In an effort to undercut future public investment in the nation’s infrastructure, Phil Gramm, former chair of the Senate Banking Committee and currently with the Swiss bank UBS, once again trots out the long-discredited notion that the recent financial crisis was caused by the Community Reinvestment Act and other federal efforts to encourage lending to credit-worthy borrowers in traditionally underserved markets. In making this connection, he claims, “The U.S. and Europe are lowering capital standards for ‘investments’ in public infrastructure—ignoring the lessons from 2007-08.”
Some arguments apparently never die, no matter how much evidence contradicts them.
In his Wall Street Journal op-ed, “The Subprime Superhighway,” Gramm asserts, “President Clinton’s financial regulators used the CRA to force banks to make subprime loans.” But, as has frequently been reported, the Federal Reserve found that just 6 percent of high-priced loans (a proxy for subprime loans) were CRA related. The Fed also found that the delinquency rate of CRA-related loans was less than half the rate for all loans in lower-income neighborhoods. In other words, it was loans made by lenders not covered by the CRA that created the crisis.
Gramm also claims that HUD used CRA “to force Fannie Mae and Freddie Mac and banks to serve government goals” by purchasing loans in underserved communities. But Fannie and Freddie did not start buying subprime loans until 2006, long after the crisis was underway. And, of course, the CRA was enacted in 1977, long before the Great Recession. In fact, as Fed researchers concluded, “the current best evidence suggests that the CRA was not a significant contributor to the financial crisis.”
Hopefully, stronger—and more accurate—evidence than this will be used to determine public infrastructure investment activity.
(Photo credit: FarTripper, via Flickr, CC BY-NC-ND 2.0)