[quote=AN]Could the repeal of Glass–Steagall Act, Community Reinvestment Act, or FHA have anything to do with it?
Don’t get my wrong, I agree that low interest rate played a huge role in this bubble, but I view low rate as the gas in the car. In order for it to speed way out of control, the road has to be paved and the car has to have wheels/etc, the user have to keep on stepping on the gas peddle vs stepping on the brake. I could have sworn hearing Greenspan encouraging people to use ARM.[/quote]
1. Yes, the repeal of Glass-Steagall was probably responsible for a portion of the credit bubble. It paved the way for the credit bubble to happen.
2. The CRA probably had very little (if any) effect on the housing market as far as the credit bubble was concerned. The CRA has been in place since the 1970s, and during much more prosperous/inflationary times (don’t forget we were dealing with the tech/stock market crash when the housing bubble began), and we’ve never had a bubble like this before.
3. Likewise, the FHA (and the GSEs, for that matter) have been around LONG before this credit bubble, and probably had very little effect on the credit/housing market in this most recent bubble.
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This is my understanding of how the credit bubble grew:
1. The passage of the Taxpayer Relief Act of 1997, which exempted capital gains ($250K/$500K) on homes personally occupied for two of five years.
This encouraged more speculators to enter the market, and its effects were seen almost immediately. This is when flipping really took off. It got the upward momentum going, which made it easier for people to believe that “housing prices only go up” and fooled them into thinking we were “running out of land.” It set up the mania that, along with the credit bubble, pushed prices to astronomical — and totally unsustainable — highs.
2. The passage of the Gramm–Leach–Bliley Act in 1999 (repeal of Glass-Steagall) paved the way for new financial “innovations” (various securitizations that supposedly spread risk out…does that mean it’s “systemic risk”?) and encouraged more risk-taking in the financial services industry (IMHO). Witness the growth of the securitization market and related derivatives after this was passed.
3. Greenspan’s lowering of interest rates to historically low levels, then keeping them there for an extended period of time (we’re still there!!!). This pushed debt investors into ever-riskier investments as they were forced to reach for yield. You have to understand that many institutions/funds are essentially required to earn a certain yield over time, or they risk capital flight or insolvency (again, think of the pension plans).
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If one wanted to belong to the “tin-foil hat club,” it would be easy to believe that all of this was planned from the very beginning. But we know better, right? 😉
