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Because a toxic meme is spreading... [Sep. 29th, 2008|11:40 am]
There's a meme going around that the Community Reinvestment Act caused the financial problems we're facing in the US.

It's false.

(edit: Hat tip to Sadly, No. Their own post is, shall we say, somewhat unkind towards the rightie bloggers spreading the meme, so I didn't use the direct link here.)

It is true that pushes to encourage home ownership helped things along a little bit. Time was when you couldn't buy a house without a large down payment, and that's changed, and that opened the door to more loans being made. And, some loan structures that were intended to help people in unusual situations were open to wide abuse, on both sides.

But the CRA did not force anyone to make bad loans. That takes greed, and stupidity, and there's always enough of that going around to cause a crisis if you're not careful.

[User Picture]From: wolfette
2008-09-29 07:11 pm (UTC)
and in the UK the Conservative Shadow Chancellor is busy blaming the Labour government for not regulating the banks and building societies for the problems our banks are suffering - neglecting to mention that it was the previous Conservative government under Maggie Thatcher who deregulated them in the first place!
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From: kightp
2008-09-29 07:27 pm (UTC)
You rock. (-:
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[User Picture]From: lblanchard
2008-09-29 08:57 pm (UTC)
For another perspective, written in 2000 (!), see


And another, written in 2003:


And another, written in 1999:

(and I might come back with a couple more)

Edited at 2008-09-29 10:28 pm (UTC)
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From: (Anonymous)
2008-09-29 11:34 pm (UTC)
Okay, so far we've seen a rant that the CRA was going to be a terrible thing, but the document I pointed to suggest that this prediction was wrong. (Much of the article seemed to be about particular people involved in CRA lending, more than the CRA itself.)

Then there are two articles about Fannie and Freddie, neither of whom forced anyone to make a bad loan... they did, however, buy bad loans, without doing due diligence.

None of these say that the CRA was at fault for any of this.

It does suggest that Fannie and Freddie did some stupid things because they could make money doing so. Well, that was my point: greed and stupidity caused bad things to happen.

And it suggests that a lot of lenders and brokers and other people did stupid things that made money for them. Again, greed and stupidity, not the CRA.

Yes, I grant you, the CRA created a situation in which greed and stupidity could cause a bigger problem than they used to. But it wasn't the CRA; it was the greed, and stupidity, and the lack of any regulatory brake on the process.

The root cause of the problem is that lenders made loans without due diligence, in some cases because they were unethical (they planned to sell the loan ASAP so why bother making sure it was good?) or because someone else was (the borrower or the broker gave them bad information, and the lender acted in good faith - but if the lender was selling the loan anyway, they had less incentive to check the numbers themselves).

And Fannie and Freddie kept buying loans (and generating cash) with a pretense that they were government backed. "Oh, sure, the government says we're private companies, but you can feel the nudge and see the wink that accompanies it. Give us money! It's safe!"

These are all failures of regulation and the free market. And yes, I grant you, the CRA played a role; it changed the kinds of loans made.

But the CRA didn't force people to lend, didn't force people to defraud others, and didn't force people to leverage their companies up to their eyeballs in trying to maximize profits on loans that couldn't be properly valued.
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[User Picture]From: lblanchard
2008-09-29 11:40 pm (UTC)
Whatever. (And yes, John, I know that Anonymous is you...)

CRA was the excuse for Fannie Mae and Freddie Mac to wink and nudge. And every time someone tried to rein them in, Barney Frank, Maxine Waters and others brought up affordable housing as the reason they shouldn't be reined in.

I agree and I think everyone else agrees that the goal of affordable housing is laudable. But it sure opened the door to greed, and the folks who should have been watching it made sure the door stayed open. If you can agree that as expanded in the 1990s it had a bit of a security flaw and lacked the proper oversight, then we have an accord.

[Sorry for the multiple edits. We had significant losses to our retirement fund today and I'm a little rattled.]

Edited at 2008-09-30 12:07 am (UTC)
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[User Picture]From: johnpalmer
2008-09-30 02:43 am (UTC)
(And yes, John, I know that Anonymous is you...)

I fully expected to be signed in when I wrote that. There wasn't any reason for me to think you'd think it was someone else. Heck, my style is relatively distinctive.
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[User Picture]From: johnpalmer
2008-09-30 04:34 am (UTC)
You know, I don't even know how to discuss these kinds of things with you.

I point to an article that shows that CRA loans were less likely to be sold, and less likely to default. Remember: that's the root of this issue, loans that were bundled and sold, and that are defaulting.

You respond with a link to a rant about how terrible the CRA was before the entire bubble started, one article about Fannie increasing the mortgages it would buy (under pressure from the Clinton administration *and* its stockholders, remember) and one about a Bush administration request to change regulations with a quote from a representative in the minority saying he didn't think the changes were necessary.

I can understand it if you think I'm wrong. I can understand it if you think you're right.

But I can't understand why you seem disappointed that the evidence you've presented doesn't convince me, because I know that the same amount of evidence wouldn't convince you, if our situation was reversed. You'd rightly point out that you can't blame the minority party for failing to pass legislation. You'd point out that an increase in the mortgages Fannie would buy does not mean that everyone had to start making lousy loans, without due diligence, and bundling them and getting them improperly high ratings, and turning credit default swaps into something less valuable than a horse race ticket - a good handicapper knows the horses, the track, and the weather conditions, after all - and so on and so forth.

I feel comfortable that you wouldn't be swayed by that kind of an argument, so I wouldn't present it to you. I know if I want to convince you, I need something stronger. So, I'd let it go (or at least try to).

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[User Picture]From: nsingman
2008-09-29 11:31 pm (UTC)
The CRA is unconstitutional garbage (just as the thankfully failed bailout is), but of course it did not cause the current crisis. The Federal Reserve did, with interest rates kept artificially low for a decade and a half, during which the money supply grew twice as fast as GDP. Throw in the moral hazard of implicit and explicit guarantees for mortgage lenders and fractional reserve banking, and this was wholly predictable. Read the Austrian School economists if you want to get the correct story; the other types can't even predict the past.
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[User Picture]From: lblanchard
2008-09-29 11:43 pm (UTC)
As I just said to John, the CRA gave cover for a range of moral hazards.

I can't claim to have predicted the extent of this meltdown, but when I saw home values quintuple in two or three years in my neighborhood I knew something was amiss -- and it wasn't just gentrification. I was expecting a bunch of punk kid condo flippers to get caught -- the meltdown is more than I expected but as you say it was wholly predictable.
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[User Picture]From: lblanchard
2008-09-30 12:43 am (UTC)
I've added you to my friends (reading) list.
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[User Picture]From: nsingman
2008-09-30 02:08 am (UTC)
Thanks. I'll reciprocate, but I'll also give you fair warning that I'm dull. I tend to have these discussions by commenting in others' journals.
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[User Picture]From: firecat
2008-09-30 06:15 am (UTC)
Thanks very much for this link. Prior to seeing this study, I could only point out that it's far-fetched to blame an act that went into effect 31 years ago for something that started happening only in the past few years.
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[User Picture]From: johnpalmer
2008-09-30 06:05 pm (UTC)
Well, the CRA was strengthened under the Clinton administration, but it still wasn't anything that forced anyone to make a stupid loan. It did (as I understand it) expand the types of loans people came up with to try to comply. But there was still an understanding that each loan was one where the borrower was expected to be able to pay it back. And, as the article shows, it was a reasonable expectation.
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