The Real Deal New York

Bernanke’s legacy will be “an absolute disaster”: OPINION

By Business Insider | January 07, 2014 06:00PM

New research suggests that “predatory lending” — the buzzword villain of the financial crisis — may have only played a small part in the subprime lending crisis.

An upcoming study in the Journal of Financial Economics found that “predatory lending was responsible for only about a quarter of the default rate, suggesting it wasn’t the most important driver of the subprime crisis,” said co-author Itzhak Ben-David of Ohio State’s Fisher College of Business (via Bloomberg’s Matt Levine).

Then there’s this new San Francisco Fed economic letter, which found that borrowers’ “tendency to choose adjustable-rate mortgages is consistent with mortgage decisions based on economic considerations, rather than just lack of financial sophistication.”

As Levine points out, these papers offer a different story of the financial crisis. It’s a tale much more sympathetic to the lenders (less “predator,” more “presenting borrowers with the opportunity to take perfectly rational risks”).

History will have to place the blame.

  • AntiKeynesian

    To understand the housing/credit bubble and crash you have to study Austrian economics. Students of this school of economics saw the bubble forming and predicted its obvious demise. Read Mises, Hayek, Hazlett, and Rothbard to kick it old school or Thomas Woods, Peter Schiff, and Henry Block to read modern day Austrians. They predicted the bubble and subsequent burst based on the Business Cycle Theory. This theory highlights the importance of interest rates on investments and production. When interest rates are held artificially low investors and entrepreneurs are sent a false signal and create what they call a “cluster of errors”. In other words, seemingly intelligent entrepreneurs who have successfully forecasted risk in the past are suddenly all wrong at the same time. This is due to the malinvestments that are made as a result of the false signal created by the bogus interest rate. Read. Educate yourself. And stop blaming the free market. A manipulated interest is NOT the free market.

  • “A” ?

    The bundling of mortgages, then sold off with an “A” rating to investors was the main reason the investment scam (that was to complicated to discuss “derivatives”) came to a crashing end. The bundles were found out not to be all “A” rated loans, guess the investors finally figured it out to be bogus!

    • AntiKeynesian

      You’re not looking at the root cause of the problem, just it’s symptoms. You have to drill deeper. It’s certainly a complex issue but the primary root cause of the bubble was bad monetary policy and systemic moral hazard created by bad government: Fannie and Freddie, FHA, community reinvestment act, FDIC insurance, precedents set by government during the long term capital crisis, etc. The derivatives and bogus credit ratings and the other Wall Street garbage could never have occurred without the government’s follies. The so-called crash was the attempt at the free-market to cure the disease. The Fed doesn’t allow for that though. They just prime the pump and blow up another bubble. We’re experiencing the same symptoms now. When the dust settles from this fed induced bubble we’ll finally be able to reveal the true villain in this story.