While there were indeed silly obligations for organisations covered by the CRA, the sub-prime crisis was the initial trigger for an inevitable real-estate bubble collapse, which was itself trigger for an inevitable global asset bubble collapse.

A systemic failure on many fronts has brought about this global crisis:

* Legislation like CRA forcing banks to take on excessive risks.
* Easy money policies from the US Federal Reserve - i.e. Greenspan trying to fix the bursting dotcom bubble, but inadvertantly creating a raft of new ones.
* Lack of regulatory oversight leading to a shadow finance system larger than the real one it was built upon.
* Corporate bonus schemes that reward risky behaviour like short term share price pumping instead of stable long-term growth.
* Mispricing of risk by credit ratings agencies.
* A huge interconnected web of opaque credit default swaps that are based on the premise of taking out fire insurance on a house down the street while being able to flick metaphorical matches in its direction through short selling.
* Gross imbalances in global trade - i.e the Smith family going into debt on China’s dime. The average American now owes the average Chinese US$4,000. We Aussies are also guilty of living beyond our means.
* Computerised trading algorithms that have complicated global money flows to the point where no one really knows what the hell is going on anymore. The crash of ‘87 was thought to have been partly triggered by a cascading explosion of automatic computer trades.

There’s probably a few more that I’ve missed, but suffice to say, I wouldn’t disagree with some of the leaders around the world who have been calling for an overhaul of the global financial system, having lost faith in the current overseers. The G20 is probably the best place to work it out.

Greed did have much to do with this collapse in the form of loan repackaging as financial instruments and insurance selling on these financial ‘investments’.

But without doubt the Community Reinvestment Act was enforced more stringently under the Clinton administration to push banks into making mortgage loans to low-income people even if their credit didn’t check out.

The government threatened fines and other punishments for mortgage originators who didn’t preference “disadvantaged” borrowers. In conjunction, the government-sponsored entities Fannie Mae and Freddie Mac loosened their standards and became willing to buy virtually any mortgage, including the CRA-driven ones.

With federal pressure to make subprime loans, a willing buyer for all of the loans, artifically low interest rates, and hefty fees, the incentives were all aligned for private companies to make way too many loans to bad borrowers.

The government didn’t force this on mortgage companies, but they provided great incentives both as carrots and sticks .

Shouldn’t be surprising that the result was more of the actions that the government encouraged and less of the ones they constructed disincentives for.

Thus the Reserve, Clinton and Bush share the responsibility

2nd: Am I right to think global recovery depends alot on the US markets and consumption returning to ‘normal’? In which case that depends alot on the USA diplomacy replacing a big chunk of what Stiglitz (?) calls the $3 trillion bill in Iraq. That is substituting external military industrial expenditure with domestic budget/stimulus. That will take a while if at all.

3rd: Am I also right to think this is a “bad one … epochal” as per Stephen Long ABC World Today 27 Jan 09. Like a human body depression - doesn’t that tell us indeed we are living wrong? Personally I still quite like the view that the standard growth fetish political economy has hit the ecological wall in a variety of ways, and is a long way from synthesising this new reality.

I don’t exactly mean capacity to further grow but rather largish number of folks actually voluntarily withdrawing their social license to the growth fetish ideal.

So just like the web causes structurally less economic activity in some ways, also alot of smart people in the inner city of the west aren’t buying the boomer lifestyle as wise, and then there is climate policy saying wrong way go back etc. These all suggest to me a political economy splitting away from traditional material consumption patterns. In Australia 10% core vote Green these days. And if they live a reasonably green life then that’s got to be affecting the domestic economies.

Which is all a long way around of saying pump priming is good money after bad, in denial even. Better to allocate it to big green infrastructure job generators.

You can talk about Clinton, Bush affirmative action pushing poor folks into the home capital game of monopoly but there’s a weakness about that analysis common I suspect to well off folks. Namely where were the millions of poor folks to live? The human right to shelter. So you can say they were bad loan prospects but they still needed shelter. Then Shane Oliver on 7.30 last night said the USA had a mountain of empty houses looking for customers.

And then it’s not real political economic analysis to quarrantine this policy issue of shelter from other calls on the US federal budget … like the crushing pressure of the military industrial complex. So market solutions, even pseudo market solutions, would have been a very cute and appealing path of least resistance on shelter.

Then weave in the cannon fodder for the armed forces recruitment is from that same strata of society - the poor neighbourhoods. Well it’s a sort of quid pro quo of the right wing of politics and their allies in business, to the left wing poor folks to buy them off with shelter.

That’s what I call a real political economy analysis of sub prime. It may not be exactly right but my intuition it’s bigger than just securitisation of bad loans on a systemic basis. Could be but there have to be macro drivers beyond individual greed for everyone to suspend scepticism across swathes of society.

On the numbers alone there is simply no way the commonwealth can replace the amount of money taken out of circulation by tightening credit markets in addition to peoples desire to get in on the new craze sweeping the nation - saving. There is, therefore, no way that asset prices can be propped up, consumption prodded back to ‘normal’ levels or the assorted bubbles in shares, housing, commercial real-estate re-inflated. We should be demanding the government give it a rest, already and save its money for when it might be useful. It might be useful, for example, when 7% of the population need unemployment benefits, or can’t afford private schools, can’t maintain a car or return to the public hospital system in unexpected droves.

The Community Reinvestment Act legislation in America didn’t force mortgage companies to offer loans for no money down, or to throw underwriting standards out the window, or to encourage mortgage brokers to aggressively seek out new markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on packages of subprime debt.

The toxic debt was amassed due to predatory lending practices (largely by agencies outside the scope of the CRA legislation), and the reason these bad loans blew out of all proportion was because credit-rating agencies scrawled AAA ratings on the debt so they could sell them to suckers all over the world as prime investments. Suckers like Wingecarribee Shire Council, who too late realised they’d bought a grenade with the pin pulled out.

On top of the sub-prime fiasco, the big brains at the Wall Street investment banks had thrown all concept of risk out the window. Bear Stearns had a leverage ratio of 33 to 1, while Lehman Bros. borrowed hundreds of billions of dollars in short-term debt in the capital markets to buy tens of billions of dollars of commercial real estate at the top of the market. AIG dived into the credit default swaps business despite their inherent risk - Warren Buffet labelled them years ago as “financial weapons of mass destruction”.

The western financial system became a highly leveraged and unsustainable pyramid scheme due to wreckless short term bonus pumping by the honchos, and severe lack of oversight by regulators. If anything, this crisis has shown the risks posed by leaving our investments in the hands of wealthy white men.

Nick’s enthusiasm for nationalisation ignores the value of keeping up bank profits but also the great difference between our banking sector and almost every other country’s. What politicians and bureaucrats does he know who might run a banking industry better than competitive private business people with no security of tenure and much at stake? A spread of private errors with commercial punishment offers a much better prospect than a clod-hopping march to the kind of disaster that Iceland and some
Eastern European countries have arrived at in their banking sectors (without much help from tenured public sector functionaries as far as has been reported generally).