The discussion over the cause of the financial crisis continues more than 10 years after it happened. This week in the New York Times, Christopher Caldwell provides support to the idea raised by Michael Bloomberg among others that the Community Reinvestment Act is one of the key reasons for the crisis. Caldwell correctly notes that this idea as put forth by Michael Bloomberg “(g)oes easy on bankers: Complex derivatives, swaps, “tranching” and opaque offshore deals play no role in (Bloomberg’s) account.” He further states that studies support this view but cites no specifics related to this thesis.
This discussion was quickly countered by Robert Kuttner in The Washington Post. He correctly notes that the references to governmental legal requirements ignore specific elements intended to maintain the ability for banks to ensure credit quality whilst eliminating discriminatory practices including “red-lining” used in the US to identify on maps with red lines neighbourhoods where mortgages were not to be provided. Kuttner continues to note:
“It wasn’t until the 1980s and 1990s that Wall Street investment bankers and local mortgage originators came up with the scheme that led to the subprime collapse. This was all about inflating profits and passing along risks to someone else. It had nothing whatever to do with the Community Reinvestment Act.” A far better analysis of the cause of the crisis – bankers seeking to make short term profits to provide personal bonuses with any risks to be paid by others.
Kuttner continues to note: “As the authoritative report of the Financial Crisis Inquiry Commission later revealed, the lenders and brokers who participated in the subprime scam did it to make scads of money with no risk, not because of prodding by the CRA — which expressly prohibited unsound loans. The report explained: “They competed by originating types of mortgages created years before as niche products, but now transformed into riskier, mass-market versions.” The CRA, according to the report, was not a factor.” Thereby citing a detailed and authoritative report.”
This discussion highlights the continued desire to characterise broad based access to finance as dangerous rather than being critical for economic and social development. Values-based banking seeks to make finance accessible to all without diminishing the focus on responsible underwriting of credit and other risks.
