Kroszner: "It's not the CRA."

"we found essentially no difference in the performance of subprime loans in Zip codes that were just below or just above the income threshold for the CRA."

I've seen quite a bit of writing in the blogosphere, pointing to the Community Reinvestment Act (CRA) as the, if not one of the, causes of our current financial crisis. Ridiculous as it may seem, some are very adamant about the impacts of the CRA. Fed Govenor Randall Kroszner, today, spoke on the results of a study by the fed to investigate those allegations.

The findings clearly show that the CRA could not have had a significant impact.

"First, only a small portion of subprime mortgage originations are related to the CRA. Second, CRA- related loans appear to perform comparably to other types of subprime loans. Taken..."

Given the stories about lenders giving loans to whom ever they could without regard to standards, affirmed in my personal experience in mortgage origination, it's hard to see how anyone could blame a program like the CRA as been the root of the problem.

Our nation has been experiencing an economic decline since some time in 2002. We've shipped many of our jobs over seas to locations with lower, if non existent, labor and environmental quality practices. An expansion of credit made possible through accelerated regulatory liberalization in our financial industry masked a decline. We've now reached a point where the benefits of industry and production are exceeded by the levels of debt we've incurred.

This strong debt contraction is a necessary reaction to correct potentially 30 years of financial abuse. The idea that bailing out lending institutions so they can continue lending in the face of an already over leveraged economy makes little or no sense.

Given this idea, that we are facing the consequences of over-leveraging (or that we're just bankrupt) it seems impossible to point to something the size of the CRA, especially in light of the comparison of CRA eligible loans in default to non CRA loans, as the source of our current financial troubles.

[Kroszner's Speech]

This is not about keeping people in their homes.

I hear the call from so many to prop up housing and "keep homeowners in their homes." I see the goal however, as a dangerous one. The consequence of trying to do that would be to continue to artificially inflate home prices, preventing new buyers from entering the market. It would prevent housing from reaching a price that is commensurate with median incomes. This is dangerous for the housing market and will leave it stagnant. Propping up home prices is harming prudent people who chose to wait until home prices came back down to a level that is more historically consistent with incomes.

This would likely also harm many of those who are "kept" in their homes, as they may have been better off financially speaking defaulting from their debt and getting out from underneath a massive burden.

Mortgages are not the problem in this financial crisis. The problem is leverage. The institutions in question have over leveraged themselves so that the amount of credit they have outstanding far outstrips their asset base. They cannot afford to support even the smallest of losses.

It is unfortunate that we are faced with this now, but being that the core production of our economy cannot now sustain the levels of credit we have created, a credit contraction must take place.

Doing anything keep the credit party going will only serve to harm us further. We're maxed out congressman, it's time to stop preventing a debt default with more debt.

These companies have to deleverage, and our economy has to adjust. That's the fundamental truth to this.

Congress can work to reinforce time tested regulations. Enforce reasonable capital and leverage requirements. Enforce transparency and accounting principles. Prosecute false and misleading information used to manipulate stock price. Eliminate insider trading (it's happening now and it's troubling). None of this is new, but it's not being done. The opposite is occurring, and it's the opposite that brought about this financial crisis. The measures being taken thus far continue and encourage that troubling behavior.

Extraordinary measures that must be taken will include regulating the derivatives markets, and creating a program that facilitates expedited chapter 11 bankruptcy protection for insolvent financial institutions. Lastly Congress must act to fund the FDIC. The insurance program does not have the money to handle the bailouts that are coming, and congress must demonstrate it's commitment to shoring up the program. These things are new, but they must be done in order to wind things down in a more moderate fashion.

We're in trouble. No matter what is done our economy must undergo a major shift. The Bush/Paulson/Dodd plan makes it much worse. But these measures I've mentioned will help bring up investor confidence, and bring in billions of dollars that is sitting on the sidelines (including my own), and aid in a speedier recovery.