[thechat] Hiding from Elections Now

Matt Warden mwarden at gmail.com
Mon Oct 27 11:00:33 CDT 2008


Jeremy,

On Mon, Oct 27, 2008 at 11:41 AM, Jeremy Weiss <eccentric.one at gmail.com> wrote:
> On Mon, Oct 27, 2008 at 10:04 AM, erik mattheis <zero at gozz.com> wrote:
>> Sorry Matt, but you're continuing to posts "facts" at odds with those
>> generally in agreement to mesh with everyone elses' reality -
>> http://www.federalreserve.gov/dcca/cra/
>
> I think the issue here is that Matt is referring to how things play
> out, while Erik is referring to the letter of the law. Often times we
> find that something that looks good on paper does not work so great in
> practice.
>
> For example, if you're a small bank in a small town and the CRA says
> that you can't discriminate against a certain part of town because
> it's low income that puts pressure on you and your bank to make sure
> you fund a proportionally appropriate amount of loans for properties
> in that area. However, because it is a low income area, most of the
> people who are interested in buying property there have low income and
> oftentimes bad or no credit. So now you in the position of trying to
> maintain a balancing act. You have to have some loans on the books to
> this area or you'll be accused of being in violation of this aspect of
> the CRA. But, very few people who have wanted to buy property in this
> area meet your banks guidelines. What do you do?

Exactly. There really are only three options:
1) The regulation was not necessary to begin with, as banks were
already incentivized by profit to loan to these borrowers
2) Banks were leaving profit on the table out of ignorance, and the
regulation introduced banks to a new market segment and at the same
time gave these potential borrowers access to loans (the win-win
scenario)
3) OR, the market was such that lending to these individuals was not
as profitable, likely due to the increased risk

The claim by the Fed and some members of Congress is that these loans
were both safe and profitable. If that were true, why did we need the
legislation? Were banks just stupid and didn't realize they were
leaving profit on the table? If it was so safe and profitable, why
didn't Senate and House members open up their own banks serving this
un-served market instead of passing legislation?

If someone were to ask me if home ownership is a good thing and should
be promoted, I would probably say "yes". This was surely the intent of
the legislature. I am not someone who believes that government is
inherently evil and only creates legislation for personal gain. I
think most legislators do things because they believe it is the right
thing to do. Often, though, we are not smart enough to recognize all
the potential short term and long term side effects of market
regulation.


-- 
Matt Warden
Cincinnati, OH, USA
http://mattwarden.com


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