Wednesday, September 24, 2008

Blaming the Poor for Ruining the Market

Ladies and gentleman do not be fooled. Poor people are not to blame for this financial crisis. Over the coming days you are going to hear free market ideologues try to pin this whole mess on the Community Reinvestment Act or CRA's. CRA's are a financial instrument pushed onto banks by the government to get low-income families the necessary loans to buy homes. These were "sub-prime" borrowers. Some will point to these CRA's, or "loans to irresponsible, poor, inner-city people" as the genesis of this financial crisis. DO NOT BELIEVE IT.

A study done by Traiger and Hinckley regarding the CRA’s found that these banks were less likely to make bad loans than banks not using CRA's. The summary conclusion of that study was as follows:

CRA Banks were substantially less likely than other lenders to make the kinds of risky home purchase loans that helped fuel the foreclosure crisis. Specifically:
  1. CRA Banks were significantly less likely than other lenders to make high cost loans.
  2. The average APR on high cost loans originated by CRA Banks was appreciably lower than the average APR on high cost loans originated by other lenders.
  3. CRA Banks were more than twice as likely as other lenders to retain originated loans in their portfolio.
  4. Foreclosure rates were lower in MSA's with greater concentration of bank branches.
Or listen to Larry James, Executive Director of Central Dallas Ministries who has on the ground experience with CRA's:
"Most small banks make donations to organizations like CDM. Larger banks find ways to do community development deals with stronger, larger community organizations and even cities like Dallas. There is no quick and easy loan process, no system flush with money flowing toward the "irresponsible poor." The poor never see such funds directly and getting funds for projects is difficult, guarded and complete with all sorts of accountability. In Dallas the large CRA projects (if you want to call any of them "large") have been positive for the city, especially in underdeveloped communities.
There is more than enough blame to go around in this financial crisis. From the Financial Services Modernization Act which brought down the firewall between commercial banks and investment banks (supported by Republicans, Democrats, and Bill Clinton), to investment managers that bet the farm on securities that went bust (Lehman was leveraged $30 to $1)!

It's clear the markets need to be bailed out in a responsible manner. And a proper review of what got us in this mess needs to be undertaken. But do not even entertain the idea for one second that the Governments "over eagerness to help the poor" is what sunk the ship. Nothing could be further from the truth.


David Kirk said...

I don't know who to believe, but I want to see the guilty persons go to jail over this mess. Am I the only person who feels this way?

J-Wild said...

Nope you aren't.

The problem is on an existential level, we are all guilty. We are a credit based society in which we can own homes, cars, etc and not really afford them.

It's clear these execs, were just mad for money. And the government bought into an ideology that said less regulation means greater prosperity. Clearly it doesn't.

Always appreciate your comments David.