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Loan purchases, students and the criminal justice system, and more 


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The Community Reinvestment Act (CRA) allows banks to meet their quotas for lending to low- and moderate-income communities by either making loans or buying loans made by others, a policy designed to make the market for CRA loans more liquid. However, Kenneth Brevoort of the Federal Reserve Board finds that giving these two activities equal weight increases loan purchases without increasing lending to targeted communities. Using Home Mortgage Disclosure Act data and comparing neighborhoods just above and just below the definition of low- and moderate-income community, Brevoort finds that banks purchase up to 9.5% more loans in low- and moderate-income communities, but do not increase loan originations. According to Brevoort, banks temporarily divert loans that would have otherwise been sold to government-sponsored enterprises, providing little-to-no benefit to the communities the CRA is meant to help.   

Using education and criminal justice records of students in North Carolina, Evan Rose of the University of Chicago, Yotam Shem-Tov of the University of California at Los Angeles, and Johnathan Schellenberg of the University of California at Berkeley find that teachers influence their students’ likelihood of having future contact with the criminal justice system. Specifically, students assigned to teachers who improve student attendance and discipline by 1 standard deviation are 2-4% less likely to have contact with the criminal justice system between the ages of 16 and 21. Unlike teachers who improve behavioral outcomes, teachers who improve academic performance do not appear to influence the likelihood of criminal justice contact of their students. The results suggest that students’ likelihood of criminal justice contact is reduced largely through the accumulation of behavioral “soft skills” in school. While teachers who boost academic performance have a positive impact on students’ long-run academic prospects, “policies based solely on teachers’ test score quality may inadvertently remove teachers with important impacts on students’ future [criminal justice contact],” the authors conclude.  

In 2021, the Texas legislature banned local governments from contracting with banks that use ESG (environmental, social, and governmental) criteria to limit business with oil, gas, or firearms companies. These laws led to five major municipal underwriters leaving the Texas market, reducing competition and increasing borrowing costs for localities. Daniel Garrett of Wharton and Ivan Ivanov of the Federal Reserve Board estimate Texas will spend an extra $303 million to $532 million in interest on $32 billion in bonds issued since the laws passed. The abrupt decline in competition increased the average interest rate on municipal bonds by 15.4 basis points, raising the state’s overall interest outlays by 4%. For the localities most dependent on exiting underwriters, a 25.2 percentage point drop in auction frequency contributed to borrowing costs rising by nearly 20%.   

Bar chart of US population growth since 2006 and its projected path over the 2022-2051 period

Chart courtesy of The Congressional Budget Office 

“Inflation at current levels represents a clear risk for current and future macroeconomic stability and bringing it back to central bank targets should be the top priority for policymakers. In response to incoming data, central banks of major advanced economies are withdrawing monetary support faster than we expected in April, while many in emerging market and developing economies had already started raising interest rates last year. The resulting synchronized monetary tightening across countries is historically unprecedented, and its effects are expected to bite, with global growth slowing next year and inflation decelerating. Tighter monetary policy will inevitably have real economic costs but delaying it will only exacerbate the hardship. Central banks that have started tightening should stay the course until inflation is tamed,” says Pierre-Olivier Gourinchas, Chief Economist, International Monetary Fund. 

“Targeted fiscal support can help cushion the impact on the most vulnerable. But with government budgets stretched by the pandemic and the need for an overall disinflationary macroeconomic policy stance, offsetting targeted support with higher taxes or lower government spending will ensure that fiscal policy does not make the job of monetary policy even harder. As advanced economies raise interest rates to fight inflation, financial conditions are tightening, especially for their emerging-market counterparts. Countries must appropriately use macroprudential tools to safeguard financial stability. Where flexible exchange rates are insufficient to absorb external shocks, policymakers will need to be ready to implement foreign exchange interventions or capital flow management measures in a crisis scenario.”  


The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation. 

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