The Community Reinvestment Act Helped Cause the Wall Street Crisis

Getting class-warriors to admit they’re wrong about anything is always a struggle.

Witness Bill O’Reilly’s attempt to get House Financial Services Committee chairman Barney Frank (D-Massachusetts) to admit he was on the wrong side of housing policy for decades. Frank, a member of the socialist Congressional Progressive Caucus, wouldn’t give an inch in a recent interview even though his fingerprints (and those of some Republicans) are all over the current crisis on Wall Street. (See transcript from October 2 “The O’Reilly Factor” show here; video here)

But let’s look at the facts.

Stanley Liebowitz, an economist at the University of Texas, wrote that the current mortgage market debacle is “a direct result of an intentional loosening of underwriting standards — done in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults.”

Enacted in 1977, the Community Reinvestment Act (CRA) catered to liberals’ sick fascination with economic egalitarianism. CRA inspired the aforementioned intentional loosening of underwriting standards and helped to alter the culture of financial institutions in America. It encouraged lenders to rely less on usual lending criteria such as creditworthiness, i.e. whether the borrower can and will actually pay the money back.

CRA, a financial affirmative action scheme, played a large role in getting all U.S. lenders –regardless of the specific regulatory regimes they fell under– to start playing fast and loose with loans. Lenders were terrified of being called racist by left-wing groups such as ACORN, the Greenlining Institute, the National Council of La Raza, the National Low Income Housing Coalition, and the National Community Reinvestment Coalition so they did what Corporate America often does: they tried to appease the left by buying it off.

Good luck with that, Rabobank.

The CRA isn’t entirely to blame for the nation’s economic turmoil, but it, and a number of economic factors including the Federal Reserve Board’s decision to keep interest rates artificially low for far too long after the 9/11 terrorist attacks, created a perfect financial storm. Since money was ridiculously cheap, bankers took leave of their senses and went overboard with exotic mortgage products as investors kept inflating the housing bubble and sending home prices into orbit. The bubble popped, and now the whole country is suffering. Thanks, CRA.

But left-wingers refuse to accept that their beloved policy is largely responsible for the human suffering that the economic downturn is only just beginning to cause. 

Cynthia Tucker of the Atlanta Journal-Constitution disingenously suggests that pointing out the flaws of the CRA constitutes “playing the race card.” This is a cheap trick aimed at shutting down discussion of the CRA.

John Podesta’s Center for American Progress is trying to confuse the issue by hiding the culpability of liberalism in a kind of word smog. 

Take this lawyerly CAP item, “Idea of the Day: The Community Reinvestment Act Didn’t Cause the Financial Crisis,” which makes an attempt at misdirection. It argues that the CRA came into force “long before subprime mortgages at the heart of the current crisis were ever made.” But that’s not the point. The CRA mandated a loosening of underwriting standards, and this loosening of underwriting standards eventually permeated the entire lending industry. (CAP’s argument here seems similar, if not identical, to the argument made here by the National Community Reinvestment Coalition.)

Two other CAP analysts argue here and here that conservatives complaining about the CRA are merely blame-shifting.

Even as I write this blog entry, mere hours after the president signed the awful $700-billion Wall Street bailout package into law, the activists of the National Community Reinvestment Coalition are determined to destroy even more of America’s wealth. The NCRC‘s convention planned for March 11-14, 2009, is called “Achieving the Financially Inclusive Society.”

These economic equality-obsessed people never learn and if economists’ worst fears come true, we’re all going to be a lot more financially equally soon.

To quote Treasury Secretary Henry Paulson out of context, heaven help us!

(Note: For more information on how community organizers used the CRA to shake down lenders and wreck the economy, see my article, “Financial Affirmative Action,” in the American Spectator, September 29, 2008. Here is a link to it. Another good source of information on the CRA is the paper titled “The Community Reinvestment Act’s Harmful Legacy,” by the Competitive Enterprise Institute’s Michelle Minton.)

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