Unfettered greed is the suspect many point at to explain the current economic crisis. To some extent, they are right, but it isn’t irrational greed on the part of bank managers or fat cat CEOs. It is the unwieldy bank regulations that forced the entire industry to walk the proverbial plank and then blame it for drowning.
Critics have alternately claimed that over-regulation and under-regulation are the causes for the current crisis. I believe one specific regulation, the Community Reinvestment Act (CRA), should shoulder a lot of the blame for creating an environment where a lending institution’s short-term survival hinged on it making the decisions that in the long-term would likely cause its demise.
As I noted in my paper The Community Reinvestment Act’s Harmful Legacy, one of the effects of the CRA was the creation of a weapon that has been effectively utilized to extort money from lenders. When lending institutions wish to open a new branch, expand, or merge, they must apply for permission from one of the four governing bodies (Federal Reserve, Office of Comptroller of the Currency, Federal Deposit Insurance Corporation, and Office of Thrift Supervision). Their request can be postponed or outright denied if any community group files a CRA protest. Lending institutions can of course fight these protests, but CRA investigations can take months and cost large sums of money.
The institution under investigation stands to lose money due to the actual costs of the process of investigation as well as the potential loss of money (millions or even billions of dollars) for each day a merger is postponed. Such loses could be the ruin of a lending institution. In an attempt to bypass CRA protests, banks make sure they comply with CRA regulations (making risky lending choices), make sure the public knows they are in compliance (wasting money on PR campaigns), and often bribe these “community groups” to guarantee that they won’t file a protest.
The correlation between a bank’s compliance with CRA and its relative financial health has been well documented. As I noted in my paper The Community Reinvestment Act’s Harmful Legacy, there is a discernible correlation between a lending institutions’ compliance with CRA regulations and a decrease in their financial health. In his paper, Jeffrey W. Gunther noted that banks engaging in the risky and aggressive lending that would get it a good CRA rating would result in a lower rating for the institution’s financial soundness.
Despite this correlation financial institutions continued to tailor their lending habits in order to maintain satisfactory CRA ratings decreasing their ability to respond to market shifts. The reason is, until now, the threat of CRA costs was more present than the potential loss in a banks ability to react to a down-turning market. But building sand on top of sand only works for so long.
So yeah, maybe irrational greed is a factor in the current crisis, but it is the irrationality of regulators and the greedy demands of community groups that we should be pointing fingers at. If banks had been allowed to act in their own long-term best interest, sure some ill-managed institutions would still crumble, but we would not be witnessing such a wide-spread failure that indicates a system wide error in judgment.
Loading ...
Uh, excuse me; that wasn't a regulation; that was just an earmark to the deal. It is in NO WAY a regulation! Stop trying to blame the greed and insanity of wall street on the democrats…you're doing NOTHING but hurting your own cause. REGULATION: NOUN: 1. The act of regulating or the state of being regulated. Is the definition of regulation. They said mccain tried to put regulations ON THEM. Does't that mean they didn't have regulations? Who's right? You or mccain? You are VOTING for him aren't you?
Do you have any statistics to support this condemnation of CRA? My understanding is that CRA only applied to banks and thrifts which took deposits from redlined neighborhoods and that CRA loans were more likely to be held by those institutions, than the typical sub-prime mortgage. If true, then it would seem as if CRA loans would have had minimal impact on the mortgage crisis. I have seen lots of ink spilled accusing the CRA of having a substantial link to this crisis. I have yet to see any hard facts or figures to support that accusation.
McCain tried to strengthen oversight on Fannie/Freddie. Which “THEM” are you talking about?
CRA is a regulation. If anyone has an open lawsuit under housing discrimination law, CRA says that mergers, opening or closing branches and all sorts of stuff is off limits until the suit is settled. Which most banks did.
CRA is a massive price-fixing scheme: the thing whose price was controlled was risk: businesses were forced to acquire tons of risk as the cost of doing business. As soon as the market went south, sure enough, everything went to hell.
Go to http://delicious.com/somercet/subprime_market and read some of the links I've saved. It's an eye-opener.
Redlined neighborhoods? How did the government know which neighborhoods were redlined if the banks did it secretly? Obviously, the government measured the income and ethnicity of borrowers:
http://en.wikipedia.org/wiki/Community_Reinvest...
“He further states that Gordon's statistic ignores that independent mortgage companies are middlemen who sell subprime loans to banks that are in turn regulated by the CRA.” Which no doubt counted as a good CRA score.
I love the quote by Ellen Seidman. Basically, if a bank has a low CRA score, then it suffers a ban on mergers, acquisitions and opening and closing new branches. If they become overloaded with risk, they get — a lecture from Ellen! Wow, what an incentivization package, there, Ellen!
http://www.newamerica.net/blog/asset-building/2...
