Rethinking the CRA

John Carney has been doing a lot of blogging about the role of the CRA in the financial meltdown.  That role is overstated by conservatives who are unwilling to admit that markets can have bad outcomes, but it is understated by liberals who are unwilling to admit that regulation, too, can produce hideous unintended consequences.

The CRA did not singlehandedly cause the meltdown.  But the relaxation of credit standards that allowed the meltdown did start, as far as I can tell, with the CRA.  And perhaps more importantly, the CRA, and the mentality behind the CRA, made regulators extremely unwilling to intervene.  Everyone wanted to make credit more widely available to the poor.  Well, the poor aren't good lending risks.  So if you want to give them access to credit, you need to relax your lending standards.  Any attempt to tighten lending standards on the part of the government would have resulted in a massive contraction in the credit available to core Democratic constituencies.  Meanwhile, the Republicans were hoping that turning poor people into homeowners would make them more Republican.

Regardless of how much causal blame you assign it, the financial crisis has certainly proven that the CRA seems to have been a very, very bad idea.  Yet Barney Frank is still trying to keep risky loans flowing in the hope that things will all somehow come right in the end if we just pretend, as hard as hard can be, that there isn't substantial risk attached to doing things like buying a condo in a building that is less than 50% occupied.