to Daron Acemoglu of MIT...
The FCIC Republicans are right to place the government at the center of what went wrong. But this was not a case of over-regulating and over-reaching. On the contrary, 30 years of financial deregulation, made possible by capturing the hearts and minds of regulators, and of politicians on both sides of the aisle, gave a narrow private-sector elite – mostly on Wall Street – almost all the upside of the housing boom.
The downside was shoved onto the rest of society, particularly the relatively uneducated and underpaid, who now have lost their houses, their jobs, their hopes for their children, or all of the above. These people did not cause the crisis. But they are paying for it.
The reasoning is explained in more detail in the article (and for more debunking, see here or the links here).
Posted by Mark Thoma on Wednesday, January 19, 2011 at 11:01 AM in Economics, Financial System |
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