The mortgage crisis: who's to blame?

Lot's of second guessing going on with regard to the current credit crunch. Randall Parker has a roundup of recent pronouncements by Stephen Roach and other economists.

One of them quoted there in this NY Time article is Martin Eakes, the head of The Center for Responsible Lending, a non-profit group:

“The Federal Reserve could have stopped this problem dead in its tracks,” said Martin Eakes, chief executive of the center. “If the Fed had done its job, we would not have had the abusive lending and we would not have a foreclosure crisis in virtually every community across America.”

For contrary evidence, which I agree with, I cite Gary Becker:

The vast majority of economists, including me, were surprised by the extent of the subprime mortgage crisis. This needs to be recognized when evaluating the numerous proposals about how to prevent the next housing crisis, and also about how to help those who are in danger of having their homes foreclosed.

Many economists and members of Congress have claimed that the housing crisis was greatly magnified because unqualified home buyers with limited incomes and assets were not fully aware of the terms of their mortgage loans, such as that the low initial (teaser) interest rates were only temporary. This belief in the beneficial effects of greater knowledge about mortgage terms is inconsistent with the evidence that the most sophisticated banks and investment companies, including Merrill Lynch, Citibank, and Morgan Stanley, have written down their housing investments by billions of dollars. No one can reasonably claim that these banks lacked the skills and knowledge to evaluate all the terms of, or the likelihood of repayment, on the subprime and other mortgages that they originated or held as assets. The losses to investors have been so large, and have so eroded their capital base, that some of the major investment companies have needed large infusions of capital from Middle Eastern and Asian Sovereign Funds (see our discussion of these funds on December 10th).

In other words, some of the most astute investment banks and investors didn't see this coming, and have lost billions as a result. All the carping from heads of non-profits as well as politicians ignores this. They make an almost perfect example of hindsight bias.

What really takes the cake is the likes of these two, quoted in the NY Times piece:

John C. Gamboa and Robert L. Gnaizda of the Greenlining Institute implored Mr. Greenspan to use his bully pulpit and press for a voluntary code of conduct.

“He never gave us a good reason, but he didn’t want to do it,” Mr. Gnaizda said last week. “He just wasn’t interested.”

Oh, The Greenlining Institute, whose mission statement runs:

Mission Statement: The Greenlining Institute’s mission is to empower communities of color and other disadvantaged groups through multi-ethnic economic and leadership development, civil rights and anti-redlining activities.

Greenlining Definition: The business practice of investing energy, products and services in low-income, minority and disabled communities to increase profits and expand the economic pie.

Redlining: The discriminatory and unprofitable practice of avoiding or refusing investment in inner-city and minority neighborhoods and the overcharging of services and products to these communities.

The mission of the Greenlining Institute was to browbeat banks and the government into making risky loans to people that really shouldn't have had them. The fact that these same people are now attempting to place the blame elsewhere smacks of hubris, to say the least. They helped cause the problem in the first place.

Over the past five years or so, everyone, individuals and banks alike, was perfectly happy to benefit from the runup in housing prices. As usual for asset bubbles, a combination of greed and ignorance helped them along. That, and the government-sponsored entities, Fannie Mae and Freddie Mac.