Wednesday, Apr 30, 2008
Explores a little known US act which appears to have encouraged subprime lending in the first place. The seeds sown in 1977?!
Mises Institute: The CRA Scam and its Defenders
"The myth that the CRA (The federal government's 1977 Community Reinvestment Act) would not be harmful to bank-industry profits was hidden for years by the Fed-created housing bubble, which allowed for easy refinancing of all the bad debt. But now that the bubble has burst, all those unqualified borrowers — whom the government calls "subprime" — are defaulting. The bursting of the Fed-generated housing bubble is the reason why the CRA scam was not exposed until now." - So far as I understand, this Act empowered banks to invest in subprime. The article seems to suggest that packaging of debt was a solution to the risk taken on by banks in response to the CRA Act. But, that continual housing booms cycles of house price booms, fed led, let the problem be hidden till now.
4 Comments
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1. drewster said...
I don't buy it. Were the seeds of this crisis sewn in 1913, when the Federal Reserve was founded? Or in 1971 when Nixon cancelled the Bretton Woods accord and halted the convertibility between the dollar and gold? Or the 1996 Housing Act (UK) which made shorthold tenancies the default option?
Although each may have played a small part, no single event can take the blame for the current situation. Bubbles are a natural part of the economic cycle. Bad regulation meant this bubble affected housing, something we all need!
2. planning4acrash said...
Interesting Drewster, I'd tend to buy that. I didn't really understand the article and was posting it to see if anybody could shed light on it.
3. drewster said...
The article highlights a piece of US legislation which encouraged banks to lend to poorer people, on the basis that this would help the poor to move up the social ladder (homeownership being associated with the middle classes). Socially this was well-intentioned and very unlike the rampant free-market thinking which dominates American politics today. However it could have added to banks present troubles with subprime.
Given that the legislation dates back to 1977, why has it taken 31 years to cause trouble? That's what I'm not buying.
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