Tuesday, February 24, 2009

Elizabeth Duke Defends the CRA

Fed Governor Elizabeth Duke gave a speech on the Community Reinvestment Act (CRA) today, and had some harsh words for the crazy right-wingers who claim that the CRA caused the subprime crisis:

The most recent misperception promulgated by many who either do not know much about the law or don't like it, is that the CRA caused the subprime mortgage meltdown.
That makes two conservative Fed Governors (Duke and Randall Kroszner, both of whom were appointed by Bush) who have recently offered vigorous defenses of the CRA, and have flatly rejected the argument that the CRA had anything to do with the subprime crisis. And their analyses were based on two comprehensive Fed studies of the CRA, which definitely disproved the CRA-subprime argument [1], [2]. (In fact, the Fed studies showed that the CRA often improved lending standards.) Conservative idiots like Phil Gramm, Peter Wallison, and Steve Sailer, however, are still pushing the argument that the CRA caused the subprime crisis, which their wingnut followers will no doubt continue to eat up. It's sad, really, because when we eventually get around to reforming financial regulations, the Republicans will argue—citing the likes of Gramm and Wallison—that we need to repeal the CRA, not reform financial regulations. Update: The Boston Fed has now posted their new book about the CRA online, which can be found here. The book is titled, Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act. Amazingly, the book includes the following passage in an article by NYU Stern professor Lawrence White, who is a longtime CRA critic and an extremely conservative economist:
There have recently been broader critiques of the CRA: that it encouraged banks to make subprime mortgage loans (which were then securitized) and thus the CRA bears major responsibility for the housing bubble of 1999–2006, and then for the mortgage-related securities crisis that began in 2007. I believe that these broader critiques are badly aimed. It appears that the bulk of the subprime lending of the earlier years of this decade was made by nonbank lenders—that is, by “mortgage banks” that either securitized the mortgages themselves or that quickly sold the mortgages to securitizers. These nonbank lenders were not covered by CRA requirements. Further, the major financial difficulties that were related to investments in these mortgage securities were experienced mostly by investment banks (such as Bear Stearns, Lehman Brothers, Morgan Stanley, and Merrill Lynch) and by a large insurance conglomerate (AIG)—none of which was covered by the CRA. Where banks did experience difficulties that were related to subprime mortgages, such as CitiBank, WaMu, Wachovia (having absorbed Golden West in 2006), IndyMac, and Countrywide, it appears that they were heavily involved in subprime lending because of its perceived profitability (and their underappreciation of the risks) and not because of CRA pressures. The CRA has multiple flaws, but responsibility for the subprime mortgage lending and securities debacle does not appear to be one of them.
White, who I've generally had very little respect for as an economist (he was a professor of mine at Stern way back when), actually does the right thing here by acknowledging that the data do not support the argument that the CRA contributed to the subprime crisis. Good for him.

4 comments:

Gentlemutt said...

Follow-up question:

do we know what percentage of the sub-prime mortages written by non-bank bucket shops ended up in Fannie and Freddie securities? do we know what percentage of Fannie & Freddie securities in, say 2003-2007, were composed of non-bank sub-prime loans?

it is good to know that CRA, for all its faults real and potential, was not the linchpin its critics claim. now it would be useful to know to what extent Fannie and Freddie were used to process the evil sausage, since their supposed role --- other than bringing themselves down --- is the other "big govt" leg pointed to by the fox news crowd.

thanks for the informative post.

RS Gold said...

awesome post... will help me a whole lot,it is precisely what I was searching for! Many thanks.




Buy Cheap RS Gold
Gold WOW Cheap

Trần Duy Thuận said...

Trần Duy Thuận Blog đang cần nhận gia công tại nhà. Ai có cần người nhận gia công tại nhà tphcm liên hệ mình nhé. Truy cập vào đặt vé máy bay giá rẻ vietjet để có thêm kinh nghiệm khi đi máy bay nhé.

Fire Ball said...

Khi đến với thằng ghờm shop nơi chuyên cung cấp đồ điện máy cũ hàng đầu với chất lượng đảm bảo. Đến với thằng ghờm bạn có thể tìm thấy máy lạnh cũ giá rẻ, máy giặt cũ giá rẻ nơi chuyên bán tủ lạnh cũ giá rẻ. Hãy đến với chúng tôi để tìm thấy cho bạn sản phẩm bạn cần.

Cập nhật những kiến thức mới lạ như atsm là gì, thẻ tín dụng là gì,... qua mục kiến thức tổng hợp.