Michael Bloomberg has come under a lot of criticism for remarks he has made about the origins of the financial crisis. In Slate, Jordan Weissman tries to give the former New York City mayor a charitable reading: Bloomberg wasn’t saying that ending redlining caused the crisis; he was saying that an overzealous effort to stamp it out did.
[H]e wasn’t trying to say that banks should have never been forced to lend to black people. Rather, he’s saying that government officials tried to fix the legacy of redlining by pushing banks to make loans to low-income Americans, which led them down a slippery slope to taking greater and greater credit risks. In other words, it’s a story about good intentions leading to government overreach.
Weissmann concludes that Bloomberg is wrong even granting this interpretation. Expert opinion has generally rejected the view that efforts to extend homeownership to the non-creditworthy played an important role in causing the crisis. It has often rejected that view vehemently. Only one of the ten members of the national commission on the causes of the crisis placed much emphasis on the issues Bloomberg has identified as central.
A minority view can, however, be correct. Let me suggest another one: It’s an error to look for the origin of the housing crash, or the financial crash, and treat that origin as the explanation of the sharp recession of 2007–2009. The sharp recession explains more of the housing crash and the financial crash than they explain of it. And the sharpness of the recession was largely the result of monetary-policy mistakes.
I made that case in NR around the tenth anniversary of the financial panic. I concluded by noting that there is a precedent for an economic catastrophe that was misunderstood for long after it happened.
Until at least the publication of Milton Friedman and Anna Schwartz’s Monetary History of the United States, in 1963, the prevailing explanation of the Depression treated non-monetary factors such as stock-market speculation and banking problems as its major causes. Now we take for granted the centrality of monetary tightness to the Depression.
A similar reevaluation of our more recent economic misfortunes, with greater attention to monetary dysfunction, is in order. That reevaluation need not conclude with the wholesale rejection of other ideas about the crash. It may be that conservatives are right about the oversubsidization of housing, or that liberals are right about the deficiencies of financial regulation, before the crisis. We can also continue to debate whether the federal government handled Bear Stearns and Lehman Brothers appropriately in 2008. But we should consider whatever other policy errors were made, of omission and commission, to be secondary to the great monetary failure of our era.
Bloomberg’s mistake in thinking about the origin of the crisis is thus deeper than even his critics have recognized, because it is a mistake most of them also make. (The only politician of note who has gotten these issues right, in my view, is Senator Ted Cruz.)
(Disclosure: I write a regular column for Bloomberg Opinion.)