“No good deed goes unpunished” is a maxim that pretty much everyone except the irredeemably foolish learn at some point, if only temporarily.  “No good intention goes unperverted” would be the corresponding maxim of government.

The Community Reinvestment Act was passed in 1977, back in the waning days of blind faith in government “initiatives” to accomplish just about anything, with the stated goals of increasing the number of Americans who lived in their own house.  On its face this seems to be not just a morally commendable goal — “landlord” comes in neck-and-neck with “tax collector” and “kulak” for most-reviled occupation — but Good Policy as well.  There are hosts of desirable socio-economic data which are positively correlated with home ownership, and equal numbers of undesirable data which are negatively correlated.  So by increasing home ownership we increase the Good Things and decrease the Bad Things.  All at the margins, of course, but hey!, it’s still a twofer and every step forward is a step forward.  And all that, right?  So let’s throw it against the wall and see how much closer we can get.

How the statute worked was that it loosened the loan underwriting requirements that banks were otherwise required to observe in making residential loans.  “Loan underwriting” is the technical term for “those criteria by which a bank determines whether any particular loan is an acceptable risk.”  Much shorter and easier to remember, in other words.  Generally banks, the deposits of which are insured by the FDIC or its S&L counterpart, FSLIC, or those which are to be guaranteed by an agency of the federal government, such as the VA or the FHA, or which are to be purchased by an entity which is backed by the federal government, are required to make some sort of effort to figure out ahead of time whether any particular loan is likely to be paid back, and not to make the loan at all if the answer is too close to “no.”  There are a whole host of things that banks look at, such as income-to-fixed expense ratios, the amount of the loan expressed as a percentage of the collateral’s value, the prospective borrower’s track record in paying his other creditors, whether the borrower has, within a certain period of time before, sought the protection of the bankruptcy system, the prospective borrower’s other unencumbered assets expressed as some percentage of the prospective loan, etc. etc. etc.  Generally those lenders are required to verify what their borrowers tell them.  They do that by requiring the production of tax returns, bank or investment account statements, or obtaining information from unrelated third parties like appraisers of the proposed collateral, or credit reporting agencies which collate information about the proposed borrower.  All well and good, and proper when you consider that, however imperfect it may be in that function, the past is in fact the only thing we have to rely on in figuring out what the future is likely to look like.

The CRA explicitly provided that for certain borrowers, in certain locations, and under certain circumstances, a lender was permitted to look at a loan application that fell into the “don’t make this loan” territory and ignore the warning signs.

A quick aside:  Those folks who think that banks just made up all this stuff about loan underwriting requirements in order to deny loans to people actually able to pay the money back, just because . . . well, just because, are fools.  Banks do not make money if they do not make loans.  OK?  They owe the money on their deposits, including interest; those deposits are obligations on the bank’s books.  Banks cannot get money to loan without themselves borrowing it, from their depositors, or from the Fed, or from other banks.  The only way they can pay the interest is by charging interest and then actually collecting it.  If they make good loans, they stay in business.  If they make bad loans, they cannot pay their debts and, once they’ve exhausted their own capital, they go out of business.  Period.  Banks which willingly pass up good loans are leaving money on the table.  Banks which by bigotry exclude entire classes of borrowers or depositors because they’re . . . well, not people like us, create business opportunities for others who are savvy enough to court those good loan and deposit customers.  Like the Italian-American Immigrant Bank, which loaned to that group because they understood that Italian immigrants paid their bills.  You may have heard of them; they’re now known as Bank of America.  Don’t think I’m just making this up, either; Gary Becker won a Nobel in economics in part for his study of the economics of unjustified invidious discrimination.  He showed that actors who indulged their bigotry under circumstances where there was not some concrete basis for doing so (such as, for example, not serving a drunk stinking of his own piss and who also happened to be black, versus someone who just decided he wasn’t going to do business with the 20% of the town’s population that was black) paid a price for it, and that in a free market, without direct or indirect government subsidy of such behavior, it tended to go away because the people who paid the price realized they were paying it.

