Wednesday, 24 October 2012
CRA and the GFC
There are people out there who believe the CRA caused the GFC reading the Sub-prime crisis.
Randall Kroszner , (a person thought too conservative to be a Fed governor by silly Democrat Senators) gives both a good description of what the CRA is/was and looks at one of the many studies into by either the Fed or each of the Regional Feds.
This paper blows that CRA caused the GFC argument apart.
I now quote Richard Green who is far more knowledgeable than I.
" If CRA encouraged subprime lending, one should see a discontinuity at the thresholds, but there is none.
These are originations for 2-28 subprime loans. Under CRA, lenders received credit for originating and funding loans in census tracts whose median incomes were below 80 percent of area median income. If the CRA was inducing lending, we should see a jump in lending to the left of the 80 percent cut-off--there isn't (either visually or econometrically). They find the same result when looking at pricing and default. "
Finally The RBA's Luci Ellis looks at the causes of the GFC in part of this speech.
All in all people who support the theory the CRA caused the GFC have no evidence and like old time communists are letting their ideology overule the facts of the situation.