So, she says it was created in 1977. Wow. She fails to mention how it was amended in 1995 (Yes, it used to be a local-only law until then). That version lasted until 2005, when Republicans had 55 seats to force the Senate Democrats to action.
The problem is not necessarily the CRA. Alone, it might have been perfectly benign. Another part of the problem was (I hate typing this anthropized name) Fannie, which began keeping its mortgages instead of selling them. Then it used them as collateral for money to get, yes, more mortgages. No one ever destroyed an economy by going broke; they do it by going broke while super-leveraged, called “dying with someone else's money in your pockets.” It's considered rude.
Basically, several factors combined to honeycomb the mortgage traders, insurers and holders with risk. As soon as the market went south, the entire market went south like a termite-ridden house. It did not help that the Dems sat on it for ages, afraid to call an exterminator lest the neighbors think badly of them.
I forgot to add: bonds in Fannie itself were used as collateral by other banks and investors. Those are now worthless (Fannie is the company that falsified its earnings, which might have let the rest of the world know the ride would come to an end). Also, lots of institutions used the Fannie-guaranteed MBSs as investments.
This is why everything came apart. It's so pervasive, so weak, and it all looked great until just before it exploded.
Ummmm. Still no facts or figures. Just more spilled ink.
Kim–
This press release from Fannie in the year 2000 may be of interest to you re the pressures exerted on banks for more community-based lending — with lower standards. Their plan was to purchase $20 billion of such CRA mortgages in 10 years.
Fannie Mae Announces Pilot to Purchase $2 Billion of “MyCommunityMortgage” Loans; Pilot Lenders to Customize Affordable Products For Low- and Moderate-Income Borrowers
http://www.csrwire.com/PressRelease.php?id=482
10/30/2000
MyCommunityMortgage product options give flexibility to lenders by allowing variances that borrowers need to qualify for loans, often unique to particular communities. These variances apply to basic loan features such as loan-to-value ratio, borrower contribution, housing expense-to-income ratio, and others. For example, the need for down payment assistance may be a critical borrower need in one part of the country, while the need for 2-to-4-family housing may be foremost in another part of the country.
• Community 97 is a new 97 percent loan-to-value product option for single-unit borrowers who need to devote more of their income to housing.
• Community 100 is a new 100 percent loan-to-value product option for single-unit borrowers who lack cash and reserves, but have good credit.
• Community 2-Family offers underwriting flexibilities for 2-unit properties to 95 percent LTV.
• Community 3- and 4-Family offers underwriting flexibilities for 3- and 4-unit properties to 90 percent LTV.
• Customized CRA-Eligible Flow Product Option provides lenders with approval recommendations for CRA-eligible flow product that does not fit within the parameters of the four options listed above.
•
. . . Today’s announcement is part of Fannie Mae’s goal to purchase $20 billion in special targeted CRA-eligible loans over the next ten years, and is part of the company’s $2 trillion “American Dream Commitment” to increase homeownership rates and serve 18 million targeted American families.
Ummmm. Still no facts or figures. Just more spilled ink.
Right back atcha, Kimmie.
I don't think CRA destroyed the biggest, most stable housing market in the world. But it was a piece in the political machine that did.
How many global markets closed when Enron went under? Bear Stearns? Lehman Bros.? Now that Fannie, a government entity with an implicit government guarantee, had to be taken over, the Russian market closed and several banks in Europe have failed or gotten emergency help.
Irish government guarantees all bank deposits
http://uk.reuters.com/article/hotStocksNews/idU...
Have you ever heard the expression, “Money is the root of all evil”? The current financial situation that we face (as a global community) seems to echo those words. Yet, you say that “maybe irrational greed is a factor in the current crisis”, but not the cause? Greed is the driving force behind every decision that we make. When you consider your choices at the end of your day, and evaluate your motivation behind them, do you not come to this conclusion? Of course, throughout our day-to-day existence, we don't think of our lives in these terms because that would mean that we ARE, in fact, GREEDY…it doesn't sit well on the stomach. Herein lies the cause, the true cause, of not only the financial crisis, but also other global crises as well.
To be quite honest, most of this economic talk is very confusing…who did what, who's buying who, stocks, mortgages, loans, etc…I've never claimed to be an economic expert. However, this crisis affects us all; shouldn't we be considering a solution that will benefit us all? I was reading an article that Michael Laitman wrote on his website that talks about how we can achieve this. Check it out: http://www.laitman.com/2008/10/the-financial-cr...
Thanks for sharing
world economic crysis