keep the credit flowing. Besides, there’s a really long list of elected officials, from both political parties, directly responsible for terrible policies that contributed to the crisis. Why not, for example, pick on Bill Clinton? Not only did he reappoint Greenspan, but Clinton’s National Partners in Homeownership program set an explicit goal of raising the U.S. homeownership rate from 64 percent to 70 percent by 2000. It was specifically designed to work with Fannie Mae’s Trillion Dollar Commitment, a program that earmarked $1 trillion for affordable housing between 1994 and 2000.
Clinton openly relied more heavily on the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac to securitize more home mortgages. In other words, he pushed more people into debt. Aside from the details, a big problem was that the U.S. homeownership rate had been stable at about 64 percent from 1968 (the year Fannie completed its transformation to a GSE) all the way till 1994. You don’t need a Ph.D. in economics to guess – correctly – that something was bound to go wrong: the government tried to boost the rate to some arbitrarily high number above where the market had stabilized by inducing more people to take out mortgages. It would have been nice if the movie had provided more of this context, especially given how colorfully it described the flood of low-quality mortgages. In one of my favorite scenes, actress Margot Robbie, in a bubble bath, explained MBS, short selling, and subprime loans. And she did it all in just a couple of minutes. The script gets right to the cusp of the problem: there are only so many homes and people with good enough jobs to buy them. And that’s why it was a terrible idea to force that stable rate up in the first place. But according to Robbie, the banks simply started filling the MBS with riskier and riskier mortgages to keep their profit machine churning. They just got greedy and lied about the quality of the mortgages they were selling. I’m sure they did want to keep making money, but we can’t let government policies off the hook here. Those policies had every bit as much to do with creating the excessive credit that inflated home prices. And it goes well beyond Clinton and Fannie Mae. If I were writing a book, I could go all the way back to before the Great Depression to start talking about terrible federal policies. But I’m not writing a book, so I’ll fast forward to the 1980s and give a tiny list of policies that increased risk taking in financial markets.
- In 1988, banking regulators imposed the Basel capital requirements on all banks. These rules gave banks an incentive (via a preferential capital charge) to hold GSE-issued MBS instead of actual mortgages.
- In 1991, the Federal Deposit Insurance Corporation Improvement Act allowed the Federal Reserve to make emergency loans to investment banks. (Previously, these loans were only available to commercial banks.)
- In 1998, regulators changed the Basel capital rules via the market risk amendment. This change effectively expanded the risk categories large banks used to estimate their regulatory capital and also lowered the capital charge on GSE-issued MBS.
- In 2001, regulators changed the capital rules again. The recourse rule gave many private-label MBS the same low-risk weight as the GSE-issued MBS. It also extended preferential capital treatment to various other types of asset-backed securities (ABS).
- The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act expanded several key safe harbors from bankruptcy provisions. As a result, firms using the derivatives known as swaps, as well as the short-term loans known as repurchase agreements (repos), had preferred creditor status in any bankruptcy filing. (Congress expanded derivatives priorities in 1982, 1984, 1994, 2005, and 2006 as well.)