The Community Reinvestment Act, which was heavily revised and strengthened in 1995, compels federally insured depository institutions “to help meet the credit needs of the communities in which they operate." http://www.ffiec.gov/cra/ These lenders are prohibited from engaging in mergers and acquisitions unless they receive a satisfactory rating from federal regulators which rate each lender based on their proportion of loans to low-income neighborhoods.
Although the magnitude of this explanation is not entirely clear, the CRA clearly seems to have contributed to the sub-prime crisis. When legislation compels market forces to provide more of something then otherwise would be provided, there are going to be unintended consequences. For example, Countrywide’s loans to low-income neighborhoods grew by $600 billion by 2003 http://www.investors.com/editorial/editorialcontent.asp?secid=1502&status=article&id=291507506135021
The law was originally intended to stop the practice of “redlining” in especially high credit risk neighborhoods. Now banks are being accused of “predatory lending” practices instead, with more regulation sure to follow. Despite what the regulators claim http://www.federalreserve.gov/dcca/cra/ lenders were given an incentive to increase the default risk of their loans so that they could obtain a satisfactory rating and engage in critical mergers and acquisitions. Even our new President-Elect, Barack Obama, oversight chairman of the banks, Rep. Barney Frank (D-NY) and others on both sides of the isle are equally to blame for this debacle http://obama2.com/archives/tag/community-reinvestment-act/ It seems to me that any free market analysis of the sub-prime crisis should consider the consequences of legislation perverting the incentives of depository institutions. Obama even sued Citibank over its refusal to change, what should have been prudent loan application risk analysis, its criteria for lending to sub-prime borrowers which have caused the recent bailout (at taxpayer...and future generations'.... expense) http://www.mediacircus.com/2008/10/obama-sued-citibank-under-cra-to-force-it-to-make-bad-loans/
A poor example of leadership.
1 comment:
Let's remember it was your fascists approach of hands off and let the corporation make it's own rules for the elite that put us where we are. The return of regulation and anti-trust law to break up the companies so we don't have one that is to big to fail is what we need and what you oppose. Bailouts of the auto makers at least makes sense as they are a Nat'l Security asset and an industry we should keep. If regulation like alternative fuel and cafe standards were not blocked by the GOP they may not have failed. If we had universal health care and protected pensions backed by the govt. like all other industrial democracies our companies would not be at a disadvantage but your side blocks this. You would rather drive down wages of Americans in favor of pooling all the wealth at the top which is what your policies have done. You have pretty speeches and words but in practice your ideas have resulted in fascism, you have no creditability with this silly argument of socialism. An idea is not socialist if pushed by a democratic people and not imposed by a govt or corporation. If the people want to help a corporation they can, that is not socialist as long as we have the power to remove those who represent us.
Still throwing your fear bombs in hopes of scaring people to vote for fascism again.
Denisee
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