Robert_S wrote:I have yet to see a convincing case made for that. And if that act did force banks to make risky loans, it certainly did not force banks to play that securitization game. I'd also like to see where in the Community Reinvestment Act it stipulated that loans were to be made to people without any assets or proof of employment.
What happened is an excellent illustration of how one piece of legislation ends up distorting the economy far beyond what a naive estimation of the legislation might estimate.
The CRA amendments didn't explicitly require loans without proof of employment, for example. However, when the courts interpreted the CRA as involving quotas - requiring a certain percentage of loans to go to certain segments of the population - it turned out that there simply weren't enough takers in those segments of the population. The banks were faced with a choice between partially shutting down the mortgage market by ceasing to make loans to people who could afford them, or finding ways, such as not checking up on income, to make loans to people who couldn't afford them.
Congress didn't want the mortgage market squeezed, so they inflated it instead. The permitted FNMA ("Fannie Mae") and FHLMC ("Freddie Mac") to purchase "low income" mortgages and mortgage securities that took the loan originators off the hook for the risks of making the loans. This is an example of what Seth characterizes as the government "picking winners". At that point, investment banks and insurance companies also got into the act.
Of course, the government then chose to exacerbate the damage even further by engineering an indirect bailout of the investment banks and foreign governments that ultimately ended up holding most of the mortgage securities. Instead of limiting the damage of the bust largely to investors who made bad buying decisions - either in houses or mortgage securities - the bailout is spreading the damage throughout the economy.
IIRC, the Community Reinvestment Act was to make banks loan money in low income neighborhoods. Where I live, there wasn't much of an increase in the price of housing in the hood. There was a great deal of growth in the more affluent areas though. I could rent part of a McMansion pretty cheap if I cared to live in such a sterile environment.
That was true for the original Carter era CRA. The Clinton era amendments which were the cause of the problem focused on the income of the borrowers rather than the location of the housing. The result was people buying houses in better neighborhoods that they couldn't afford, rather than more home ownership in the slums.
