A ton of bricks. Exactly.
This is a proposition so appealing (I admit) that I’m likely to accept it until something/somebody proves it isn’t so.

the anti-red-lining law was passed in 1968.

I’ve heard of long lags in economic studies, but almost 40 years seems to stretch it a little too far.

I’ll say that that argument is a very nice piece of ex-post rationalization( it’s sort of sad that that “think-tanks” are actually remunerated for such soft thinking ).

The idea, proffered, gives no inkling to the rampant fraud( appraisal, at the mininum ) that has been at the center of the “home value” spike.

That the “banks” are looking to blame their long-standing partners, is only endemic of how severe a problem this is.

It seems doubtful that redlining by government planners posed more than a marginal contribution to what evolved into the subprime fiasco. After all, the real estate boom since 2000–and before–has been fueled by a universal loosening of lending standards, which buoyed demand and pushed real estate prices higher.

This decay of lending standards is by no means restricted to real estate mortgages. It has been a widespread, almost ubiquitous, financial trend that featured diminished risk premiums all across the baord–in stock pe ratios, junk bond spreads, foreign sovereign debt spreads, ranch and farm prices, credit card issuance, and much more.

In fact, the exponential growth of that artificial life form that is the realm of financial derivatives–debt instruments employed for the purpose of facilitating leveraged speculation–is a major offshoot of this financial decay. At last count, one form of derivative, which is publically traded futures markets, was about to reach total notional value of $350 trillion bucks. Add to this staggering number other forms of derivatives, including the large portion that are not traded on public markets, and the total value of these financial contracts used in various forms of leveraged speculation might total (my perhaps ridiculous guess) 1,000 trillion dollars.

If this tottering creaking empire implodes, the Fed would be powerless to avert catastrophy.

I would argue that the more fundamental issue is the creation of the loanable funds in the first place. Without the considerable amount of loanable funds that were created by the Fed several years ago out of thin air and not backed by real savings, the funds would not have been available to loan to sub-prime credits, at least not without the lending industry first withdrawing the funds from other areas of lending. If the Fed did not considerably expand credit, the sub-prime loans arguably could not have been made. While I do not believe that the Fed specifically targeted increasing the amount of sub-prime lending, the magnitude of this lending was made possible by the Fed’s credit and interest rate policies.

In the previous credit expansion, the newly created Fed credit largely flowed into the internet and technology sectors; this time it flowed into sub-prime lending and other areas such as M&A.

Wow, Jeffrey_Tucker, I can’t believe I’m in agreement with you about something you brought up on the blog. This is exactly what I had been thinking as it all unravelled (Alex_Tabarrok on MarginalRevolution.com credited me with an insight related to this if anyone cares). Basically, before it was like, “omg why won’t you extend credit to these people???” and now it’s, “alright, let’s make mortgages into the new aristocracy”. I have some support for your theory: check out this lefty’s criticism of subprime lending, found on Slate:

In the past, investors who bought housing loans required initial lenders to provide and verify facts about borrowers’ income, expenses, debts, and assets. This was the 1980s and ’90s, when these initial lenders were bankers who were well-schooled in old-fashioned lending. They asked the borrowers about their jobs and how long they’d held them. They took borrowers through their monthly expenses and showed them how those expenses would change in light of mortgage payments and other homeownership obligations, such as property taxes. And, in close cases, bankers looked borrowers in the eye and made a judgment about character. This was subjective, but it also protected their money.

Is this guy dense??? Yeah, they made judgments about their character, alright — and got called “racist” and “redliners” for doing so!

Kathy H, the incitement of greed has very little to do with the fundamental cause of the market meltdown. You’ll probably hear an awful lot in the states about “greed” and the cause it incurs on lenders, but the “greed” is just about the last thing you should list. The fact is, greed plays out in everything, listing it as the cause for any type of meltdown is nonsensical because its just a part of life. By doing that, you’re sidestepping the actual cause of the sub-prime fiasco.

I believe Dennis hits it square on the head here. Though it wasn’t sub-prime directly that the fed increased credit in, the sub-prime mess would not have been possible without the increase in credit, no matter where it originated from.

The mortage issues have nothing to do with the tiny percentages of loans that banks are forced to give away to make special interest groups happy.

The current mess (NOT CRISIS) has everything to do with the Fed creating money and the Freddie Macs and Fannie Maes buying up garbage mortgages in bundles that mix good ones and bad ones.

The solution is not to create more money or expose tax payers to Fannie-Freddie risk. The solution is simple and provided 75 years ago by Mises: Shutdown the Federal Reserve and these stupid hidden taxes of Fannie Mae and Freddie Mac. Then force banks to compete on serving their customers by managing their money.

The suggestion that “greed plays out in everything” is too cynical for me to swallow. There was a time, in the not too distant past, when bankers would have known better. They wrote 20 percent down home loans because those loans were in both the borrower and the lenders best interest. The loan departments I worked in were not staffed by angels by any definition, but they were good people whose natural greed was tempered by traditonal values and common sense. This may sound old fashioned and out of touch, but it worked and we would never have written 104 percent loans or ANY loan unless a thorough financial check was done on the borrower. The very concept of liar loans would have been laughed out of the bank as ridiculous.