2/3 of the subprime loans issued during the bubble were made by non-bank lenders. By the shadow banking system. The CRA did not apply to a single one of these loans. It applied only to depository firms. And moreover the loans issued by these firms were the most exotic and creative of subprime loans, the Option ARMS, No Docs, NINJAs. These loans were issued because they made a lot of money for those who wrote them. There was no other encouragement needed.
This has all been examined in books written by people who watched the subprime market develop and who were involved in it. But then reading takes effort and no one wants to do it, especially when it is a rather dry subject to begin with. Assuming you do wish to investigate you could start with ‘Chain of Blame’ by Muolo, ‘Fools Gold’ by Tett, and ‘ECONned’ by Smith.
Thanks for the references. How does that pertain to the sections of the Glass-Steagall Act that were repealed.
“How does that pertain to the sections of the Glass-Steagall Act that were repealed. “
I don’t know that it does. And I’m not sure that any provision of Glass-Steagall directly prevented what occurred during the bubble.
I suspect that referring to the demise of Glass-Steagall is more like shorthand for the removal of, or prevention of, regulation in the financial sector. The Commodities Futures Modernization Act of 2000 is probably more responsible for opening the door to the crisis than most other legislation.
One major aspect of Glass Steagall was to wall off investment banks (Wall Street firms) from the world of retail banking, what we all think of by the word “banks”.
The G-S Act was repealed over time, not all at once. And as G-S was repealed investment banks began moving into retail finance. One sector they were eager to cultivate was the subprime mortgage market. And unlike traditional lenders, investment banks had much shorter time horizons and no interest in holding any of the paper they created. This short term focus is a big reason that investment banks were walled off from retail banking in the first place. But I doubt that Glass Steagall ever applied to mortgages. No one in the 1930s was likely to have foreseen the innovations that occurred in mortgage lending in the late 1990s.