Then the geniuses on Wall Street found they could make billions with credit default swaps that even they did not understand. They just ignored the "consistent with safe and sound lending practices" provision.
We live in the looney bin.
CRA
The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII of the Housing and Community Development Act of 1977, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.[1][2][3] Congress passed the Act in 1977 to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining.[4][5]
The Act requires the appropriate federal financial supervisory agencies to encourage regulated financial institutions to meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation (Section 802.). To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance, and take this information into consideration when approving applications for new bank branches or for mergers or acquisitions (Section 804.).[6]
You make an interesting argument, however if the Community Redevelopment Act was enacted in 1977, why did the crash occur in 2008? I suspect there is more to this problem than just the Community Redevelopment Act. President Bush was pushing for home ownership early in his administration. Were laws changed at some point that allowed the banks to bundle and sell mortgages? It is quite obvious the housing crisis was related to the economic crisis that laid off millions of people who subsequently lost their houses. There was also a housing Bubble at the time which is still being corrected to date. Throwing Freddie and Fannie under the bus is a simplistic solution for such a complicated issue.
ReplyDeleteThe timeframe makes sense to me. It took those years for the bubble to develop. The CDS also took time to gestate. Financial types originally sold mortgages and over time (partially responding to the CRA) the standards fell. Other financial types figured how to bundle the "product" and credit default swaps. BTW. Those were originally a good idea since the spread risk, much like the re-insurance industry does. The problem was two-fold. Political pressure from Rangel and company and excessive greed on Wall Street. If I throw Freddie and Fannie under the bus, they would have company.
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