I have a fierce quarrel with Professor James' references to the banking industry. I have been shocked at the intellectual bankruptcy of the academic community- especially those at Princeton - when it comes to the forces that drove the housing crisis.

In 2007 the national organization representing over 600 local and regional housing activists posted on its website a 63 page report detailing 446 "agreements" activists "negotiated" (Sen. Phil Gramm in 1999 labeled the "agreements" as "extortion") with banks totaling $4.56 trillion of minority lending commitments. $4.5 trillion of that amount was "negotiated" after 1994. Prohibitions against interstate banking were removed in 1994 - BUT only on condition that banks proved to the satisfaction of regulators and housing activist interveners that they were making a "satisfactory" amount of loans for inner-city redevelopment and revitalization, including subprime mortgages.

46 of the 63 page report, "CRA Commitments" - which can be found on the website ncrc.org - describe demands in addition to the $4.56 trillion of regulatory commitments. These demands essentially required banks to write no-documentation, no-down payment and no-or-low closing costs.

Moreover, in 1991 ACORN staged a 2-day sit-in of the House Banking Committee which then deputized ACORN to draft what became known as the Government Sponsored Enterprises Act of 1992 which required Fannie and Freddie to devote 30 percent of their business to subprime mortgages. In addition, the act made HUD Fannie's and Freddie's "Mission Regulator." Under President Clinton Fannie's and Freddie's subprime "mission" was boosted to 50 percent with a minimum ten-year target of $2.4 trillion.

Yet, with the exception of the book, "Fragile by Design" academics, including Professors Krugman, Blinder and former Professor Bernanke display absolutely no awareness of the $4.56 trillion of government sponsored "CRA Commitments" or the impact of the Government Sponsored Enterprises Act of 1992 which had as one objective the creation of a s subprime mortgage market.

While the Volkswagen incident is extreme it should not be used as the basis for judging business behavior generally.

In studied economics B.C. (Before Computers) and one of my professors taught that government sets the rules of the game and businesses generally play by those rules but, yes, where rules are excessively restrictive, such as the prohibition against interstate banking, private enterprise will seek ways to end-run the rules. And if government applies brutal pressures on the banking system to finance the redevelopment and revitalization of decaying inner-cities and the demands made upon the banks hugely exceeds their resources then the development of a subprime market should not come as a surprise to anyone except a Princeton economics professor.



