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The Bailout Reader

A series of articles about today's financial mess. The articles go back to the 90's. A great background for those who want to understand what has happened.

The Bailout Reader - Mises.org - Mises Institute

An excerpt from an article (1999) on the harmful effects of government regulation and how gov extorts money from the private sector. The excerpt concerns the CRA.

Quote:

Banks do -- and should -- "discriminate" against less creditworthy borrowers, but in doing so they run the risk of regulatory extortion. An entire industry of sometimes federally-funded "community groups" has sprung up, with names like "Center for Community Change" and Association of Community Groups for Reform Now (ACORN), which essentially extort money from banks with the following ruse: Whenever a bank proposes a merger, expansion, or building of a new branch, it is subject to regulation by the Fed, the Comptroller of the Currency, and the FDIC. If anyone files a complaint to any of these agencies accusing the bank of making too few CRA loans, the merger or expansion is halted. So-called community groups frequently lodge such complaints and do not withdraw them until the banks give them or other groups which they designate large sums of money, sometimes in the tens of millions of dollars.

For example, the "Neighborhood Assistance Corporation of America (NACA)," led by self-described "urban terrorist" Bruce Marks, has "won" loan commitments totaling $3.8 billion from Bank of America Corp., First Union Corp., Fleet Financial Group, and others. These monies are lent to borrowers favored by Mr. Marks, and his organization usually gets a lump-sum fee or a percentage of each loan. NACA plans to operate in all 50 states by 2001 when it expects its annual budget to be in the $80 million range.

Regulatory extortion via the CRA was on display on national television during Bill Clinton's summer 1999 "poverty tour." One of the corporate executives who accompanied Clinton on his tour of economically depressed areas was the CEO of NationsBank, which was at the time in the process of merging. Before granting NationsBank permission to merge, Clinton required the bank to commit to $150 million in low-interest loans to individuals and businesses in areas chosen not by the bank, but by the Clinton administration. One can be sure that the areas chosen for such favorable treatment will be ones in which Al Gore is in need of votes for his presidential bid.
....

The CRA is a welfare program financed by (legal) regulatory extortion. It is bound to have a negative effect on the capital values and stock prices of banks in particular and and on the entire economy in general, because it socializes a portion of the capital markets. The major negative effect on the economy is the diversion of capital from economically sound to politically popular but economically dubious uses. A moral hazard problem is also created, in that a signal is sent to lower-income people that one does not necessarily need to become creditworthy (by working regularly, paying one's bills, and saving part of one's earnings, for example) to have access to credit, but to become politically connected instead. The Clinton administration has been budgeting over $100 million per year in federal subsidies for "community development banks," which are another (similar) way of politicizing lending. This, along with the expansion of the CRA, possibly into credit unions and the insurance industry, is a recipe for another savings-and-loan-type financial disaster in the future.

This article was written in 1999 and foresaw the disaster that the CRA would cause in the mortgage markets.

Re: The Bailout Reader

The banks ought to take personal responsibility for their failures. We live in system of competition commonly known as capitalism, and in that system competing interests try for their share of the pie. In taking the excerpt you provided at face value, it merely shows that the banks ultimately failed to successfully navigate the competition from community groups.

Had banks done more for public service rather than pad the pockets of their executives, they would have built good will and greater support among community groups. Your post is a classic example of conservatives trying to avoid personal responsibility and stifle the competition. The banks were never mandated to make bad loans; they chose it because it was easy to do.

Re: The Bailout Reader

I have trouble blaming the banks. Bankers are naturally cautious people. Everything from the old, grumpy-looking men in charge to the Greek-inspired architecture commonly associated with banks says stability and sense. It wasn't easy to turn them into flighty teenage girls swooning over every last money-making opportunity the way actual teenage girls swooned over Mark Walberg back in the day.

Re: The Bailout Reader

Quote:

Originally Posted by Patters (Post 1283146)

The banks ought to take personal responsibility for their failures.

Uhm yeah, if they were allowed to act as capitalistic companies instead of what the Democrats forced them to do with red lining and forcing sub-prime mortgages. They wanted to give everyone a house and now we all have to pay.

Re: The Bailout Reader

Quote:

Originally Posted by Michael (Post 1283374)

They weren't forced to do anything, and they were never encouraged to make bad loans except in the sense that deregulation gave them more latitude. Funny how conservatives talk personal responsibility, but then blame government for corporate America making bad choices.

Re: The Bailout Reader

Quote:

Originally Posted by Patters (Post 1283383)

There are a whole series of articles, while there was no doubt greed much of the greed component was driven by the belief that the gov would bail them out...which is also documented at the articles linked above.

To deny the government was strong arming the banks is looking at the world through pink dem glasses, especially given the fanatic opposition to reform by people like your heroes Dodd and Frank.

Re: The Bailout Reader

Quote:

Originally Posted by Patters (Post 1283383)

They weren't forced to do anything, and they were never encouraged to make bad loans

Keep telling yourself that.