The money pool: Community Reinvestment

Scott describes The Dems’ poisonous cocktail and refers to a Peter Schweizer column in Forbes, “Expanding the CRA,”. The crux of the issue is a huge money pool finding legislation intended to rebuild communities.

The White House and Congress want to expand a 30-year-old law–the Community Reinvestment Act–that helped to fuel the mortgage meltdown. What the CRA does, in effect, is compel banks to seek the permission of community activists to get regulatory approval for bank expansions and mergers. Often this means striking a deal with activist groups such as ACORN or unions like the Service Employees International Union (SEIU) and agreeing to allocate credit to poor and minority areas that are underserved.

The CRA is not about community development; it is, essentially, affirmative action in lending. Trillions in loans are now to be made not on the basis of whether they can be paid back but to meet CRA goals. This is precisely what we need to get away from. Drinking this potent cocktail would be dangerous to our financial health.

Obviously the money had to exist before it could be borrowed. One source of that money was created by ‘boomers saving for retirement. This was a created wealth of the labor force that created a pressure to find a ‘reasonable’ rate of return for investment. The Community Reinvestment Act was on the other end in creating a market for money. In between were creative people finding ways to connect the money pool to the market for funds. That brought in credit management schemes, leveraging, and bundling of assets.

What happened was that the accountability of the market was superseded by political desire. The accountability of the market will not go away and it will eventually catch up to the political desire. When that happens, something breaks.

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