With another financial crisis fast approaching the cause of the ‘08 crash hasn’t been settled. Austrians generally line up on the side of the all-powerful Fed having lowering interest rates below what the market would produce, sending capital into malinvestments: In this case, too many subdivisions of houses and other real estate. When the Fed hit the brakes in ‘06, raising its fed funds rate, housing peaked and the party was brought to an abrupt and painful end as the value of mortgage backed securities melted down.
I’ve given this talk plenty of times, most recently for The Nassau Institute in the Bahamas.
There is another part of the story touted by Austrians such as Tom Woods and Tom DiLorenzo that government required banks to provide mortgages to those who couldn’t afford them through the force of the Community Reinvestment Act (CRA). Predictably, these borrowers couldn’t or wouldn’t pay and their mortgages turned into toxic paper that led to Wall Street’s almost demise.
Because of my experience in the non-bailed-out part of the banking sector, I’ve always doubted the CRA-did-it thesis. CRA seemed easy for the little bank I worked for as we made a number of development and construction loans for entry-level housing and even received credit for a loan made on a building where X-rated movies and sex toys were sold. These loans were made for economic reasons with no thought to CRA.
But Peter Wallison’s book Hidden In Plain Sight has changed my mind. Wallison is no tin foil hat wearer, being the Arthur F. Burns Fellow at the American Enterprise Institute and serving as a member of the 2010 Financial Crisis Inquiry Commission (FCIC).
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