Fannie and Freddie were not the only government-backed or government-controlled organizations that were enlisted in this process. The Federal Housing Administration was competing with Fannie and Freddie for the same mortgages. And thanks to rules adopted in 1995 under the Community Reinvestment Act, regulated banks as well as savings and loan associations had to make a certain number of loans to borrowers who were at or below 80% of the median income in the areas they served.Let me respond with someone who knows something about this: Federal Reserve governor Randall S. Kroszner:
Our findings are important because neighborhoods and communities affected by the economic downturn will require the active participation of financial institutions. Considering the situation today, many neighborhoods that are not currently the focus of the CRA are also experiencing great difficulties. Our recent review of foreclosure data suggested that many middle-income areas currently have elevated rates of foreclosure filings and could face the prospect of falling into low-to-moderate income status. In fact, 13 percent of the middle-income Zip codes have had foreclosure-rate filings that are above the overall rate for lower-income areas.Barry Ritholtz over at the Big Picture Blog has a far more devastating take down of this intellectual bile. See the numerous links at the bottom of this link.
Helping to stabilize such areas not only benefits families in these areas but also provides spillover benefits to adjacent lower-income areas that are the traditional target of the CRA. Recognizing this, the Congress recently underscored the need for states and localities to undertake a comprehensive approach to stabilizing neighborhoods hard-hit by foreclosures through the enactment of the new Neighborhood Stabilization Program (NSP). The NSP permits targeting of federal funds to benefit families up to 120 percent of area median income in those areas experiencing rising foreclosures and falling home values.
In conclusion, I believe the CRA is an important model for designing incentives that motivate private-sector involvement to help meet community needs. The CRA has, in fact, been helpful in alleviating the financial isolation of many areas of concentrated poverty, but as our report illustrates, there is much more that could be done in these communities. Contrary to the assertions of critics, the evidence does not support the view that the CRA contributed in any substantial way to the crisis in the subprime mortgage market. Today's discussion is an important first step in the process of identifying other initiatives and areas of cooperation between government and the private sector that will effectively address the continuing challenge of poverty in the United States.
I realize that getting paid to spread this type of complete tripe is what "think tanks" are about. But, could you at least come up with something new?
And shame on Marc Perry for linking to this crap. He should know better.
8 comments:
Given the strident tone of this blog post, I think you should produce some stronger evidence that the CRA was not responsible for the housing crisis than a single appeal to authority. "Contrary to the assertions of critics, the evidence does not support..." Which evidence, and how did he come to this conclusion? The rest of the quote reads like a political press release; Kroszner is advocating expansion of the CRA's role, so of course he wouldn't hold it to blame...
The case for the CRA's role in the crisis is actually pretty strong. Have you read Thomas Sowell's book, The Housing Boom and Bust?
Please read the many links at the bottom in Barry Ritholtz's blog post. There are five separate web pages, each with many links and supporting data. In addition, people who work at the Fed are people who have masters and PhDs and spend their life researching economic issues.
Sowell advances Jean Baptiste Say's theory of supply creating its own demand -- a theory that was completely repudiated by the Great Depression. His work is questionable at best, garbage at worst.
In the six links, there were only about two substantive arguments I saw - 1) only a small proportion of banks were regulated under the CRA and 2) the CRA is "flexible" and doesn't call for risky loans. But, the real problem with the CRA was that it opened the door for groups like ACORN to sue banks for not making enough loans to the "under-served" population, making direct oversight by the CRA irrelevant. And, while the language of the CRA bill left flexibility open to banks in theory, its application in practice was very different. Both of the arguments named above are more than thoroughly rebutted in Sowell's book, which I why I suggested that you read it.
None of this has anything to do with Say's law, by the way. And, if you think the Great Depression "completely repudiated" Say's Law then your understanding of it is overly simplified. Few credible economists would defend the proposition that "supply creates its own demand." That characterization was created by JM Keynes and is a straw man version of the true argument.
