The John Carney-Barry Ritholtz debate on whether the Community Reinvestment Act caused the financial crisis has a strangely retro feel to it. It’s just so … 2008. It started with Clusterstock’s Carney explaining, in a long, thoughtful post, why he had changed his mind about the 1977 law meant to bring more bank lending to poor and minority communities. Yeah, he used to think blaming CRA was just a silly Republican talking point. But he has become convinced that the CRA, or at least the big-time mid-1990s rewrite of the CRA rules by bank regulators, was a major factor in the relaxation of home lending standards that ended so badly a couple of years ago.
Ritholtz promptly accused Carney of “agnotology”—a word I had never encountered before (and which does not appear in my American Heritage College Dictionary) that means “the study of culturally constructed ignorance“—and challenged him to a debate with $100,000 going to the winner. Carney is currently trying the raise the $100,000 stake, and Felix Salmon has recruited the FT‘s John Gapper and BusinessWeek‘s Michael Mandel as judges.
I think the most difficult judging exercise will be in determining just how culpable the CRA has to be for Carney to win the debate. It’s pretty clear it’s not the sole cause or even the main cause. To paraphrase that great CRA expert Phil Gramm (from my account of a Gramm appearance at the American Enterprise Institute back in January):
The decades-long push from Washington to increase home ownership metastasized into a de facto government mandate to make bad loans. Gramm told this story really well. He mentioned the Community Reinvestment Act as an element of this push, but immediately dismissed the argument—made by lots of Republicans during the election campaign—that it was decisive. “Don’t get subprime lending confused with lending to poor people,” he said at one point. “There’s not any evidence to substantiate that subprime lending was worse among poor people than not among poor people.” … The biggest issue, he seemed to be saying, was that by the early 2000s regulators and Congress and the White House had all basically embraced the idea—whether they meant to or not—that there was no such thing as a bad mortgage loan. And he didn’t exempt himself from culpability for that.
Gramm has been less nuanced about this in print, claiming that:
Community Reinvestment Act (CRA) requirements led regulators to foster looser underwriting and encouraged the making of more and more marginal loans. Looser underwriting standards spread beyond subprime to the whole housing market.
That’s still more a story of the CRA as unwitting spark than CRA as proximate cause, though. And it’s the argument of Phil Gramm, a key architect of some other legislative moves that may also be to blame for the crisis. So I’m leaning toward Barry’s side in this. But he has defined the debate question as, “Is the CRA significantly to blame for the credit crisis?” I dunno. Define significant.
Update: In an e-mail, Barry Ritholtz defines significant:
Important / meaningful / major — not minor /unimportant /
or
Would the event X have occured but for Y taking place?
or
Make a list of the 50 factors involved in any incident — does X come in your top 10%? How about Top 20%?
The really nice thing about the list is that you can see what is omitted and placed way below these items.
Also, I like this “thought experiment” by Barry on what the world would look like if CRA were in fact behind the crisis.
