The Thirty Year Itch

Things said by Charles Krauthammer are generally not true, and today’s edition in which he once again busts out the old “blame the CRA” theory of the financial crisis is no truer:

For decades, starting with Jimmy Carter’s Community Reinvestment Act of 1977, there has been bipartisan agreement to use government power to expand homeownership to people who had been shut out for economic reasons or, sometimes, because of racial and ethnic discrimination. What could be a more worthy cause? But it led to tremendous pressure on Fannie Mae and Freddie Mac — which in turn pressured banks and other lenders — to extend mortgages to people who were borrowing over their heads. That’s called subprime lending. It lies at the root of our current calamity.

See Robert Gordon for a thorough debunking in great detail. But just think about the chronology — the Community Reinvestment Act passed in 1977. By contrast, the current problem didn’t exist ten years ago at all. Or to remove considerations of partisanship, it didn’t exist twenty years ago either. That’s because it wasn’t caused by policy shifts undertaken in the late 1970s. This is, I would think, completely obvious.

Meanwhile, even if you believe that Jimmy Carter’s Time Machine suddenly forced bad loans into existence in 2006, did Carter really force financial services firms to make highly leveraged bets on complicated derivatives of mortgage-backed securities? Really?