Saturday, January 12, 2019

Cra and Financial Crisis

Table of bailiwick Introduction2 Real-life ex adenylic acidles2 verifiable cycle2 Other suppositions of Babbie, Gravetter and Forzano use2 closedown2 References2 Introduction The stop of the United States lodgement trade spew initiated the worldwide fiscal crisis. Amongst all ho office regulations, the companionship reinvestment crook (CRA) may be the virtually signifi plundert. The achievement passed in 1977 to advance low-income house gives admit opportunities. As such, the act elevated the incentives for banks to leave mortgages to low-income households (FFIEC, n. d. ). Over cadence, some(prenominal) political administrations, like the George H.W. Bush-, Clinton- and George W. Bush-administration, changed the original act, adapting to in the buff challenges in the living accommodations market (Braunstein, 2008). However, as time passed, the act became less important for banks, as the products, mortgages, became to a greater extent(prenominal) pro lodgeable. A s a result, to a greater extent and more monetary institutions started offering mortgages to low-income classes. These so called subprime mortgages be often associated with high risks (Aalbers, 2009). This organize of view push aside be cogitate with the supposition that the CRA will be seen as a cause of the financial crisis.Firstly, the diverse opinions and their respective arguments with regard to the hypothesis ar illustrated. Secondly, an explanation is given on how these ex deoxyadenosine monophosphateles fit in the empiric cycle. Thirdly, three other fancys of Babbie, Gravetter and Forzano are applied to the ex angstromles. Finally, a termination is drawn with respect to the ex vitamin Ales. Real-life ex angstromles As a result of the CRA, banks were rated, based on the frame of loans given out to low-income households. A horrid rating could urinate had severe consequences for a bank.The circumstance that the FED did non bear a Hartford, Connecticut bank to convey a New Htype Ashire bank on CRA grounds demonstrates this. In order to clench their CRA ratings high, banks had to countenance low-income classes with loans. In essence it mickle be say that the CRA ratings raise(a) the banks incentives to provide low-income households with loans (Carney, 2009a). It can cl azoic be seen that the enforcement of the CRA e rattlingplace time led to a heartsease of lending standards and consequentially to more risk-taking in the banking sector in the form of mortgages. These wild mortgages are flat seen as separate of the problem.Thus, Carney (2009b) concludes, the CRA is interpreter of the cause of the financial crisis. Carney agrees with the hypothesis. Defendants of the CRA exclusively claim that an act passed in 1977 can non trio to the insertion of a caparison babble out in the early twenty-first century. Nevertheless, the CRA was not a static piece of legislation. The act evolved over the years, as it was mentioned earlier in the introduction. To be more specific, it was more and more enforced over the years. As a finis it can be said that the enforcement of the CRA great power have been crucial in creating the housing cardcastle.Therefore the act could have created a housing bubble in the early 21st century (Carney, 2009a). However, Aalbers (2009) alike argues in estimation of the CRA and tries to falsify the hypothesis. He states that the mass of subprime loans in 2006 were provided by non-bank lenders. These non-bank lenders, however, were not survey to CRA regulations and thus were not obliged to provide affordable loans to low-income classes. The only limpid conclusion that can be drawn from this cultivation is that these loans to low-income classes were an attractive investment.Thus, Aalbers says, the CRA was not the cause of the wild mortgages providence to low-income households by banks. By clearly, Aalbers would extinguish the hypothesis that the CRA was a cause of the financial b ubble. Nonetheless, his ancestry has to be questioned. In 1977 most of the loans and mortgages were provided by banks as well as savings and loan associations. The especial(a) mortgages that were provided as a result of the CRA probably change magnitude the occupy for houses, which in offer resulted in an inflation of housing equipment casualtys.Several years later, due(p) to rising housing prices, subprime mortgages became a more attractive investment for financial institutions. Consequently, the majority of loans issued since the inception of the CRA came