This was no unintended consequence but the inevitable result of adopting the so-called Basel II banking standards. The SEC was supposed to apply these standards created for commercial banks to investment banks, but with additional measures to ensure liquidity.
Was Basel II a libertarian plot cooked up at the Cato Institute? Not quite. It was the product of many years of effort by the world’s major central banks, intended to avoid crises such as the savings and loan disaster of the 1980s. Basel embraced the theory that a common set of global banking standards and more intensive study of the risks of particular assets would yield a more efficient use of capital and a more stable financial system.
As for the SEC, if commissioners took on a massive burden in 2004 without realizing they had signed up to safeguard the world’s financial system, then they overreached. But they certainly did not “deregulate.”
For years, ACORN had combined manipulation of the CRA with intimidation-protest tactics to force banks to lower credit standards. Its crusade, with help from Democrats in Congress, to push these high-risk “subprime” loans on banks is at the root of today’s economic meltdown.
When the role of ACORN and congressional Democrats in the mortgage crisis is pointed out, Democrats reply that banks subject to the CRA represent only about a quarter of the loans that led to our current troubles. In fact, the problem goes way beyond the CRA.
As ACORN ran its campaigns against local banks, it quickly hit a roadblock. Banks would tell ACORN they could afford to reduce their credit standards by only a little – since Fannie Mae and Freddie Mac, the federal mortgage giants, refused to buy up those risky loans for sale on the “secondary market.”
That is, the CRA wasn’t enough. Unless Fannie and Freddie were willing to relax their credit standards as well, local banks would never make home loans to customers with bad credit histories or with too little money for a downpayment.
So ACORN’s Democratic friends in Congress moved to force Fannie Mae and Freddie Mac to dispense with normal credit standards. Throughout the early ’90s, they imposed ever-increasing subprime-lending quotas on Fannie and Freddie.
Another recommend read is this Beyond Bailouts post on whether a “foreclosure moratorium” makes sense. It doesn’t, of course, as a least a few intelligent people would stop making mortgage payments when they realize there is no consequence for their actions.