December 2, 2008

The Community Reinvestment Act Cancer

September 26, 2008

The Community Reinvestment Act Cancer

Posted by Thomas DiLorenzo at September 26, 2008 01:53 PM

As I and others have pointed out, the federal government has been forcing banks to make bad loans to unqualified or "sub-prime" borrowers for more than 30 years under the 1977 "Community Reinvestment Act." Such loans comprise a large portion of all the sub-prime foreclosures. But the effect of the CRA is even worse than that. The chairman of the board of a major bank writes me:

"Mortage originators not subject to the CRA (presumably because they are not registered banks or thrifts) will still be subject to market pressures to make sub-prime loans. If banks and thrifts are pressured by CRA regulators . . . into making sub-prime loans, competitive pressures will encourage the non-CRA regulated institutions to make similar loans. Otherwise they will see their balance sheets decline relative to these other institutions."

"When you couple the pressures to make the sub-primes with the increase in the money supply arising from Federal Reserve actions, the fault comes fairly and squarely back to government actions over many years."

(I would add that the competitive effect mentioned above existed as long as the real estate bubble was bubbling).

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