Credit & Debt: Bernanke Comes To Jesus On Easy Credit

OH, PLEASE, GOD, JUST LET ME GET OUT OF THIS WITH WHAT LITTLE HAIR I HAVE LEFT....

In a speech detailing the merits of the Community Reinvestment Act, Fed chair Ben Bernanke had some interesting comments:

Third, access to credit in lower-income communities is obviously much greater today than when the CRA was enacted. This greater access has had tangible benefits, such as the increase in homeownership rates (Joint Center for Housing Studies, 2006). However, recent problems in mortgage markets illustrate that an underlying assumption of the CRA--that more lending equals better outcomes for local communities may not always hold.12 Whether, and if so, how to try to differentiate "good" from "bad" lending in the CRA context is an issue that is likely to challenge us for some time. One possible strategy is to place more weight in CRA examinations on factors such as whether an institution provides services complementary to lending--for example, counseling and financial education.

This is as close as you probably will ever get to hearing Bernanke or anyone else admit that the ocean of credit extended to the subprime markets was a prime factor for inflating home purchasing in the last half-decade.

It's also a prime signal that banks and lenders are going to tighten things up for the foreseeable future. Less available credit = fewer new home buyers = fewer home sales = flattening market.

The Center for Responsible Lending has a new study out which indicates that even the saw about available credit increasing homeownership is false. Instead, they claim that the subprime market was chiefly targeted to refinancing existing loans rather than originating new ones. It makes sense when you think about it--how often did you hear and read about people swapping their fixed loans for fancy new interest-only products without much in the way of documentation or money down?

The housing boom and bust was a tremendous example of letting short-term thinking and the desire for easy profits trump responsibility, frugality, and accountability. Now we have a sagging, fragile economy, millions of homeowners in foreclosure or default, lenders going belly-up like dying whales, and the creeping fear that it will get worse before it gets better.

That Bernanke has his Jesus moment now is convenient, and not particularly impressive, to say the least.

Posted at March 30, 2007 02:28 PM

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OH, PLEASE, GOD, JUST LET ME GET OUT OF THIS WITH WHAT LITTLE HAIR I HAVE LEFT.... In a speech detailing the merits of the Community Reinvestment Act, Fed chair Ben Bernanke had some interesting comments: Third, access to credit in lower-income communities is obviously much greater today than when the CRA was enacted. This greater access has had tangible benefits, such as the increase in homeownership rates (Joint Center for Housing Studies, 2006). However, recent problems in mortgage markets illustrate that an underlying assumption of the CRA--that more lending equals better outcomes for local communities may not always hold.12 Whether, and if so, how to try to differentiate "good" from "bad" lending in the CRA context is an issue that is likely to challenge us for some time. One possible strategy is to place more weight in CRA examinations on factors such as whether an institution provides services complementary to lending--for example, counseling and financial education. This is as close as you probably will ever get to hearing Bernanke or anyone else admit that the ocean of credit extended to the subprime markets was a prime factor for inflating home purchasing in the last half-decade. It's also a prime signal that banks and lenders are going to tighten things up for the foreseeable future. Less available credit = fewer new home buyers = fewer home sales = flattening market. The Center for Responsible Lending has a new study out which indicates that even the saw about available credit increasing homeownership is false. Instead, they claim that the subprime market was chiefly targeted to refinancing existing loans rather than originating new ones. It makes sense when you think about it--how often did you hear and read about people swapping their fixed loans for fancy new interest-only products without much in the way of documentation or money down? The housing boom and bust was a tremendous example of letting short-term thinking and the desire for easy profits trump responsibility, frugality, and accountability. Now we have a sagging, fragile economy, millions of homeowners in foreclosure or default, lenders going belly-up like dying whales, and the creeping fear that it will get worse before it gets better. That Bernanke has his Jesus moment now is convenient, and not particularly impressive, to say the least.