The right-vs-left contest over the credit crisis seems to have crystallized to some extent into whether the crisis was the outcome of regulators forcing banks to loan to bad borrowers (the right-wing version) or of under-regulated banks and financial institutions peddling bad mortgage products and then aggregating them into un-valuable derivatives that “clogged” the credit system (ahh, such metaphors!).
A UNC researchers has produced a rather interesting report (PPT format) suggesting that it is more the latter than the former: “bad” borrowers with “good” loans didn’t default at a particularly high rate; it was “bad” borrowers with “bad” loans who did so.
The implications of this question are vast. If the problem is forcing banks to adopt bad borrowers, the policy implication is to deregulate, repeal the CRA, and so on, which would clearly have major effects on systematic wealth inequality over time. If the problem is the proliferation of weird mortgage-based financial products and instruments, the implication is to re-regulate markets, which would likely sacrifice some degree of growth for greater stability and equality.