The mildly-common-sensical reader will immediately note a few problems with the thinking behind the CRA.  For starts, it treats the genuine economic considerations behind loan underwriting as if they in fact did not exist.  Telling Lender X that it may ignore adverse loan underwriting results for a specific loan application does not mean that the loan is now less likely to prove to be a bad loan.  Secondly, it assumed that because A and B are positively correlated, it must be because A causes B, where A is home ownership and B is positive socio-economic attributes.  This of course not only confuses correlation with causation (the first is a statistical phenomenon that can be determined based upon counting instances of A and B within a population; the second is a logical relationship the existence  and directionality of which can only be determined by experiment and examination of the specifics of the population in question), but it made the assumption that the direction of causality was from A to B.  Of course, what if it’s B that causes A, or what if A and B have no direct causal relationship but rather are both results of (that is, both are caused by, rather than cause) some other factor C?  Artificially increasing A is simply not going to produce more of B in either such case.

In 1995 the enforcement mechanisms under the CRA were significantly sharpened.  Now your examiners were authorized to determine how many CRA loans you ought to be making, and if they found you weren’t making enough, they could fine you.  Really.  No kidding.  You exposed yourself to liability to the government if you did not make sufficient loans to people who could not reasonably be expected to pay them back.  At about the same time, Fannie Mae and Freddie Mac decided, on their own, that they were going to increase the percentage of their total loan portfolios represented by “sub-prime” loans (in other words, loans made to people who weren’t likely to pay them back, including specifically CRA loans) to up to 50%.  You read that number right:  Fannie Mae decided that it wanted to have half of its loans consist of paper that was more likely than not worthless.

Well now.  What happens next?  In point of fact sub-prime loans, as a percentage of the total loan market, went through the roof.  And the race was on.

Audit of a bank’s CRA compliance was no empty threat.  Bank of America within the past few months paid $25 million to settle a CRA enforcement action brought by the DOJ.  That’s a lot of money to pony up because you tried not to lose money on bad loans.  But that’s the perversity of the incentive system we created.

Bank of America is of course a large bank.  But what about smaller banks, community banks?  Well, let’s say that I work for Community Bank X, and I know that my bank has a corresponding relationship with Fannie Mae.  That means that I know, for a fact, that every loan which I make which fits within the loan standards established by Fannie Mae, whatever those standards may be, I can originate and have sold and off Community Bank X’s books before the ink is even dry on the closing documents.  In other words, I know that, so long as I have a loan applicant who fits within Fannie Mae’s underwriting requirements, I can make that loan with zero effective risk to my bank.  Community Bank X only has a re-purchase obligation in the event the loan didn’t comply, at the front end, with whatever requirements Fannie Mae had in place at the time.

Let’s see how that plays out:  I have a loan applicant come to see me.  I can look at their application and just about guarantee that they’ll never, ever be able to repay this money.  But wait:  This application in fact does fit within the You-Gotta-Be-Kidding-Me program recently rolled out by Freddie Mac or Fannie Mae.  So I can make this loan and in less than 24 hours Fannie or Freddie will have taken it off my hands and if three years later the whole thing blows up, it doesn’t do so on my desk.  Do I make the loan?  Well, if I do not make the loan, and the applicant is a member of a pet constituency, or the proposed property is located in a CRA area, what I am doing is risking tens if not hundreds of thousands of dollars in defending either a private civil action alleging illegal discrimination or a DOJ enforcement action for failing to comply with the CRA or Fair Housing Act, or whatever.  Those risks are uninsurable, meaning the bank gets to pay to defend them and then pay out of pocket any liability.  Even if the bank wins the discovery process will absorb hundreds of thousands of man-hours and attorney’s fees and forensic accountant’s fees.  So do I make the loan?  Hell yes I make the loan.  Have I done anyone any favors?  No.  Is this person any more likely not to lose his home to foreclosure at some point down the line?  Not in the slightest.  But I’ve protected my bank from liability; we can even brag on our website about how we aggressively support the Community Reinvestment Act.

