Tuesday, October 14, 2008

Meyer, the Fed, and CRA

Laurence Meyer's A Term at the Fed does a better job of explaining what the making of monetary policy entails than any other book I know of. It certainly is far superior to Alan Greenspan's Age of Turbulance, which says almost nothing about monetary policy and maybe says a bit too much about Greenspan's fascination with celebrity and power.

At the beginning of his book, Meyer describes his appointment to the Fed. One his first hurdles was an interview with Joseph Stiglitz, then chairman of Clinton's Council of Economic advisors:

"Joe ended our conversation by telling me that he didn't want to pressure me on any issues on behalf of the Clinton administration, but he did want me to know that the administration was strongly in favor of CRA.

"I suspect we've all had moments when our responses to a particular situation could change our lives and careers. This seemed like one of those moments to me. I could have said: Joe I have heard of the NBA, the PTA, and CPAs, but CRA--I don't have a clue. But then, I figured I would still be a professor of economics at Washington University and an economic forecaster. ...

"Or I could have said: Joe, I am with you 100%--and figure out later what I had committed myself to. ... So I gave Joe the silent treatment. After a brief pause, Joe said good-bye, and I patted myself on the back for apparently dodging that bullet successfully. ...

"The second lesson is about Joe Stiglitz. He handled my ignorance of CRA in a very gentle and indeed constructive way....

"Democrats love CRA because it demonstrates how the government can provide better opportunities for lower-income families. Republicans hate CRA because it represents interference by government in the operation of businesses.... I became the member of the Board to testify before Congress on issues related to CRA. I went around the country supporting the superb work that community groups and banks were doing in providing affordable housing for low- and moderate-income groups. "

There is no further mention of CRA, the Community Reinvestment Act, in the book. I wonder if Meyer would have given it a lot more space if he were writing today. CRA was not the immediate source of the current financial panic, and I do not think it was either a necessary or sufficient cause. Rather it served either as a few early steps on a long path to, or perhaps one of a number of tributaries to the river that flowed to the current panic. A full understanding of what led to the current panic would be incomplete without some discussion of CRA and the desire to expand home ownership.

No comments: