Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram G. Rajan Read Free Book Online Page A

who could not afford a mortgage. But reflecting the nexus between the regulator and the regulated, HUD acknowledged in a report in 2000 that the agencies “objected” to disclosure requirements “related to their purchase of high-cost mortgages,” so HUD decided against imposing “an additional undue burden”! 31

Lending Goes Berserk
     
    As more money from the government-sponsored agencies flooded into financing or supporting low-income housing, the private sector joined the party. After all, they could do the math, and they understood that the political compulsions behind government actions would not disappear quickly. With agency support, subprime mortgages would be liquid, and low-cost housing would increase in price. Low risk and high return—what more could the private sector desire? Unfortunately, the private sector, aided and abetted by agency money, converted the good intentions behind the affordable-housing mandate and the push to an ownership society into a financial disaster.
    Both Clinton and Bush were right in worrying that growth was leaving large segments of the population behind, and their solution—expanded home ownership—was a reasonable short-term fix. The problem with using the might of the government is rarely one of intent; rather, it is that the gap between intent and outcome is often large, typically because the organizations and people the government uses to achieve its aims do not share them. This lesson from recent history, including the savings and loans crisis, should have been clear to the politicians: the consequences of the government’s pressing an agile financial sector to act in certain ways are often unintended and extremely costly. Yet the political demand for action, any action, to satisfy the multitudes who believe the government has all the answers, is often impossible for even the sensible politician to deny.
    Also, it is easy to be cynical about political motives but hard to establish intent, especially when the intent is something the actors would want to deny—in this case, politicians using easy housing credit as a palliative. As I argue repeatedly in this book, it may well be that many of the parts played by the key actors were guided by the preferences and applause of the audience, rather than by well-thought-out intent. Even if no politicians dreamed up a Machiavellian plan to assuage anxious voters with easy loans, their actions—and there is plenty of evidence that politicians pushed for easier housing credit—could have been guided by the voters they cared about. 41 Put differently, politicians may have tried different messages until one resonated with voters. That message—promising affordable housing, for example—became part of their platform. It could well be that voters shaped political action (much as markets shape corporate action) rather than the other way around. Whether the action was driven by conscious intent or unintentional guidance is immaterial to its broader consequences.
    A very interesting study by two of my colleagues at the University of Chicago’s Booth School, Atif Mian and Amir Sufi, details the consequences in the lead-up to the crisis. 42 They use ZIP codes to identify areas that had a disproportionately large share of potential subprime borrowers (borrowers with low incomes and low credit ratings) and show that these ZIP codes experienced credit growth over the period 2002–2005 that was more than twice as high as that in the prime ZIP codes. More interesting, the number of mortgages obtained in a ZIP code over that period is
negatively
correlated with household income growth: that is, ZIP codes with lower income growth received more mortgage loans in 2002–2005, the only period over the entire span of the authors’ study in which they saw this phenomenon. This finding should not be surprising given the earlier discussion: there was a government-orchestrated attempt to lend to the less well-off.
    The greater expansion in