Home -> Law Blog Directory -> Legal Commentary Blogs -> Economics of Contempt

Legal Commentary

: Economics of Contempt

Oh My God, the CRA Didn't Cause the Housing Bubble

By Anonymous

Now that the financial crisis has become a political issue, there has been a surge of commentary on the financial markets from political commentators. Let's just say that they haven't raised the quality of the discourse. The sooner they're back to fighting about the outrage-du-jour on the campaign trail, the better, as far as I'm concerned.

One argument that has predictably caught on with the far right is the that the Community Reinvestment Act (CRA) caused the housing bubble. The CRA "forced" banks to make loans to minorities who were poor credit risks, the argument goes, and these "subprime loans" are the root cause of the financial crisis.

This argument is, of course, not true at all. A Bank for International Settlements working paper released this week concluded:

Contrary to some media commentary, there is no evidence that the Community Reinvestment Act was responsible for encouraging the subprime lending boom and subsequent housing bust. This Act only applies to depositories, and did not cover most of the important subprime lenders. Depositories showed a lesser tendency to write subprime loans than lenders not subject to the Act (Yellen 2008).

Arguing that the CRA caused the housing bubble reveals a lot about the person making the argument, but very little about the origins of the housing bubble.

Full post as published by Economics of Contempt on September 24, 2008 (boomark / email).