Note, by the way, that even if my lender is for whatever reason not subject to the CRA, or the loan in question is not a CRA loan, so long as the prospective borrower fits within whatever cock-eyed Fannie Mae loan programs are within the scope of my lender’s corresponding relationship with Fannie, if I refuse the loan my lender is still subject to liability.  And in truth how do I justify refusing to make a loan that someone solvent has already promised to buy off me so that my risk in making the loan is zero or close to it?

And now some folks have come along and demonstrated by precise examination that yes, in fact the CRA and its enforcement did increase the loan risk accepted by large lenders in CRA areas.  They conclude pretty plainly that the Community Reinvestment Act in fact materially contributed to the subprime lending bubble and therefore to the subsequent crash.  In fact they allow that because of the constraints of their data sampling it’s likely that their study understates the impact of that misconceived statute.  They only looked at large lenders who were in the midst of CRA examinations.  They observe, “If adjustment costs in lending behavior are large and banks can’t easily tilt their loan portfolio toward greater CRA compliance, the full impact of the CRA is potentially much greater than that estimated by the change in lending behavior around CRA exams.”  In other words, the study’s authors admit that their sampled lenders might have been engaging in Potemkin lending, but that they can’t exclude that the observable behavior extended outside their window of observation.

The above link is to Reason magazine; the actual study is not downloadable for free (except to certain people), but here’s the link for those who wish to pay.

By the way, the Community Reinvestment Act remains out there, unchanged, over four years after the disaster it contributed to exploded into the worst economic downturn the country has experienced since the Great Depression.  Just like the Belgian farmers still plow up, and occasionally get blown up by, old artillery shells from World War I, the CRA still harbors its lethally defective assumptions beneath the American banking system.

When I hear people talking about “reasonable restrictions” on the right guaranteed (not established, by the way) by the Second Amendment.

We are assured that no right is absolute.  We in fact can look about us and confirm that much for a fact.  We have all heard that my rights stop at the tip of your nose; which is likewise correct.  We are told that, in order to make a society of 310 million-odd people rub along in some sort of fashion, you’ve got to be willing to take some jack-planing to things you’d rather hold dear.  Also correct.

On the other hand, we are told that all portions of the Constitution are of equal dignity.  We are told that with the exception of express provision, such as the 21st repealing the 18th Amendment, or the 17th Amendment explicitly changing how senators are chosen, no provision of the Constitution trumps any other provision.  Most importantly, the same canons of construction apply across all portions of the document; we don’t — or at least we hold ourselves out as not doing so — craft certain rules of interpretation for certain provisions and then read others in a diametrically opposed fashion.

[And here a short rant:  What made the U.S. Constitution so radical was not its concept of separation of powers; was not the suggestion that there are some things which government may not do; it was not the practice of lodging sovereignty in an elected assembly rather than in the will of a crowned head.  What made the Constitution so radical was precisely that it was written.  It had substance and form, and the latter determined the former, not the other way around.  We hear continuous blather from the bench about respecting “substance over form,” which is nothing more than an ipse dixit declaration of a desire not to follow the letter of the law in order to achieve a particular result in a specific case (what the late Maurice Rosenberg correctly described as “judicial ad-hockery”).  Statutes are written for the purpose of establishing that certain forms of behavior are legal and certain other forms of behavior are not legal; that certain forms of actions will produce Result X and other forms will produce Result Y or at least Result Not-X.  When a judge announces that the case will be decided on a “substance-over-form” basis what he’s announcing is that he does not believe himself bound to his oath of office.  But I digress, slightly.  The reason that written constitutions were so abhorred by the would-be absolute monarchs is precisely because, until the U.S. Supreme Court decided that texts are “living documents,” pretty much everyone acknowledged that a written text means the same thing today that it did yesterday, and that “evolving standards of decency” (one of the most fat-headed expressions ever to ooze from the judicial pen) cannot change what the document says, and therefore cannot change what it means.  It was precisely this insight, which the American judiciary has now found so quaintly outdated, that drove the revolutions of 1848 across Europe.  The tyrants and would-be tyrants from Prussia to Vienna to St. Petersburg were terrified of written constitutions for precisely one reason:  They, like the modern American judiciary, did not care to be bound by what some bunch of dead guys wrote years ago.  The “living document” crew which holds that the text means what they say it means is the moral and intellectual twin of the absolute tyrant, and both are entitled to the same deference from a free people, which is to say zero.  Here endeth the screed.]

