Monday, September 29, 2008

Blame Whitey!

Believe it or not, I try not to post too much about politics here. This morning there are about half a dozen things I want to rant about, from the McCain campaign previewing their post-VP Debate strategy of claiming that it's unfair to ask any questions Palin doesn't know the answer to, to this awful act of anti-Muslim terrorism in Ohio. But most of that would just be me yelling to make myself feel better. There's one thing I really want to say something about, though, because it's a really nasty piece of conservative propaganda that's starting to make the rounds, and it's one that I'm sure is going to catch on, because it just sounds like something that people want to believe. I'm talking about the idea that the Sub-Prime Crisis was caused by the Community Reinvestment Act of 1977, a liberal program designed to get banks to offer mortgage loans to poor and minority communities. I can tell this is going to be a popular idea, no matter how much evidence is against it, because I know poor, white, Southern conservatives, and I can see how neatly this idea fits into their world view (not even getting into the Libertarians, who will go to their graves believing this).

This idea was put forth in an essay by Terry Jones (hopefully not the Monty Python alum) in Investor's Business Daily, spread on Fox News by Neil Cavuto ("loaning to minorities is a disaster"), and John Derbyshire took up the idea in a post on The National Review blog. And I want to point out up front that I have no sort of expertise in this matter. I couldn't give you a detailed account of what, exactly, could have been done to prevent the current meltdown. But I do know that this idea that "lending to minorities" caused the problem is bullshit.

Ta-Nehisi Coates has been blogging a good deal about this (you should read his blog anyway, he's a very smart and funny read), and he pointed me toward an excellent takedown in The American Prospect by Robert Gordon, which I am now going to quote at length:

The revisionists say the problem wasn't too little regulation; but too much, via CRA. The law was enacted in response to both intentional redlining and structural barriers to credit for low-income communities. CRA applies only to banks and thrifts that are federally insured; it's conceived as a quid pro quo for that privilege, among others. This means the law doesn't apply to independent mortgage companies (or payday lenders, check-cashers, etc.)

But CRA has always had critics, and they now suggest that the law went too far in encouraging banks to lend in struggling communities. Rhetoric aside, the argument turns on a simple question: In the current mortgage meltdown, did lenders approve bad loans to comply with CRA, or to make money?

The evidence strongly suggests the latter. First, consider timing. CRA was enacted in 1977. The sub-prime lending at the heart of the current crisis exploded a full quarter century later. In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as noted by the New America Foundation's Ellen Seidman (and by Harvard's Joint Center), that activity "largely came to an end by 2001." In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law's toughest standards. Yet sub-prime lending continued, and even intensified -- at the very time when activity under CRA had slowed and the law had weakened.

Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn't even apply to most of the loans that are behind it. As the University of Michigan's Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.

Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the "tendency to conflate the current problems in the sub-prime market with CRA-motivated lending.? CRA, Yellen says, "has increased the volume of responsible lending to low- and moderate-income households."

That's sort of a summary of the hilights, but it's useful to read the whole thing.

The other, and perhaps even more persuasive, source I want to point you to is this episode of This American Life, entitled The Giant Pool of Money. It explains why banks began offering these sub-prime mortgages to everyone who wanted them, and it has nothing to do with incentives (or coercian) from the government. The incentives came from bundling the mortgages together and selling them up the foodchain to investors. They had no concern about people failing to make their mortgages, because they were going to sell them all to someone else anyway. It was the market in action.

Again, I have no idea what could have been done to prevent this. I have no idea whether the bailout plan that got voted down this morning was a good thing or not. (My biggest question is why congress isn't haggling over it. You need $700 billion? We'll give you $400 billion--enough to keep the economy from collapsing, but an amount that still causes some pain. Maybe this proves how little I know about the situation.) But I can clearly see that this is not a crisis caused by over-regulation.


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