U.S. agencies played a larger role in the housing crisis than first reported

Washington, May 16, 2011 -

That’s the conclusion of Michael Cembalest, the Chief Investment Officer of JP Morgan Chase.  In a May 3 “Eye on the Market” report, he revised his 2009 account of what caused the financial crisis.  Under the general heading of “Retractions,” Cembalest writes:

 “In January 2009, I wrote that the housing crisis was mostly a consequence of the private sector…However, over the last 2 years, analysts have dissected the housing crisis in greater detail.  What emerges from new research is something quite different:  government agencies
 now look to have guaranteed, originated or underwritten 60% of all ‘non-traditional’ mortgages, which totaled $4.6 trillion in June 2008.  What’s more, this research asserts that housing policies instituted in the early 1990s were explicitly designed to require US Agencies to make riskier loans, with the ultimate goal of pushing private sector banks to adopt the same standards.  To be sure, private sector banks and investors are responsible for taking the bait, and made terrible mistakes.  Overall, what emerges is an object lesson in well-meaning public policy gone spectacularly wrong.”

Cembalest concludes:  “As regulators and politicians consider a wide range of actions designed to stabilize the global financial system, some reflection on the role that policy itself played in the collapse would seem like a critical part of the process. It’s not clear that it is.”

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