What happened last Friday was that a lunatic, exercising a constitutionally protected right, then used those otherwise protected actions to commit a number of actions which are already criminal offenses in every jurisdiction of the country.  In consequence of his actions, it is now proposed that the constitutionally protected rights of everyone else, none of whom is the person who shot up that school, be permanently and in blanket form diminished, ex ante. 

Oh don’t worry, we are told; these will be only “reasonable” restrictions on what isn’t an absolute right.  We must do this because we have to make sure that your ability to exercise your rights does not facilitate the commission of what is already a criminal offense by someone to whom you have no connection, and whose criminal actions will be neither assisted nor hindered by your exercise, or not, of any right you possess.  The rights of all must be diminished because a few, some of whom are identifiable in advance and others of whom are not so identifiable, might use those rights to commit a crime.  Not that they will do so, but they might.  Other actions which would result in the diminishment of the otherwise constitutionally protected rights of a much smaller number of people — specifically that subset of Americans consisting of those mentally disturbed individuals whose potential for violence has either already been demonstrated or who are sufficiently objectively diagnosable that you can point to them and say this guy is a ticking bomb — must be avoided because, well, to commit them to an institution would be in derogation of their constitutional right to personal liberty.  Well, yes, it would do so.

I am going to suggest that such reasoning is dangerous.  We also have a constitutionally protected right to practice our religion of choice.  That right is neither more nor less protected than our Second Amendment rights.  Some people — above all some adherents of the Religion of Peace — use their freedom of exercise to promote and even engage in criminal acts.  Like encouraging specific individuals to become active members of terroristic organizations.  Like using affiliated organizations to launder money in support of terroristic organizations.  Like acting as meeting places for members and active supporters of terroristic organizations.  All those actions are already criminal offenses, no matter by whom committed, or how committed.  Just like killing 26 people in a single rampage is a crime whether done with a firearm, a machete, a bomb (Timothy McVeigh, anyone?), a motor vehicle, a cigarette lighter, or an airplane. 

Now, it just so happens that of all the bewildering tapestry of religious practices in the U.S., there is one and only one in the organizations of which such terroristic activities are actively and systematically pursued (not even the nut-jobs at the Westboro Baptist Church launder money in support of, for example, Aryan Nation).  Of course, I am perfectly willing to assume that the overwhelming majority of the adherents of that Religion of Peace are not knowingly engaged in those activities . . . even if they might personally know some who are.  But the same logic which tells me that it is merely a “reasonable restriction” on my right to defend my family and myself that I get only seven shots to do so, rather than fourteen, or that I may not use a particular caliber bullet or a particular load to do so, would also support liquidating every congregation of the Religion of Peace, or restricting them to congregations of no more than, say, five, because well, you know, we can say for a fact that some of them have, and some of them are, and therefore that some of them inevitably will actively use their otherwise protected right to congregate and worship as they please to commit criminal acts.  We know that.

Alternatively, we know that at least some people who are accused of criminal offenses are in fact guilty.  Guilty as sin.  We know that at least some of them refuse to testify for no other purpose than to increase their likelihood of escaping the consequences of past criminal action and facilitating future criminal action.  Now, some of the folks who refuse to testify actually did not do the act for which they are charged.  We know that at least some of them refuse to testify for any number of reasons (including, by the way, the fact that they are guilty of other crimes for which they have not been caught or charged, but for which they can reasonably expect to get fingered if they ever expose themselves to cross-examination).  Now, I am assured that my having to make application to some government drone who will examine me to make sure that I’m not one of the — say, thirty or so — crazy mothers who during any given year will shoot up a school, movie theater, or mall (in a population of 310 million people, that thirty makes up 0.000001% of the population), before permitting me to exercise my constitutionally protected right to keep and bear arms, is nothing but a “reasonable restriction” on that right.  OK.  So let’s have a government office to which a criminal accused must apply before being permitted not to testify against himself.  He will need to convince them that, more likely than not, he did not actually do the deed for which he is charged in that proceeding, and that he does not intend to use his silence to cloak illegal activity of any other sort.  This office would of course be hermetically sealed off from the prosecutor’s office, but without that certificate he would not be permitted to exercise his right not to testify against himself.  But it’s only reasonable, right?  And don’t get me wrong, some of the people making that application would be some truly evil people.  Like Adam Lanza, had he survived.  I mean, why should we, the taxpayers and the public in general, have to spend all that money to pot the guy who actually did it, and take the risk that he walks to do it again?  I mean, I don’t have a constitutional right to get away with a crime; if I did have a right to get away with it, it wouldn’t be a crime because I’d have the right to do it without molestation by the state.  So the only constitutional right that’s being affected here is the right not to assist the prosecution in coming after me.  And seriously, if I actually did the deed, then how much truly important constitutional injury can be said to have occurred?

