Sonntag, November 30, 2008

Community Reinvestment Act Retour...

I've written about the Community Reinvestment Act (CRA) before. It's a criminally stupid attempt to enforce "fairness" in lending by forcing banks to make loans that make no financial sense, passing the inevitable costs on to the rest of us. It sounds like a good idea, but it's not. It has fundamentally distorted markets, creating imbalances that have led to subprime meltdown and has, now, cost the taxpayer, literally, hundreds of billions, and which has generated close to $13 trillion in losses.

The good news is that it cannot be anything but obvious that the CRA has been a major cause of our current recession.

The bad news is here.

Like the undead, the CRA refuses to die.

And it has friends. People who should have acted in a timely manner to stop the crisis, but who actively interfered and prevented those who knew that it would be a problem from actually doing anything about it.

The deluded, who actually believe that the CRA was a good thing.

Chris Dodd for one. Democrat from Connecticut.

Why is this man still serving? Anyone with a sense of responsibility must have resigned, especially after the news of his sweet-heart mortgage deals with a company that is under the oversight of the committee on which Dodd serves.

This is the modern face of corruption: you can claim all you want this and that, but Chris Dodd is a corrupt politician. Of course, under the current make-up of Congressional leadership, the likelihood that he will face even something as mild as a rebuke is miniscule, let alone an actuall process. Which goes to underscore just how corrupt Congress has become.

But getting back to the CRA: it will not die as long as the friends of the CRA remain in power, labelling anyone who dares to criticize the program as being racist because it "ensures" that minorities get loans. In the bizarre world of DC, that is tantamount to political suicide, so the CRA will continue to distort the market. Banks still feel the pressure from bank regulators who use the CRA as a bludgeon to force banks to continue to make loans that will not perform.

Might as well have the banks just burn the money.

It's really a very, very simple causal connection: banks were forced by legislation to take on higher levels of risk than they would have otherwise; new risk instruments were developed to counter the risk; the new risk instruments were repackaged and sold to disguise their inherent risks (and the rating agencies in the US deserve blame here); when risks materialized, the system reacted as it was designed to do; the system went down because the risks were improperly classified and hence became toxic. The credit derivatives based on subprimes were not the cause, but rather the symptom of the fundamental imbalance.

There are two lessons to be learned from this.

1) Rating agencies' commitment to internal regulation failed miserably and hence such agencies must be regulated directly.

2) CRA and subprimes distort markets and must be legislated out of existence.

Avoiding either actions sets the economy up for a repeat event.

And how stupid is that?

Well, there is a House Resolution 7264 that aims at repealing the CRA: the actual language is this:

The Community Reinvestment Act of 1977... is hereby repealed.

See? That wasn't so hard. I put the ellipsis in to simply remove the reference to the legislation that passed the CRA.

The chance of this happening? Uncertain. Nine sponsors, all Republicans.

The Democrats aren't even thinking about this one. That would be too much of a strain, I suppose.


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