The Road to Hell…..

Have you ever heard of the Community Reinvestment Act? It was a bill passed by President Carter back in 1977. The law was supposed to pressure banks to give more loans to low income people in urban areas. A bill with very good intentions. But good intentions do not mean positive results. The law was largely ignored by Presidents Reagan and Bush. It was not until the Clinton Administration that it was really enacted. President Clinton asked the Fed to put pressure on the banks to comply with the law. I think he did this for two reasons. First, I think Bill Clinton genuinely cares for those less fortunate. A very good trait to say the least. Secondly, I think it was to show support for a great deal of his voting base. This was done in his own self interest, but again, I think it was done with the best of intentions. Well this law forced banks to lower their lending standards. If they failed to do so, the Fed would block mergers and deny charters. A threat they lived up to when they checked the first bank for compliance during the Clinton Presidency. The banks did not want to lower their standards because people below those standards often failed to pay back the loans. To assist in removing the risk away from the banks, the government backed mortgage companies Fannie Mae and Freddie Mac purchased many of these loans. Since the majority of risk of default was removed from the banks and put on other investors, there soon was no downside to sell a loan. Hence predatory lenders got into the business. Bad people always show up when there is free money being thrown around. Soon the creation, bundling and selling of home mortgages became a business of fraud and or ignorance. We can blame the finance sector for the corruption. But it was forced regulation and coercion that set the stage for the biggest financial collapse the world has ever seen. A lot of movies have been made about this story including The Big Short. They talk of the arrogance and deception of the big finance banks. But most fail to answer the primary question. Why did the banks start selling bad loans in the first place? The answer is, The Government told them to. Here is Bill Clinton talking about it back in 1998, ten years before the Community reinvestment Act really took off and ultimately destroyed the economy and the lives of millions.


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