From today's Triangle Business Journal: "White House Tells Banks to Start Lending".
Wait a minute… wasn't it government telling banks what to do the reason we got into this whole mess to begin with?
What's next, the White House telling banks that they must start lending to high-risk individuals and that the government will back them up?
Actually a formal study shows that it’s not about the low-income borrowers but rather about the mortgage products the banks sold them: http://www.ccc.unc.edu/documents/CFED_9_12_13_2008final.ppt
Bottom line: 1) the risky nature of the mortgage product promotes default and
foreclosure, not the risky borrower, and 2) people with risky mortgages are
uniquely vulnerable to economic instability.
Whether you’re right about the causal direction here, Andrew, (I’d gather you’re not – http://online.wsj.com/article/SB122298982558700341.html) you are not addressing Chris’s basic point, which is that the banks have the greatest incentives to decide when the best time to lend is — having the most to gain or lose. Government does not. Indeed, this whole notion that government has an exogenous god’s-eye view of the market is absurd. “Send in the regulators” assumes they have a privileged view of a chaotic system, which they do not. They are part of it, for better or worse. If you make it less chaotic, you lose all the benefits of said system (which far outweigh government hastened Black Swan events like we’ve just had.)
The question of whether regulators can play a productive role in the market is a distinct one, and it’s not one I sought to address in my comment above. I’m not as pessimistic about it as you are, but agree there are reasons to be skeptical. My comment went to the separate empirical claim in Chris’s post, which is that the crisis was precipitated by bad borrowers as opposed to the characteristics of the loan products they had taken out.
Professor Roberts’ article in the WSJ does not address this question because it considers all subprime loans as a single bunch. Dr. Ding’s study, by contrast, demonstrates that low-income borrowers with traditional mortgages did not experience a particularly high default rate; it was those with “baloon” and other nontraditional products who did. So considering the data instead of the ideology fails to support the claim that it was bad borrowers who caused the credit crisis.