from nonbanks that deemed mortgages a good investment. In other words, the CRA created major lending opportunities for financial institutions (Kroszner, 2009). Since the CRA initiated the inflation of housing prices to some extent, it can be argued that the CRA can be hold partly responsible for the creation of the housing bubble. This theory should verify the hypothesis. This argumentation has to be investigated further. As Foote et al. s (2008) re essay concludes, housing price information in milli angstrom unitere reveals that nigh 70% of all homes lost to foreclosure were rattling purchased with prime mortgages. From that breeding Aalbers (2009) derives that most loans were not employ for directly financing new homes, but rather refinancing existing loans. Hence, Aalbers insinuates that the extra mortgage lending as a result of the CRA did not cause a rise in housing prices. That information implies that the CRA was not a cause of the creation or inflation of the United States housing bubble. Clearly, this would resist the hypothesis.Nonetheless, Aalbers argumentation contains dickens pit locomote. First, his argumentation solely rests on inductive argumentation. milli ampere is just one small part of the United States of America. Without any frequentive data to back up the thesis that the milliampere housing market is representative of the safe and sound nations housing market, it h as to be concluded that Aalbers overgeneralizes the statistical data provided by Foote et al. As Babbie (2005) mentions, overgeneralization can lead to beguilement or rendering of inquiry. Due to this fact Aalbers argumentation is questionable. Second, even if the study of Foote et al. 2008) were representative, Aalbers failed to tell apart the other side of the medal The tally side, as it is not in respect of his opinion. If the CRA-related loans were utilise to refinance homes only, it would strongly put on the supply side of the housing market in the way that supply was unnaturally lowered. Homes were occupied that otherwise would not have been, driving up the prices of real estate. Aalbers falls victim to the fallacy of selective reflectivity. He only looks at the effects of the CRA on the demand-side. Looking at the supply-side would not support his theory and point of view on the topic.That makes this expression a selective one. Empirical cycle This debate fits in the empiric cycle in the way that it started with an observation The burst of the housing bubble. Consequentially incompatible hypotheses and theories where hypothesize and tested by savvy and cor proportion. As markets nowadays are very complex phenomena, it is difficult to establish a causative relationship among several factors of this system. In spite of that it is possible to use logical reasoning and correlation between these factors to hint at the correctness of a thesis. For example, it can be investigated how many another(prenominal) subprime loans were CRA-related.A disparate question that can be represent is how these CRA-related subprime loans performed against other loans (Kroszner, 2009). The answers to these questions could give an idea of the causal relation between the CRA and the financial crisis. after testing the hypothesis, a new hypothesis and theory might be formulated until a conclusive theory is found. Nevertheless, Kroszner himself admitted the creat ive activity of a wish of data to protrude conclusive answers to the previously mentioned questions. For the empirical cycle, this lack of data means it is very badly to reject or not reject theses, obstructing the formulation of new theses and theories.Other concepts of Babbie, Gravetter and Forzano applied The empirical cycle is not the only concept of Babbie (2005), Gravetter and Forzano (2009) which can be applied to the examples. another(prenominal) concept that can be applied apart from the empirical cycle is the concept of authority. Carney (2009a), who was mentioned earlier in this paper, started out as a strong defendant of the CRA. He did change his mind though, relying on, among others, the FED regulator Meyer. Since Carney used a quotation of Meyer, it can be concluded that Meyer is a person with authority and strong references in the arena of economics.Babbie, Gravetter and Forzano define authority as a person with strong references in certain(a) fields. Authority is used as a source for knowledge and can be referred to. Gravetter and Forzano (2009, p. 11) define rationalism as the search for answers by the use of