Cra and Financial Crisis

Table of Content Introduction2 Real-life ex group Ales2 existential unit of ammunition2 Other imaginations of Babbie, Gravetter and Forzano applied2 Conclusion2 References2 Introduction The abound of the join States lodgement market guggle initiated the cosmopolitan fiscal crisis. Amongst alone caparison regulations, the residential district reinvestment feign (CRA) may be the close to signifi cleart. The human activity passed in 1977 to improve low-income households lodgement opportunities. As such, the act raised the incentives for banks to allow mortgages to low-income households (FFIEC, n. d. ). Over sequence, several political administrations, manage the George H.W. Bush-, Clinton- and George W. Bush-administration, swapd the original act, adapting to newfound challenges in the lodging market (Braunstein, 2008). However, as time passed, the act became less important for banks, as the products, mortgages, became more(prenominal) profitable. As a essence, mo re and more fiscal institutions deducted offering mortgages to low-income classes. These so cal take sub prize mortgages argon often associated with high risks (Aalbers, 2009). This point of find behind be cerebrate with the opening that the CRA will be seen as a political c axerophtholaign of the financial crisis.Firstly, the different opinions and their individual arguments with regard to the conjecture atomic number 18 illustrated. Secondly, an comment is addicted on how these ex amples fit in the experimental circle. Thirdly, three different concepts of Babbie, Gravetter and Forzano be applied to the examples. Finally, a windup is force with respect to the examples. Real-life examples As a resolving of the CRA, banks were rated, based on the number of loans given out to low-income households. A bad valuation could cast off had severe consequences for a bank.The regionicular that the FED did not allow a Hartford, Connecticut bank to acquire a New Hampshire b ank on CRA campaign demonstrates this. In straddle to keep their CRA ratings high, banks had to yield low-income classes with loans. In essence it fag end be said that the CRA ratings raised the banks incentives to get out low-income households with loans (Carney, 2009a). It raise clearly be seen that the enforcement of the CRA everyplace time led to a re wantonation of lend standards and consequentially to more risk-taking in the banking welkin in the form of mortgages. These high-risk mortgages are now seen as part of the problem.Thus, Carney (2009b) concludes, the CRA is part of the possess of the financial crisis. Carney agrees with the hypothesis. Defendants of the CRA simply telephone call that an act passed in 1977 cannot lead to the populace of a hold bubble 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 in the first place in the introduction. To be more specifi c, it was more and more compel over the years. As a conclusion it can be said that the enforcement of the CRA office have been crucial in creating the housing bubble.Therefore the act could have created a housing bubble in the early 21st century (Carney, 2009a). However, Aalbers (2009) also argues in favour of the CRA and tries to falsify the hypothesis. He states that the majority of sub point loans in 2006 were provided by non-bank lenders. These non-bank lenders, however, were not subject to CRA regulations and thus were not obliged to provide affordable loans to low-income classes. The hardly analytical conclusion that can be drawn from this information is that these loans to low-income classes were an fascinating investment.Thus, Aalbers says, the CRA was not the park steering of the high-risk mortgages saving to low-income households by banks. By clearly, Aalbers would slump the hypothesis that the CRA was a have got of the financial bubble. Nonetheless, his furro w has to be head teachered. In 1977 most of the loans and mortgages were provided by banks as well as savings and loan associations. The extra mortgages that were provided as a result of the CRA probably increased the contend for houses, which in turn resulted in an puffiness of housing prices.Several years later, due to rising slope housing prices, subprime mortgages became a more mesmeric investment for financial institutions. Consequently, the majority of loans give upd since the fountain of the CRA came from nonbanks that deemed mortgages a good investment. In early(a) words, the CRA created major lending opportunities for financial institutions (Kroszner, 2009). Since the CRA initiated the ostentatiousness of housing prices to some extent, it can be argued that the CRA can be hold part responsible for the creation of the housing bubble. This possibility should verify the hypothesis. This argument has to be investigated further.As Foote et al. s (2008) research conclud es, housing price entropy in Massachusetts reveals that around 70% of all homes lost to foreclosure were actually purchased with prime mortgages. From that information Aalbers (2009) derives that most loans were not utilize for directly financing new homes, further rather refinancing existing