Absolving the Community Reinvestment Act of responsibility has now entered into the liberal phraseology playbook of "everyone knows", "the debate is over", "thoroughly debunked", "poor souls who still believe it caused everything", on and on and soon we'll be hearing about the republican "deniers". Over at Barry Ritholtz' blog, he uses pretty much the whole playbook in telling us how he has "already" debunked the whole thing. Of course, in reality, he has debunked <b>nothing</b>. http://www.ritholtz.com/blog/2009/06/cra-thought-experiment/ He lends his (il)logic to the argument by informing all that if the CRA was responsible, then the banks that made them would have had far more serious problems than others who didn't. Makes sense, eh? <u>Not so much</U>. As John Carney points out, exonerating the CRA, <b>doesn't stand up to evidence</b>. http://www.businessinsider.com/why-i-changed-my-mind-on-the-community-reinvestment-act-2009-6 " Regulators charged with enforcing the CRA's required banks to adopt many of the loan practices that turned out to be toxic. Everything from 100 percent loan-to-value ratios to no down payment loans were part of the package that banks used to satisfy the demand of regulators. Could the banks have used other lending methods to meet CRA requirements? Perhaps. But no one can say for sure that these would have made regulators happy or have produced enough loans to low-income and minority borrowers. What worked was what the banks actually did, and so they kept doing it. The lax lending standards were a proven method of satisfying regulators, and they were fully approved by regulators. More than approved. The regulators lavishly praised banks that adopted these innovative lending strategies. The Federal Reserve Bank of Minnesota attempted to absolve the CRA by claiming that only a small percentage of subprime loans were related to the act. But <u><i>this is just academic hooey</i></u>. In reality, once banks lowered lending standards to attract CRA borrowers, they found that they had to lower lending standards across the board. It simply wasn't possible or legal (thanks to anti-discrimination laws) to offer the lax standard loans only to the targeted borrowers. In short, if a bank wanted to raise the number of CRA loans, it had to lower standards across the board. <b>The broader subprime market was basically a creation of the CRA</b>. The way the CRA was enforced guaranteed that the bad lending practicies would spread like wildfire across the country. Banks that were found to be in compliance with the CRA were granted permission to acquire other banks. Banks that were not in compliance could not make acquisitions, which often meant they couldn't grow at all. The only known method of compliance was lax lending standards. This means that banks that lowered their lending standards grew through acquisitions, while banks that kept their standards high got acquired or stayed small. This process went on for years, creating a kind of perverted financial Darwinism. It was survival of the lax-ist. The same dynamic operated on the levels of individuals. If you were a skeptic about the lax lending practices, you would find that you couldn't get a job at the bigger banks or lenders. Your career potential was limited. If you were an enthusiast for lax lending, you could move from Countrywide to Shawmut Bank to Fleet Financial to Bank of America. The entire system was rigged to reward those who truly believed there was little risk in making mortgages that required scarce income information and no money down. When market processes began to counter-act this regulatory Darwinism, the politicians stepped in to keep it going. The basic check on regulatory Darwinism was the riskiness of the loans, many of which couldn't be securitized because Fannie and Freddie wouldn't touch them. But once the proper political pressure was brought to bear, Fannie lowered its own standards and we got securitized subprime. Now banks could meet their CRA obligations while passing off much of the risk to others. These days I'm a bit embarrassed for people continue to deny the CRA encouraged crappy lending practices. The evidence is unequivocal." So go ahead and deny the obvious, in the face of all evidence, that the CRA and the people who pushed it, don't bear the blame. You probably believe in man made global warming, too.