Government Policy Got Us Into the Subprime Mess
Don Boudreaux points to this letter in the WSJ:
We are all talking about subprime loans and the havoc they've wreaked on the economy, but no one is talking about why banks give out these loans -- they are required to by law. Since the Community Reinvestment Act of 1977, Congress requires banks to offer loans to minorities in low-income areas, even if the clients can't make down payments, don't have good credit histories, or even employment histories.
Since these clients are high-credit risks, the only loans lenders can offer are high-interest loans that don't require a down payment or good credit history. These loans frequently default.
In order to cut down on the number of subprime loans an institution must make, it must cut down on all loans, because its subprime business is a proportion of its overall business.
Are we willing to crash our economy over some misplaced idealism? Congress must rescind the CRA or this problem will continue beyond today's bailouts.
M. Franks, Little Rock, Ark.
See previous CD posts here, here and here on the CRA, and its contribution to the housing and credit problems.