Last week, Clusterstock's John Carney brought the debate
about what role the Community Reinvestment Act played in the credit
crisis back to the fore for economic and business bloggers. Reuters' Felix Salmon and the Big Picture's Barry Ritholtz (not to mention me) got worked up about the fallacy of his arguments. Then, The Atlantic's Megan McArdle joined the debate on Carney's side late Friday.
You can sum up McArdle's opinion with this line from her post: "But
the relaxation of credit standards that allowed the meltdown did start,
as far as I can tell, with the CRA."
Her argument centers on the dangers spawned by providing credit to
the poor. She's certainly right that such policies may be dangerous,
but did CRA, with its limited role, open floodgates of credit? The CRA
was established some 30 years before the credit crisis. Certainly, the
Clinton administration attempted to put teeth on the CRA by enforcing
it, but that was before the housing bubble began, which most argue
started sometime between 2000 and 2002.
Instead, the expansion of credit into the lower depths of the
socioeconomic strata is a likely result of other factors. One factor
Barry Ritholtz argues for in his book "Bailout Nation" is the Federal
Reserve's decision to keep interest rates unusually low following the
9/11 attacks. In effect, low interest rates made money cheap. It also
had the effect of overleveraging the system as banks from all quarters
borrowed, while most of their regulators were asleep at the wheel.
Another factor: Wall Street's insatiable demand for securitized
products. Securitization helped foster nonbank finance companies, who
were at the forefront of expanding credit to the poor. These companies
saw little risk to lending to the poor and those with bad credit
histories because these companies simply past the risk on to the Wall
Street players -- most notably the investment banks. CRA did not cover
either the nonbank finance companies or most of the buyers of
securitized mortgages, car loans and credit cards lent to the poor.
Meanwhile, Ritholtz joined the debate Monday morning and dismissed
Carney and McArdle as simply trying to obfuscate the truth. Writes
Ritholz: "The rhetoric of those pushing nonsense on the public in an
attempt to confuse rather than illuminate -- the phrase is 'agnotology' - only serves to aid the lobbyists working on behalf of the Banks and Investment houses to maintain the status quo."
Whew.
Don't hold back or anything. Ritholtz is so incensed that he's
challenging Carney (or anyone else interested) in a debate -- Lincoln vs. Douglas-style -- with a minimum cash wager of $10,000. So far, he has no takers. - Matthew Wurtzel
See McArdle's story from The Atlantic
See Ritholtz's story from the Big Picture
See Carney's latest story from Clusterstock
See earlier CRA story from Dealscape
See Carney's original CRA story from Clusterstock
See Felix Salmon's response from Reuters' Macroprudential
Continue reading below
The credit Crisis was caused by the politicians…
it's so obvious, but gets little coverage.
Tax Havens are also a significant root cause,
but Obama is going after individuals right now…
and Corporations may not be affected until 2011.
What a bunch of crap.