It is pretty clear by now that the origin of the bubble was the push to increase home ownership among low income people. The first action in this direction was the Community Reinvestment Act passed in the Carter Administration. The role of the CRA has been disputed by left-leaning commentators including the oddly named “Businessweek, which represents the views of few businessmen I know. Still, you can learn a lot of history by reading between the lines of opposing views.
The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits. Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly.
Read those two sentences and note which one is fact and which is opinion.
Now, let’s look at an official site and see what it says.
The CRA requires that each insured depository institution’s record in helping meet the credit needs of its entire community be evaluated periodically. That record is taken into account in considering an institution’s application for deposit facilities, including mergers and acquisitions.
Notice the steel fist through the velvet glove ?
Here is another opinion from a different perspective. The CRA was modified and expanded in 1995. Here is more history with comments on the Clinton Administration’s expansion of the law.
The CRA regulations were substantially revised again in 1995, in response to a directive to the agencies from President Clinton to review and revise the CRA regulations to make them more performance-based, and to make examinations more consistent, clarify performance standards, and reduce cost and compliance burden. This directive addressed criticisms that the regulations, and the agencies’ implementation of them through the examination process, were too process-oriented, burdensome, and not sufficiently focused on actual results. The agencies also changed the CRA examination process to incorporate these revisions.
That means quotas, of course.
The financial collapse had other causes, as well, and I don’t want to reargue the entire story. Bush allowed the Fed to keep interest rates too low in the mid-2000s. Investment banks got too enamored of exotic derivatives like credit default swaps, which was bad enough. What was worse was an informal market in trading derivatives of the derivatives.
What I am interested in is where this all began. I would like to suggest that Margaret Thatcher had something to do with it. In the late 1960s, a concept arose called The Right To Buy, which allowed council housing tenants to buy the home they were living in, with a discount for the rent they had paid for some period of time. This quickly became popular and the theory was that owners would take better care of the home they owned than a renter would. Labour, once she had passed form the scene, adopted the same policy and she is now being blamed for the British housing bubble in similar fashion.
The theory was probably right so long as the house being bought was modest and within the means of the buyer to maintain. Once housing prices began to rise, disaster followed.
Tags: council housing, financial, housing, Margaret Thatcher
Ha! Well, that’s interesting. I think you might want to butt heads with Josh Silver, the CRA guru at the National Community Reinvestment Coalition. I don’t believe that there’s anything about the CRA and its history that he doesn’t know.
Read: http://www.ncrc.org/wordpress/2009/03/27/would-the-community-reinvestment-act-cra-have-saved-aig/
I’m not saying that it was the cause of the entire collapse but that it began the trend that resulted in the real estate bubble. Apparently there are many who attribute the English housing bubble to similar factors.