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Financial Crisis

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Dale L. Gillis

Published: April 2, 2009

Randy Miller blames the financial crisis on the Community Reinvestment Act of 1977 in his letter of March 25. In blaming the Democrats for the CRA, he seems to be unaware that the first George Bush signed a bill strengthening enforcement of its provisions. Even so, there is no way for any banker to be fined, let alone jailed, for violations.

Fed Chairman Ben Bernanke has defended the Community Reinvestment Act. What is the Community Reinvestment Act, what does it do and where did it come from? The title says it, the principle is that banks should make loans into the communities they serve, where their depositors live.

"Death and Life of Great American Cities" by Jane Jacobs is a famous book. She describes red-lining, an economic force before the Community Reinvestment Act. Bankers had maps where they drew a red line around "slum" neighborhoods and refused all loans for property or improvements there. If a red-lined area wasn't already a slum, it became one.

In 1997, Federal Reserve economists looked at the profitability of banks subject to CRA supervision. They found that loans made to low income neighborhoods and to low income borrowers were as profitable as other mortgages.

In Business Week, Aaron Pressman describes those who blame the Community Reinvestment Act for the sub-prime crisis as "know nothings." Pressman says that 50 percent of the sub-prime loans came from finance companies not subject to the CRA. Another 30 percent came from bank affiliates only loosely supervised in such matters.

In addition, Pressman takes issue with those who blame Fannie May and Freddie Mac for the subprime crisis. "These mortgage giants bought hardly any subprime loans because those loans did not meet their standards," he says. The staff at the New York Federal Reserve Bank listed five causes of the mortgage meltdown. Fannie May and Freddie Mac are not among them.

Dale L. Gillis
Sebring

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