Well, I am going to revel in the “I told you so moment”, but yet another study asking the question”Did the Community Reinvestment Act (CRA) Lead to Risky Lending?“, reports that:
Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.
Social engineering sucks. You can not socio-engineer the laws of economics or human nature. These attempts, no matter how brutally imposed, have always failed. It did this time too, as the CRA basically was an attempt to bend the laws of economics and human nature in an attempt to make irresponsible people responsible while somehow also producing money. Trillions were lost and these effects will be with us for decades. After a lot of grandstanding and political theater, we got a lot more government regulation, regulation that makes it easier for politicians that want to sell special favors to do so, but never addressed the fundamental and underlying problem the CRA causes, and are looking at a repeat, sooner than later.
There is a reason that government ended up paying TARP money, and it was not just the too big too fail bullshit they sold us. They paid because that was part of the CRA deal. Government would save the lenders when economic reality blew the house of cards down. Our politicians, I suspect, realized that if they didn’t keep their part of this deal with the devil – the government plays the role of the devil here in case you are not bright enough to grasp that – they forced on the lenders, that their socio-engineering days where going to be numbered. The problem was the CRA and our government’s unbelievably stupid need to socio-engineer the left’s idea of Utopia, but we can keep pretending the problem is the big banks and not our government. What could possibly go wrong with more of the same?