Why yes, the CRA is part of the problem
Dino’s come up with a few posts which claim to settle once and for all that the Community Reinvestment Act is not to blame for the collapse of credit markets this year. Well, all of those sources have one thing in common; they are not answering a very basic question;
“If the CRA sets up a mechanism for the monitoring and penalizing of banks for failing to issue loans in high risk (formerly “red-lined”) areas, would we expect this law to result in more, or fewer, high-risk loans?”
While the correct answer to this question evades Dino and apparently Ben Bernanke, it’s really not that difficult. You threaten expensive legal actions against banks unless they issue risky loans, you will get more of those risky loans than otherwise.
The debate here is over whether the CRA is the dominant factor here, not whether it’s a factor. Of course, you won’t find Mr. Bernanke admitting that years of loose monetary policy created first a stock bubble in the 1990s, and then a real estate bubble this decade. And you probably won’t find him admitting that the CRA has been a disaster, either; the Fed is one of the chief proponents of the law and its expansion.
