Gerard Henderson joins the right-wing chorus blaming ‘do-gooders’ for the crisis

In today’s paper, SMH columnist Gerard Henderson promotes a smear that republicans have been circulating for a few days – that is, the Community Reinvestment Act (CRA) must bear a big share of the responsibility for the mess the world is in today:

Put simply, three decades ago the Democrat administration responded to the demands of anti-poverty activists that banks should not discriminate against low-income earning minorities. Rather, they said banks should take affirmative action to meet the needs of low-income borrowers. And so the subprime loan phenomenon came to pass with the intention that banks should loan housing funds to clients who could not meet existing prudential regulations.

Thats right folks, it is not greed, stupidity and an exaggerated faith in markets that is the problem; it is the idea that we should try and break down discrimination. Unfortunately, Henderson doesn’t provide any of the criticisms of the “CRA did it” theory which are abundant on the Internet.

For a start, there are those that lampoon the logic behind the CRA did it theory:

The twisted logic behind this newest meme is that the CRA forced formerly prudent lenders to abandon their previously cautious ways, and forced them to throw sound lending practices out the window because that’s what the law demanded, and gosh, it’s not their fault that they made bad loans in the bargain.

Then there is the Federal Reserve’s rebuttal of the CRA theory. This was covered in detail on the Big Picture weblog a few days ago and are worth quoting in full:

From the Federal Reserve:

“Neither the CRA nor its implementing regulation gives specific criteria for rating the performance of depository institutions. Rather, the law indicates that the evaluation process should accommodate an institution’s individual circumstances. Nor does the law require institutions to make high-risk loans that jeopardize their safety. To the contrary, the law makes it clear that an institution’s CRA activities should be undertaken in a safe and sound manner.” (emphasis added)

What about mergers or acquisitions — did the CRA get in the way of that?

“Since 1988, there have been more than 13,500 applications for the formation, acquisition, or merger of bank holding companies or state-member banks reviewed by the Federal Reserve Board. Over this time, twenty-five applications have been denied, with eight of those failing to obtain Board approval involving unsatisfactory consumer protection or community reinvestment issues.”

Wow, just 8 out of 13,500. That’s less than one tenth of 1%.

What about the methods of forcing compliance?

“The CRA is one of several laws enacted to ensure that consumers and communities have access to financial services and products regardless of location or demographics. Congress sought to achieve that goal not by imposing rigid, prescriptive rules but by charging regulators to use flexible standards that could change, as needed, over time.”

Gee, this doesn’t sound too onerous; What was all the brouhaha about?

“The debate surrounding the passage of the CRA was contentious, with critics charging that the law would distort credit markets, create unnecessary regulatory burden, lead to unsound lending, and cause the governmental agencies charged with implementing the law to allocate credit. Partly in response to these concerns, the act adopted by Congress included little prescriptive detail.”

What are the requirements of the CRA?

The CRA simply requires the Federal Reserve and the other federal financial supervisory agencies:

• to encourage federally insured depository institutions to help meet the credit needs of their entire communities, including low- and moderate-income areas, consistent with safe and sound operations;
• to assess their records of performance under the CRA during examinations; and
• to take those CRA records into account when evaluating proposals for expansion.

Hey, that sounds pretty flexible. What sort of discretion exists in applying the CRA:

The law gives the agencies considerable discretion and flexibility to fashion programs and procedures to carry out the purposes of the law, to issue implementing regulations that include measures of performance, and to modify those regulations in response to changing markets. This flexibility has contributed to CRA’s relevance and adaptability through times of rapid economic and financial change, and widely differing economic circumstances among neighborhoods.

Wow, this stuff makes the wingnuts and gasbags look pretty foolish. What’s your source for all this?

All quotes are come from the testimony of Sandra F. Braunstein, Director, Division of Consumer and Community Affairs of the Board of Governors of the Federal Reserve System, before the Committee on Financial Services, or from the Federal Reserve website.

An article in Businessweek went even further:

Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley (PDF file here).

Businessweek also points to a growing mountain of evidence against the CRA is to blame theory advanced by apologists like Henderson:

There’s plenty more good reading on the CRA and the subprime crisis out in the blogosphere. Ellen Seidman, who headed the Office of Thrift Supervision in the late 90s, has written several fact-filled posts about the CRA controversey, including one just last week. University of Oregon professor and economist Mark Thoma has also defended the CRA on his blog.

And so it goes on. At the end of his column, Henderson offers this gratuitous piece of condescension:

It serves no useful purpose to posit simplistic explanations for complicated realities.

Indeed it doesn’t mate; which is why you shouldn’t have just repeated this latest piece of republican drivel so uncritically.

UPDATE: Unsurprisingly, Albrechtsen has joined the chorus and just repeats the CRA did it stuff with lots of supposition but no evidence.