Morning Must-Read: David Fiderer: A Review of Fragile By Design
…The narrative… is highly selective and misleading. Worse, the section that covers U.S. banking over the past 25 years is a set of distortions and falsehoods…. Calomiris… and… Haber[‘s] familiar narrative [is] identified as ‘The Big Lie’ by Joe Nocera, Barry Ritholtz…. Calomiris and Haber embrace The Big Lie, and double down by tracing everything to Bill Clinton’s grand strategy of income redistribution as a response to economic inequality or as a sop to community activists at ACORN…. The lack of response to the critics of The Big Lie…. There is zero evidence that the loans described by Calomiris and Haber ever existed. From 2001 through 2006, GSE originations that had loan-to-value (LTV) ratios of 95 percent or higher and FICO scores of 639 or lower represented between 1 and 2 percent of total originations. According to GSE credit guidelines, those borrowers had characteristics that disallowed any kind of reduced documentation, much less no documentation or employment…. The amount of low-down-payment loans available in the marketplace was never decided by the GSEs. It was decided by private mortgage insurers, which were not regulated by the federal government…. Moreover, the financial meltdown of September 2008 was not triggered by bank failures; it was triggered by the failures of non-banks and by the unforeseen consequences of derivatives. The government had a clear legal path and precedent for dealing with bank failures like Wachovia, Washington Mutual, and IndyMac. But it had no clear path and no precedent for dealing with the imminent collapse of Lehman Brothers and AIG…”
I must confess that I have not yet read Fragile by Design by the always-thoughtful Steve Haber and the very sharp Charlie Calamiris, but I have never understood how this line of argument is supposed to work:
The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations…
Granted that that last part, “consistent with safe and sound operations”, has a tendency to become a dead letter under regulatory pressures, and that the depository institutions covered by the CRA come under pressure to make risky loans that they really should not. But that does not create risks of systemic distress or financial crisis. The depository institutions are insured by the FDIC, after all. You can complain that the CRA gets taxpayers onto the hook as insurers of loans that should not have been made. You cannot complain that the CRA forces overleveraged and undercapitalized systemically-important financial institutions to hold the lousy mortgages of low-income moochers–yet that, by all accounts, is what Haber and Calomiris’s argument is.
I don’t understand it. It just doesn’t seem to add up, arithmetically…