They keep us from seeing true facts and when we don't see the truth, we can't fix what's gone wrong. A good example of a preconceived notion that keeps leading us astray is the long-standing belief that the Community Reinvestment Act is responsible for all our financial ills.
For the record, the CRA, which passed into law as part of the Housing and Community Development Act in 1977, merely stipulated that in seeking regulatory permission for such activities as mergers, expansions and/or relocations, financial institutions should demonstrate an on-going commitment to lending and investing in communities from which they collect deposits. And, to ascertain that commitment, community groups could request an inspection or review of the institution's books. I know that's how it worked because in 1979 I initiated a challenge to a proposal to expand into another service area by Florida National Bank, whose promise to do better in future was sufficient to satisfy the regulators issuing the permit.
In fact, the CRA has never had the intended effect of "encouraging" investment in marginal or minority communities, as the continued transfer of monetary wealth to a smaller and smaller segment of the population attests. OWS is the result of nothing having stopped the transfer of financial assets, both public and private, into the hands of the gnomes of Wall Street. Yet, the idea that more equitable lending is responsible for financial recessions and crashes won't die, regardless of the fact that it wasn't responsible for the Savings and Loan debacle in the '80s, the dismantling of our industrial base in the '90s, or, more recently, the collapse of the housing bubble and market collapse in 2008. That the CRA and the people at ACORN, who tried to make it work, are responsible for Wall Street's ills is a notion that just won't die.
A recent study by staff at the Federal Reserve Bank of New York probably won't do much to debunk it either. Indeed, the disclaimer by the authors as to the study's official import (it doesn't represent the policy of the Fed) invites reporters to give it short shrift. The Associated Press, predictably ignored the hard data that a small army of "investors" acquired properties as a speculative enterprise from which they walked away, when the expected price increases no longer materialized, and focused, instead, on people who acquired old houses, made modest improvement and looked for a capital gain as compensation. That's because the latter were featured on a TV program entitled "Flip this House," while the people who took out three or four first mortgages on houses they had no real plans to occupy are not only hard to identify, but teasing them out of the national data base requires some skill.
On the other hand, perhaps the information that lots of people lied to qualify for lower down payments and lax documentation isn't supposed to be widely known. Perhaps it would anger people who ended up paying more for the houses they needed to live in because speculators (optimistic buyers) had jacked up house prices in a speculative frenzy. I suppose the media's preference for the preconceived notion could be motivated by the desire to protect people who were duped.
The authors' abstract is worth noting:
We explore a mostly undocumented but important dimension of the housing market crisis: the role played by real estate investors. Using unique credit-report data, we document large increases in the share of purchases, and subsequently delinquencies, by real estate investors. In states that experienced the largest housing booms and busts, at the peak of the market almost half of purchase mortgage originations were associated with investors. In part by apparently misreporting their intentions to occupy the property, investors took on more leverage, contributing to higher rates of default. Our findings have important implications for policies designed to address the consequences and recurrence of housing market bubbles.
What's not addressed in this study is one of the main reasons why the CRA has consistently failed to promote investment in extant marginal and minority communities, throughout the country--i.e. the focus on the role of the financial institutions, while the part played by insurers and appraisers and assessors is consistently overlooked. Indeed, the original identification of the problem as "redlining" by banks was mistaken in that the reluctance to lend was actually a response to a determination by fire and property insurance companies to deny coverage in certain communities. As we are discovering in the case of health insurance, it's the insurance industry which determines who's served and who's left out. Moreover, as more and more entities (cities, counties, states) adopt self-insurance strategies, the screws on the rest of the insurance market are tightened to extract more. For example, homeowner policies that used to provide replacement cost as an option, now mandate it and, in Georgia, new homeowner policies have to include the personal automobiles. Which would seem to preclude people who don't own cars from having their homes insured and that, of course, violates the conditions of their mortgage.
While mortgage insurance has always been a racket to extract even more money from modest income earners and title insurance evolved as an excuse to permit the recording of real estate records to become increasingly lax, the generally parasitic nature of all kinds of insurance needs to be looked at. After all, it was the insurers such as AIG which accounted for much of the debacle on Wall Street and the disinvestment on Main Street.
The division of economic actors into producers and consumers is sort of a preconceived notion which leads us to overlook the role of a host of middlemen. Traders and salesmen and financiers all play a part, unrecognized by most, at the nexus. Insurers, it seems, should be added to that list, if only because, when our public agencies are efficient, the importance of insurers is lessened. Which suggests that the insurance industry has a vested interest in failure and inefficiency. And it thrives on insecurity.