logical reasoning. This is exactly what Carney (2009b) does to come to the conclusion that the CRA was a cause of the financial crisis. He reasons that the CRA raised the banks incentives to provide low-income households with mortgages. These financial products are now seen as a cause of the housing bubble, which caused the financial crisis.Therefore, Carney concludes, the CRA is a cause of the financial crisis. Theory is described by Babbie (2005, p. 12) as a systematic explanation for the observations that relates to a particular aspect of life. This implies that the argumentations used by Carney (2009a, b), Aalbers (2009) and Kroszner (2009) are parts of divergent theories as they explain how the CRA caused or did not cause a housing bubble. Conclusion As shown in this paper, there is a huge debate about whether the CRA was a c ause of the financial crisis. As Carney (2009b) pointed out, the CRA raised the banks incentives to issue risky loans.Critics, however, state that an act passed in 1977 cannot create a housing bubble in the early 21st century. Nevertheless, the act was enforced several times, which implies that an enforcement of the CRA might have a causal relation with the financial crisis. Aalbers (2009) argues also in favor of the CRA he points out that most subprime mortgages were provided by non-CRA-related institutions. Despite that fact, Kroszner (2009) says there is no reason to believe CRA is not to be blamed. He mentions that the inception of the act increased the demand for mortgages and consequentially, houses.According to Kroszner, this was the start of the housing bubbles. Aalbers on his turn argues that the vast majority of houses bought in Massachusetts was financed with prime mortgages. He concludes that this provides evidence in order for the CRA not be tagged a cause of the crisi s. Nonetheless, Aalbers argumentation contains two fallacies. First, he uses inductive reasoning which results in overgeneralization without supportive data. Second, he uses selective observation by ignoring the supply-side of the market. This whole debate fits in the empirical cycle in a way that it started with an observation which was followed by many theses.After the formulation of these theses they were tested by logical reasoning and correlation. As a utmost feeling, new theses theories will be formulated. However, this step is obstructed heavily by a lack of data. Other concepts of Babbie (2005), Gravetter and Forzano (2009) can also be applied to the examples. Meyer has authority in Carneys argumentation, logical reasoning is used by Carney to come to the conclusion that the CRA was a cause of the crisis and the argumentations used by Carney, Aalbers and Kroszner are all parts of theories, described by Babbie, Gravetter and Forzano.References Aalbers, M. (2009). Why the c onfederation Reinvestment bet cannot be blamed for the subprime crisis. City &amp Community, 8 (3) 346-350. Babbie, E. (2005). The Basics of Social look (3rd ed. ). Belmont Thomson Wads worth. Braunstein, S. (2008). The Community Reinvestment Act, 13 February 2008. Retrieved 20 January 2010 from http//www. federalreserve. gov/newsevents/testimony/braunstein20080213a. htm Carney, J. (2009a). Heres how the Community Reinvestment Act led to the housing bubbles lax lending, June 27, 2009. Retrieved 15 January, 2010 from ttp//www. businessinsider. com/the-cra-debate-a-users-guide-2009-6 Carney, J. (2009b). Sorry, folks, the CRA very did require crap lending standards, June 23, 2009. Retrieved 15 January, 2010 from http//www. businessinsider. com/sorry-folks-the-cra-really-did-require-crap-lending-standards-2009-6 FFIEC, (n. d. ). Community Reinvestment Act. Retrieved 20 January 2010 from http//www. ffiec. gov/CRA/ Foote, C. , Gerardi, K. , Goette, L. &amp Willen, P. , (2008). Jo urnal of Housing Economics, 17 291-305. Retrieved 19 January 2010 from http//www. sciencedirect. om/science? _ob=MImg&amp_imagekey=B6WJR-4TN0KW9-1-N&amp_cdi=6885&amp_user=499911&amp_orig=search&amp_coverDate=12%2F31%2F2008&amp_sk=999829995&ampview=c&ampwchp=dGLbVtb-zSkzk&ampmd5=f93e4616adcb03662bac8ef89298dcdc&ampie=/sdarticle. pdf Gravetter, F. &amp Forzano, L. (2009). Research Methods for the Behavioral Sciences (3rd ed. ). Belmont Wadsworth Cengage Learning. Kroszner, R. (2009). The Community Reinvestment Act and the recent mortgage crisis. Retrieved 15 January, 2010 from http//www. frbsf. org/publications/community/cra/cra_recent_mortgage_crisis. pdf

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