Re: Did Liberals Cause the Sub-Prime Crisis?
Conservative pundits have recently placed the blame for the current U.S. financial crisis on the Community Reinvestment Act of 1977. In a nutshell, this act requires lending institutions to make credit available throughout their geographic area, prohibiting them from discriminating against potential borrowers based on the neighborhood in which they live or work. It does not require them to weaken their assessment of potential borrowers' creditworthiness.
Writing in The American Prospect, Robert Gordon examines the claim that the CRA is responsible for the sub-prime crisis. He begins by tracing the genesis and evolution of this meme from the conservative economist Thomas DiLorenzo in September, 2007, to Robert Litan of the Brookings Institution just before Gordon wrote his article in April, 2008 (it has become even more widespread since then). He then offers several criticisms of the theory. They are, in essence, as follows:
- As my astute readers will have already noticed, the law was enacted a full quarter-century before the financial crisis emerged. Furthermore, if the act did pressure banks to make risky loans, then the weakening of the reporting requirements in 1995 and 2005 would have decreased that pressure, not increased it.
- The majority of the risky loans have originated from institutions that are not governed by the CRA. Gordon cites the Congressional testimony of Michael S. Barr, a University of Michigan Professor of Law.
- CRA banks have originated risky loans at a lower rate than other financial institutions. Gordon cites an address given by Janet Yellen, president of the San Francisco Federal Reserve. The law firm Traiger & Hinkley, LLP, also published a careful statistical analysis showing, among other things, that CRA banks originated fewer risky loans than other lending institutions did.
It would be convenient for the conservatives to be able to blame our current financial problems on a law championed by liberals. Unfortunately for them, the facts do not support that explanation of events.
Writing in The American Prospect, Robert Gordon examines the claim that the CRA is responsible for the sub-prime crisis. He begins by tracing the genesis and evolution of this meme from the conservative economist Thomas DiLorenzo in September, 2007, to Robert Litan of the Brookings Institution just before Gordon wrote his article in April, 2008 (it has become even more widespread since then). He then offers several criticisms of the theory. They are, in essence, as follows:
- As my astute readers will have already noticed, the law was enacted a full quarter-century before the financial crisis emerged. Furthermore, if the act did pressure banks to make risky loans, then the weakening of the reporting requirements in 1995 and 2005 would have decreased that pressure, not increased it.
- The majority of the risky loans have originated from institutions that are not governed by the CRA. Gordon cites the Congressional testimony of Michael S. Barr, a University of Michigan Professor of Law.
- CRA banks have originated risky loans at a lower rate than other financial institutions. Gordon cites an address given by Janet Yellen, president of the San Francisco Federal Reserve. The law firm Traiger & Hinkley, LLP, also published a careful statistical analysis showing, among other things, that CRA banks originated fewer risky loans than other lending institutions did.
It would be convenient for the conservatives to be able to blame our current financial problems on a law championed by liberals. Unfortunately for them, the facts do not support that explanation of events.
posted by ManOfManyInterests at 1:42 PM
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