tag:blogger.com,1999:blog-7905515.post8677869559956915218..comments2024-03-14T11:09:32.759-05:00Comments on Falkenblog: Big Government's Big EffectsEric Falkensteinhttp://www.blogger.com/profile/07243687157322033496noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-7905515.post-76837969771434431702009-01-26T18:15:00.000-06:002009-01-26T18:15:00.000-06:00I've finally figured out the main mechanism by whi...I've finally figured out the main mechanism by which the Community Reinvestment Act worsened the mortgage meltdown.<BR/><BR/>Say there are two banks, Imprudent Inc. and PrudentCorp, interested in buying Third Bank. Imprudent's big strategy is to pour hundreds of billions into subprime pay option mortgages in minority neighborhoods. Prudent's big strategy is to not do that. ACORN and the federal government team up to give the two bidders for the third bank the hint that to get approval to buy Third Bank, they'll need to commit $375 billion in lending to low income and minority borrowers. <BR/><BR/>Imprudent Inc. replies, "Well, $375 billion is a bit of a stretch, but we were already planning to loan them almost that much, so we'll do it!" <BR/><BR/>PrudentCorp replies to the feds/ACORN, "Are you crazy? The FDIC would probably have to bail us out. If that's the condition, Imprudent Inc. can have Third Bank."<BR/><BR/>Repeat again and again, and the CRA's favoritism in acquisitions toward imprudent banks meant that imprudent bankers -- specifically, imprudent bankers eager to lend to low income and minority borrowers with dubious credit -- completed more acquisitions and thus artificially grabbed a larger share of the market.Steve Sailerhttps://www.blogger.com/profile/11920109042402850214noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-28328370257602067112009-01-25T21:06:00.000-06:002009-01-25T21:06:00.000-06:00Eric, You're interpreting their PR spin the wrong ...Eric, You're interpreting their PR spin the wrong way; their goal was not to promote home ownership. What they were really saying was: "We believe we can make more money serving the niche market of people with bad or undocumented credit. Sure, they will default more. But we're we're charging a higher interest rate, will package the loans and pass them on to other people, and for the amount we keep on our books we have priced that risk in."Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-87464622187606867412009-01-25T19:25:00.000-06:002009-01-25T19:25:00.000-06:00here we go again with the minorities issue, whatch...here we go again with the minorities issue, whatchamacallit? the narrative fallacy? there was no exact cause for the bust. it would have happened anyway. if anything, there was a confluence of events, most of them independent of what was going on within the US borders.<BR/><BR/>i agree subsidizing loans was a bad idea but on the basis of sound economics, what we discussed a few posts prior, not as a fuse to the bust. i'll say it again, look outside. there are markets that would make US look dull. i can argue the EU extension in 2004 makes for a better tipping point than your $400bln in loans in the US. it's a small place now. people talk. they get bloomberg in papua guinea now i bet.<BR/><BR/>and falken, let the commoners get some of the pie too. if that means $2T in bad loans and dole, so be it. all non-tradables shot up not just housing. look at healthcare, education etc. just overflow valves since the capital got all the trade gains.<BR/><BR/>now we know. at the next trade event of this scale, when we make contact with the aliens, load up on mansions.Anonymousnoreply@blogger.com