See: R. Clower and A. Leijonhufvud, Say's Principle, What It Means and What It Does Not Mean (Intermountain Economic Review, Vol. IV, No. 2, Fall, 1973)
Little Nicky
The post I linked to is from the Federal Reserve, and it begins with this statement:
Some critics of the CRA contend that by encouraging banking institutions to help meet the credit needs of lower-income borrowers and areas, the law pushed banking institutions to undertake high-risk mortgage lending. We have not yet seen empirical evidence to support these claims, nor has it been our experience in implementing the law over the past 30 years that the CRA has contributed to the erosion of safe and sound lending practices. In the remainder of my remarks, I will discuss some of our experiences with the CRA. I will also discuss the findings of a recent analysis of mortgage-related data by Federal Reserve staff that runs counter to the charge that the CRA was at the root of, or otherwise contributed in any substantive way, to the current subprime crisis.
At the end, there is a collection of footnotes with reams of supporting data. Barry's posts were also supported by documentary evidence from people with the qualifications to back it up. All we get from you is the talking point "CRA ....... ACORN ...... BAD" Do you have evidence -- studies that were done? No.
Regarding Say, let's see how he characterized his theory. From A Treatise on Political Economy, Book I, Chapter XV, titled, "Of the Demand or Market for Products. "Which leads us to a conclusion that may at first sight appear paradoxical, namely, that it is production which opens up demand for its products."
You may also want to read A History of Economic Thought by Steven Medema and Warren Samuels
Kroszner: "we found essentially no difference in the performance of subprime loans in Zip codes that were just below or just above the income threshold for the CRA.9 The results of this analysis are not consistent with the contention that the CRA is at the root of the subprime crisis, because delinquency rates for subprime and alt-A loans in neighborhoods just below the CRA-eligibility threshold are very similar to delinquency rates on loans just above the threshold, hence not the subject of CRA lending."
This is consistent with the story I gave, whereby banks loosened their standards in areas beyond the CRA-covered ones, as a defensive measure to avoid lawsuits.
The Federal Reserve also denies that low interest rates helped inflate the housing bubble. Their studies are influenced by political convenience.
Your condescension reveals a lack of confidence in your argument. If I ever need some advice on insurance law or estate planning, maybe I'll ask you. But on the subject of institutional economics and the housing market, I'll trust economists like Dr. Sowell and Dr. Perry who have no reason to shade their results for political purposes.
Little Nicky
No axe to grind? Never mind that AEI pays Perry a large salary to sell a certain story line. And to call Sowell discredited is to be too kind. His continual pushing of Say's law is embarassing. (Say himself argued that a financial collapse was impossible; read his letters 1, 2 and 3 to Malthus. This is the reason the Great Depression was his theory's death nell.
As for Krozsner, nice selective quoting. But, you miss the central point of his argument, which I linked to above and this I will re-post here:
Some critics of the CRA contend that by encouraging banking institutions to help meet the credit needs of lower-income borrowers and areas, the law pushed banking institutions to undertake high-risk mortgage lending. We have not yet seen empirical evidence to support these claims, nor has it been our experience in implementing the law over the past 30 years that the CRA has contributed to the erosion of safe and sound lending practices. In the remainder of my remarks, I will discuss some of our experiences with the CRA. I will also discuss the findings of a recent analysis of mortgage-related data by Federal Reserve staff that runs counter to the charge that the CRA was at the root of, or otherwise contributed in any substantive way, to the current subprime crisis.
Translation -- after looking at the data CRA has nothing to do with it. Period. Zip. Nada.
I'm condescending because your argument has been discredited half a million times, but you keep advancing it. Please stop. Please.
No Nicky, my tone is not embarrassing because you are an idiot. You walk in here, spouting off your talking points which you can't back up with any data. And then when someone proves you know nothing, you say their tone was an embarrassment.
Please return to Free Republic, where they also hate facts. You'll love it there.
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