I agree the CRA played a big role in setting the stage by incentivizing the issuing of bad loans. I'm sure other regulations have historically caused problems, too. I'm not the sort to think all regulations will guarantee positive outcomes. There is often an unseen foot that trips the best of intentions. However, even though some regulations ... See Moreend up causing problems, I believe we need some regulations beyond basic laws protecting life, liberty, and property.
For example, it would have been nice to have had a regulation to prevent the formation of the huge and interconnected market of credit default swaps placed against those bad loans caused by the CRA. Now, there's nothing illegal or immoral about credit default swaps. However, the interconnectedness and inter-dependencies within the financial market that were allowed to form caused huge problems when the housing bubble burst. The fraud that allegedly took place just added to the problem.
Good regulations can prevent a system from becoming fragile. Bad regulations (e.g. CFA) can cause huge market distortions.
For example, it would have been nice to have had a regulation to prevent the formation of the huge and interconnected market of credit default swaps placed against those bad loans caused by the CRA. Now, there's nothing illegal or immoral about credit default swaps. However, the interconnectedness and inter-dependencies within the financial market that were allowed to form caused huge problems when the housing bubble burst. The fraud that allegedly took place just added to the problem.
Good regulations can prevent a system from becoming fragile. Bad regulations (e.g. CFA) can cause huge market distortions.
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