« Paul Krugman: Cash for Trash | Main | It Wasn't Fannie and Freddie »

Monday, September 22, 2008

It Wasn't the Community Reinvestment Act

This needs to be debunked again:

The New Talking Points, Washington Monthly: For about a week now, Republicans have been looking for a way to blame the crisis on Wall Street on Democrats. The search hasn't gone well...

But conservatives kept on trying. In fact, the right seems to have finally come up with a new line: Democrats forced banks to give mortgages to low-income minorities, those low-income minorities couldn't keep up with their mortgage payments, and the banks struggled as a result. Voila! Blame the Dems!

Fox News' Neil Cavuto helped get the ball rolling. Media Matters reported that Cavuto conflated giving home mortgages to minorities with risky lending practices...

The National Review is on board with a similar line of thinking, blaming the Community Reinvestment Act for much of the crisis: "The CRA empowers the FDIC and other banking regulators to punish those banks which do not lend to the poor and minorities at the level that Obama's fellow community organizers would like. Among other things, mergers and acquisitions can be blocked if CRA inquisitors are not satisfied that their demands -- which are political demands -- have been met. There is a name for loans made to people who do not have the credit, assets, income, or down payment to qualify for a normal mortgage: subprime."

All of this seems rather silly on its face, but thankfully, Matt Yglesias went to the trouble of setting the record straight.

For one thing, the timeline is ludicrous. The Community Reinvestment Act was passed in 1977. Are we supposed to believe that CRA was working smoothly throughout the Carter, Reagan, Bush I, and Clinton years and then only under Bush II did overzealous anti-"redlining" enforcement come into play, perhaps a result of Dubya's legendarily close relationship with ACORN? Or maybe overzealous enforcement back in the late 1970s is somehow responsible for a real estate blowout that only materialized 30 years later? It doesn't even come close to making sense.

Beyond that, the mere existence of "subprime" loans -- i.e., mortgages given to less-creditworthy individuals at higher interest rates -- isn't the problem here. The problems have to do with what was done with the loans after they were packaged, sold and used to make leveraged plays.

Sorry, conservatives, you'll have to keep looking for a way to blame Democrats for this mess. Good luck with that.

See also: Did Liberals Cause the Sub-Prime Crisis?, by Robert Gordon, and Ezra Klein:

As Robert Gordon shows,... this is crap. First, there's the timing. CRA came in 1977. The crisis came in 2007. Indeed, by 2004, the Bush administration had weakened the CRA -- and after that (though not, presumably, because of it), bubble lending really took off. Further, CRA only governs a certain class of federally insured banks. Problem is, half of the subprime loans came from mortgage companies with no CRA involvement at all. Another 25%-30% came from companies with very little CRA exposure. For those who left their abacus at home, that's 80% of the loans which were fully or largely outside CRA jurisdiction. More than that, the non-CRA mortgage firms made subprime loans at twice the rate of CRA-covered firms. Which basically leaves a stake in the heart of this particular theory. Indeed, until now, some conservatives have been moaning that no one is talking about the CRA part because it's so racially charged. Poppycock. It's just a false charge...

    Posted by on Monday, September 22, 2008 at 01:08 PM in Economics, Financial System, Housing | Permalink  TrackBack (1)  Comments (70)


    TrackBack URL for this entry:

    Listed below are links to weblogs that reference It Wasn't the Community Reinvestment Act:

    » Delusions on Both Sides from EconLog

    Many people, including Mark Thoma (also here) are interested in the question of whether it was private markets or government regulators who got us into this mess. My answer is, "yes." There were delusions on both sides. In the private... [Read More]

    Tracked on Monday, October 13, 2008 at 03:22 AM


    Feed You can follow this conversation by subscribing to the comment feed for this post.