loans. Hence, Aalbers insinuates that the extra mortgage lending as a result of the CRA did not cause a hold up in housing prices. That information implies that the CRA was not a cause of the creation or inflation of the unify States housing bubble. Clearly, this would recant the hypothesis.Nonetheless, Aalbers argumentation contains two pitfalls. First, his argumentation whole rests on inductive reason. Massachusetts is just one small part of the United States of America. Without any collateral information to back end up the thesis that the Massachusetts housing market is representative of the whole realms housing market, it has to be concluded that Aalbers overgeneralizes the sta tistical data provided by Foote et al. As Babbie (2005) mentions, overgeneralization can lead to misdirection 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 acknowledge the separate side of the medal The publish side, as it is not in favor of his opinion. If the CRA-related loans were apply to refinance homes only, it would strongly affect the supply side of the housing market in the way that supply was artificially lowered. Homes were industrious that otherwise would not have been, driving force up the prices of real estate. Aalbers falls dupe to the fallacy of selective expression. He only looks at the effects of the CRA on the demand-side. smell at the supply-side would not support his conjecture and point of bet on the topic.That makes this observation a selective one. Empirical roll This debate fits in the empirical cycle in the way that it started with an observation The burst of the housing bubble. Consequentially different hypotheses and theories where hypothesize and tested by reasoning and cor similitude. As markets nowadays are very decomposable phenomena, it is difficult to establish a causal relationship between several factors of this system. In spite of that it is possible to use logical reasoning and correlation between these factors to intimation at the correctness of a thesis. For example, it can be investigated how many subprime loans were CRA-related.A different question that can be posed 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 test the hypothesis, a new hypothesis and theory might be formulated until a conclusive theory is found. Nevertheless, Kroszner himself admitted the existence of a escape of data to get conclusive answers to the prev iously mentioned questions. For the empirical cycle, this lack of data means it is very hard to reject or not reject theses, obstructing the manifestation 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 concept that can be applied by from the empirical cycle is the concept of business office. 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 Governor Meyer. Since Carney employ a quotation of Meyer, it can be concluded that Meyer is a individual with authority and strong references in the field of economics.Babbie, Gravetter and Forzano trammel authority as a person with strong references in certain fields. warrant is used as a citation for knowledge and can be referred to. Gravetter and For zano (2009, p. 11) set rationalism as the search for answers by the use of logical reasoning. This is on the dot 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. possibleness is described by Babbie (2005, p. 12) as a systematic explanation for the observations that relates to a accompaniment aspect of life. This implies that the argumentations used by Carney (2009a, b), Aalbers (2009) and Kroszner (2009) are parts of different theories as they explain how the CRA caused or did not cause a housing bubble. Conclusion As shown in this paper, there is a bulky debate about whether the CRA was a cause of the financial crisis. As Carney (2009b) pointed out, t he 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 bank CRA is not to be fault. He mentions that the opening 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 large majority of houses bought in Massachusetts was financed with prime mortgages. He concludes that this provides evidence in order for the CRA not be labeled a cause of the crisis. 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 cookery of these theses they were tested by logical reasoning and correlation. As a final step, new theses theories will be formulated. However, this step is block 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 partnership Reinvestment Act cannot be blamed for the subprime crisis. City & Community, 8 (3) 346-350. Babbie, E. (2005). The bedrock of Social Research (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 really did require get 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. & Willen, P. , (2008). Journal of Housing Economics, 17 291-305. Retrieved 19 January 2010 from http// www. sciencedirect. om/science? _ob=MImg&_imagekey=B6WJR-4TN0KW9-1-N&_cdi=6885&_user=499911&_orig=search&_coverDate=12%2F31%2F2008&_sk=999829995&view=c&wchp=dGLbVtb-zSkzk&md5=f93e4616adcb03662bac8ef89298dcdc&ie=/sdarticle. pdf Gravetter, F. & Forzano, L. (2009). Research Methods for the behavioural 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