Though the recovery seems to be speeding up, the U.S. economy remains weak, and the country has a long way to go before returning to full employment. One of the major forces holding back economic growth is the persistently-weak housing market, which continues to be the subject of intense debate. According to a GOP narrative that just won’t die, the economic crisis was brought on largely by the government—specifically, by laws that fueled the subprime boom by encouraging home ownership among low-income populations. Is that true?
According to an important new paper from three economists at the St. Louis Federal Reserve, “No.” Really: The paper is titled “Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?” and the first sentence of the abstract is simply “No.” The authors surveyed two main policies: The Community Reinvestment Act, a 1977 law that encouraged loans to low-income communities and individuals; and federal mandates given to Fannie and Freddie which set targets for loans to low-income and minority populations. Their analysis used data from California and Florida during the height of the boom, from 2004 to 2006. To determine the impact of these policies, the authors defined three ways in which they could have contributed to the subprime securities boom: They could have led to more loan originations for targeted (i.e., low-income and historically underserved) groups; they could have lowered loan prices for the targeted groups; and they could have relaxed loan standards for the targeted groups. In their analysis, the authors found “no evidence that the affordable housing goals of the CRA or of the GSEs affected any of these outcome measures.” The authors’ conclusion seems to warrant a major reconsideration of one of the most prominent arguments about the origins of the financial crisis. Of course, that’s not to say that Fannie and Freddie weren’t guilty of taking risks that worsened the subprime bust. But there’s no reason to believe they did so because of the policies conservatives love to blame.