[Another short rant:  I will also note that the same logic which says that the U.S. government may tax me for my failure to do an act which it does not have the constitutional power to compel me to do (such as, for example, buy a specific kind of health insurance) also lends itself to other instances in which someone’s exercise of a constitutional right (such as the right not to buy health insurance) carries serious externalities.  Like the guilty criminal’s refusal to testify against himself, or the insistence on gumming up the works with some damned lawyer’s penny-ante objections about reasonable searches and seizures.  In fact, the right to be free in one’s person, property, and papers from unreasonable searches and seizures is a pretty onerous burden on the public.  So why don’t we just say that we’re not compelling you to testify against yourself; we’re just going to tax you for your failure to do so, on a sliding scale by the seriousness of the crime?  Of if you really want us to figure out where you’ve hidden the gun, instead of just producing it on demand, we’ll impose a tax on you for the cost of the search.  Oh, don’t worry; it will be a reasonable cost.  There will even be a panel of “experts” to figure what that cost is.  They’ll update it periodically.  You really have to be a judge to accept that sort of thinking without laughing so hard you blow snot out your nose.]

Or how about the freedom to form a political party and solicit votes from one’s fellow citizens?  There are places in this world, in Wonderful Enlightened Gun-Grabbing Europe, where certain political positions may not be publicly espoused, no matter the number who may agree with them in secret.  Try setting up a fascist party in Germany these days (hell, for that matter, try to get away in Germany or Austria with saying the Holocaust didn’t happen; that’s a criminal offense, and it’s not criminal stupidity, either, that you’ll be charged with).  Now, no one’s going to argue that Europe isn’t civilized (we don’t talk about how many Frenchmen, and Dutch, and Italians, and Greeks, and Poles, and Czechs, etc. joyfully collaborated in the extermination of the Jews, do we?), are they?  So if we can point to their gun prohibitions as being reasonable, then surely their restrictions on ass-hat political movements must also be reasonable, no?  And it’s not as though the American Nazis stand any chance of actually electing anyone (in marked contrast to the Europeans, but we don’t talk about the fascists’ electoral successes either), so why not just go ahead and ban them?  Won’t be any skin off my nose (oddly enough one of the few people whom such a ban would really hit would be ol’ Morris Dees; he might have to dip into his outfit’s quarter-billion dollar nest egg, almost all of which is held in private equity, by the way).  C’mon; it’s reasonable.  And we’re all about reasonable restrictions on constitutional rights these days, aren’t we?

Oh . . . where was I?  Yes.  Once you begin accepting the assertion that my exercise of my own constitutional rights must, in advance and without reference to any action or failure to act of my own, be restricted because someone unknown to me might, just hypothetically might, incorporate into his commission of a crime the same behavior that I in my fuddy-duddy law-abidingness am constitutionally protected to indulge, then you might as well hang it up.  You are not living in a system of limited government.  You are living in a system of government in which the only limitation placed on what the governing class does to you is your willingness to stand there and take it.  And that is why I get antsy when I see the likes of Dear Leader, Dianne Feinstein (a concealed carry permit holder), and their ilk begin to drool and pant at the thought of restricting the rights of Americans as guaranteed by one but only one (as yet) of the first ten amendments to our constitution.