The Community Reinvestment Act (CRA) of 1977 was promoted by the Carter administration and required lending institutions to offer credit and home ownership opportunities to "underserved populations," those who would not qualify under market standard risk levels. Naturally, this led to a large number of no-money-down or poor-credit-rating mortgages and increased risk in the mortgage section of the U.S. financial market.
I noticed in 1980 that credit was relatively loose and questioned when the economy would adjust enough such that the hammer would fall on the credit market. Anyone with minimal financial knowledge should understand the fundamentals of “leverage,” the use of credit to enhance one's speculative capacity. On the one hand, when times are good, leverage multiplies return on investment. Which is to say, “I can grow my business beyond my available investment resources,” or, “I can get more house than I can afford.” On the other hand, when times go bad, leverage also multiplies the pressure or demand on one’s ability to pay. Clearly, increasing risk in the financial markets multiplies the consequences of a turn from good times to bad times. It’s Finance 101!
In 1995 the Community Reinvestment Act was liberalized under the Clinton administration to generate billions of dollars in new lending and extend basic banking to the inner cities and to distressed rural communities.
In 1999, U.S. Senate bill S900 was introduced to place controls in the financial markets and temper the Community Reinvestment Act. Senator Carl Levin (D) and others opposed the provisions of this bill that may weaken the CRA, saying the CRA was intended to modernize the financial sector of the U.S. economy.
Also in 1999, the New York Times reported on 30 September, an easing of credit by Fannie Mae to facilitate mortgage lending to unqualified borrowers. This appeared to be in response to pressure from the Clinton administration. More risk in the financial market.
In 2003, the Bush administration proposed regulatory changes regarding the financial market, including reducing the power of the administration. This proposal was reported in the New York Times. Senator Barney Frank (D) and others opposed the proposal, saying it was unnecessary. The proposal did not progress.
In 2005, U.S. Senate bill S190 was introduced by Senator Chuck Hagel (R) and co-sponsored by Senators Dole (R), Sununu (R), and McCain (R) to place some controls in the financial market. This bill was, however, killed out of committee.
It’s 2008. Did the hammer fall? Seems that the economy adjusts every generation, about forty years, give or take about five years. There may be a pattern here: Congress meddles with the market, the economy; eventually enough pressure builds; and the economy adjusts in response. Congress has not yet, unfortunately, demonstrated that it has learned to stop meddling.
