Hensarling's four horsemen of the financial apocalypse -- a faux Revelation
Hensarling's four horsemen of the financial apocalypse are the Community Reinvestment Act (CRA), Fannie and Freddie's "affordable housing" rules, fraud by homeowners' on their loan applications, and Alan Greenspan's low interest rate policy. If Hensarling were to admit that epidemics of accounting control fraud, as with the S&L debacle and the Enron-era, drove our current crisis his four horsemen would be revealed as fantasies. If Hensarling were to admit that the three "de's" and modern executive and professional compensation along with the evisceration of civil accountability for managers and professionals produce those fraud epidemics then he would be admitting his culpability as one of the craftsmen of the crisis.
Hensarling's failed apologia for his role in creating the criminogenic environment
I'll leave the low interest rate claim primarily to others, but the points I'll make will demonstrate that the crisis did not require low interest rates. Prior to the crisis, theoclassical economists claimed that one of the great benefits of their policies was that they brought lower interest rates which the economists claimed improved economic growth.
Hensarling doesn't take Hensarling's claims about the CRA seriously. This is what he claimed in his speech at the Bush Center.
"Proponents of CRA-like mandates have maintained that only a small portion of subprime mortgage originations are related to the CRA. However, that misses the fundamental point. Though they may be small in volume, CRA loan mandates remain large in precedent. They inherently required lending institutions to abandon their traditional underwriting standards to comply with this government mandate. And CRA implicitly put the government's Good Housekeeping Seal of Approval on such loans."
The CRA existed for decades prior to the crisis. It was substantially weakened from 2001-2008 under the Bush administration (which didn't enforce banking rules in general, and was hostile to the CRA in particular). CRA did not "inherently require[] lending institutions to abandon their traditional underwriting standards." It did not "mandate" making any bad loans. The last sentence is equally fictional. We (OTS West Region), for example, drove "liar's" loans out of the S&L industry in 1990-1991 while the CRA was in effect. The CRA played no role in our thinking.
What actually caused the crisis is where Hensarling started -- accounting control fraud
I have already explained why accounting control frauds' adoption of the fraud "recipe" causes them to "abandon their traditional underwriting standards" to make their controlling officers wealthy. Indeed, Hensarling has already explained why they do so in his discussion of Fannie and Freddie's accounting control frauds.
Hensarling's quoted passage above, unintentionally and unknowingly, constitutes an admission that is fatal to his claim. I explain below why liar's loans provide the perfect "natural experiment" to test his claims about the CRA, Fannie and Freddie's affordable housing goals, and his claims about fraudulent borrowers. Hensarling's key admission is that "traditional underwriting standards" would have prevented the crisis. That is correct. Note that it doesn't matter whether Greenspan has set relatively high or relatively low interest rates.
Lenders have known for millennia that underwriting is essential. Home lenders have known for over a century that verifying the borrower's income is essential to effective underwriting and have known for roughly a century that it is essential to obtain a sound appraisal. No honest home lender would inflate, or permit to be inflated, the appraisals or make loans without verifying the borrower's income.
The Epidemic of Appraisal Fraud by Lenders
The Financial Crisis Inquiry Commission (FCIC) described an example of the deliberate creation of a "Gresham's" dynamic in order to generate an "echo" epidemic of fraud in the ongoing crisis.
From 2000 to 2007, a coalition of appraisal organizations " delivered to Washington officials a public petition; signed by 11,000 appraisers". [I]t charged that lenders were pressuring appraisers to place artificially high prices on properties [and] "blacklisting honest appraisers" and instead assigning business only to appraisers who would hit the desired price targets (FCIC 2011:18).
George Akerlof used the metaphor to Gresham's law in his article on markets for "lemons" -- another control fraud variant in which the seller uses his asymmetrical information advantage as to the quality of the goods or services being sold to deceive the buyer.
[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence (Akerlof 1970).
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