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Part 2 on Occupy Wall Street’s Targets

Another crucial part of Rajan’s hypothesis about inequality and the financial crisis is the GSEs (government sponsored enterprises like Fannie Mae and Freddie Mack) were driving some of the lower lending standards. In turn, lenders at banks lowered their standards. What followed was the financial crisis. He is not the only one to make this suggestion. It comes up pretty frequently from conservative talk show hosts (Neil Boortz), columnists (George Will), and elected officials (Darrell Issa, Mitch McConnell). One of the contributors to the Freakonomics blog said Occupy Wall Street should blame the GOP.

Prof. Acemoglu points out that over the past few decades, GSEs have been marginalized. The chronology is also a problem. GSEs were offering subprime loans later in the game than other financial institutions.

A recent paper explores the question and concludes these ideas are not well supported.

The Subprime Crisis: Is Government Housing Policy to Blame?, by Robert B. Avery and Kenneth P. Brevoort, Working paper, FRB: Abstract: A growing literature suggests that housing policy, embodied by the Community Reinvestment Act (CRA) and the affordable housing goals of the government sponsored enterprises, may have caused the subprime crisis. The conclusions drawn in this literature, for the most part, have been based on associations between aggregated national trends. In this paper we examine more directly whether these programs were associated with worse outcomes in the mortgage market, including delinquency rates and measures of loan quality. We rely on two empirical approaches. In the first approach, which focuses on the CRA, we conjecture that historical legacies create significant variations in the lenders that serve otherwise comparable neighborhoods. Because not all lenders are subject to the CRA, this creates a quasi-natural experiment of the CRA’s effect. We test this conjecture by examining whether neighborhoods that have been disproportionally served by CRA-covered institutions historically experienced worse outcomes. The second approach takes advantage of the fact that both the CRA and GSE goals rely on clearly defined geographic areas to determine which loans are favored by the regulations. Using a regression discontinuity approach, our tests compare the marginal areas just above and below the thresholds that define eligibility, where any effect of the CRA or GSE goals should be clearest. We find little evidence that either the CRA or the GSE goals played a significant role in the subprime crisis. Our lender tests indicate that areas disproportionately served by lenders covered by the CRA experienced lower delinquency rates and less risky lending. Similarly, the threshold tests show no evidence that either program had a significantly negative effect on outcomes.


About 20smtg

Early 20s--Working for a few years after college, including part-time freelance writing. Hope to go back to school at some point, and become a scholar.


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