the Future of Change

In a recent exchange on the Sean Hannity Show, former Chairman of President Obama’s Council of Economic Advisors, Austan Goolsbee, attempted to refute an old Right Wing talking point about what a few holdouts still argue is one of the prime causes of the Financial Crisis of 2008: the Community Reinvestment Act (CRA).   Here’s an excerpt of the exchange according to Media Matters:

HANNITY: And do you know what caused the housing collapse? What really caused the housing collapse? it was the —

GOOLSBEE: Oh, no, what.

HANNITY: Community Reinvestment Act that Bill Clinton —

GOOLSBEE: No it was not. I knew you were going to say that. How can you say that?

HANNITY: Because, hang on a second.

GOOLSBEE: Let me tell you one thing about the Community Reinvestment Act.

HANNITY: Let me tell you one thing first. And the first thing is —

GOOLSBEE: Okay you tell me and then I’ll tell you.

HANNITY: Our government forced banks and financial institutions to lower their lending standards because it was the belief of socialist redistributionist statists like you that every American should own a home whether they can afford that home or not. So they lowered the standards. They literally lent money to people that never would have qualified for loans before then they all got bumbled together and did these securities that they sold. And low and behold the banks and the insurance companies — the money came due, the houses were defaulted on because the government forced this and as a result the economic calamity that you always refer to as Bush’s fault happened but it was Bill Clinton that set that up. And it was Jimmy Carter who set that up.

Goolsbee responds:

I hear you. I hear that. But let me tell you one thing about the Community Reinvestment Act. It only applies to banks. Two-thirds of the subprime mortgages that you’re talking about and the vast majority of the ones that blew up were made by non-banks. And the Community Reinvestment Act does not even apply to them. So when people say this thing about Community Reinvestment Act it drives me crazy because that’s not who was making all of the crazy loans that you’re talking about. There’s no way that it was the CRA.

It is certainly correct for Goolsbee to refute Hannity’s comments as off the mark, but what Goolsbee gets wrong is not that it was “two-thirds of the subprime mortgages” that were not covered by the CRA.  Rather, a Federal Reserve study, released in late November 2008 (i.e., before President Obama took office), established that just six percent of the worst subprime loans were covered by the CRA.

It turns out, the CRA did have something to do with the Great Recession.  The problem was not, however, as individuals like Hannity would lead one to believe, that the CRA was too strong and forced lenders to make shoddy loans.  The CRA did nothing of the sort.  Rather, as I argue in greater depth here, the problem was that the CRA was too weak.  Because of all of its loopholes, the CRA allowed banks to lend outside of the law’s short reach, to have a dramatic impact on the very communities the CRA was designed to protect: low- and moderate-income communities.

By its express terms, the CRA only covers depository institutions and only covers such institutions in certain geographic areas.  The prime drivers of the subprime mortgage frenzy, like Countrywide, were mortgage lenders: i.e., non-depository institutions not covered by the CRA.

It was this weak CRA that actually allowed institutions not covered by the CRA, or banks that were otherwise covered by it, to lend outside of its protections and to engage in the risky lending that helped bring about the Financial Crisis.  So when Goolsbee says two-thirds of subprime lending occurred outside the CRA, he should check his math.  It’s actually more like ninety-four percent.