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

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The Community Reinvestment Act (CRA) allows banks to meet their lending quotas to low- and moderate-income communities by making loans or buying loans made by others, a policy designed to make the CRA loan market 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 data from the Home Mortgage Disclosure Act and comparing neighborhoods just above and just below the definition of low- and middle-income community, Brevoort finds that banks are buying up to 9.5% more loans in low- and moderate-income communities, but not increasing the number of loans. According to Brevoort, banks are temporarily diverting loans that would otherwise have been sold to government-sponsored businesses, providing little or no benefit to the communities the ARC is meant to help.

Using education and criminal justice records from North Carolina students, Evan Rose of the University of Chicago, Yotam Shem-Tov of the University of California, Los Angeles, and Johnathan Schellenberg of the University of California at Berkeley discovered that teachers influence the lives of their students. likelihood of having future contact with the criminal justice system. Specifically, students assigned to teachers who improve student attendance and discipline by one 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 their students’ likelihood of criminal justice contact. The results suggest that students’ likelihood of encountering the criminal justice system is largely reduced by the accumulation of behavioral ‘soft skills’ in school. While teachers who improve academic performance have a positive impact on students’ long-term academic prospects, “policies based solely on the quality of teachers’ test scores may inadvertently eliminate teachers who have a large impact on students’ future. [criminal justice contact]“, conclude the authors.

In 2021, the Texas Legislature prohibited local governments from entering into contracts with banks that use ESG (environmental, social, and government) criteria to limit business with oil, gas, or gun companies. These laws caused five major municipal underwriters to exit the Texas market, reducing competition and increasing borrowing costs for localities. Estimate by Daniel Garrett of Wharton and Ivan Ivanov of the Federal Reserve Board Texas will spend an additional $303 million to $532 million in interest on $32 billion in bonds issued since the laws passed. The sharp drop in competition raised the average interest rate on municipal bonds by 15.4 basis points, increasing the government’s overall interest expenditure by 4%. For localities most dependent on exiting underwriters, a 25.2 percentage point drop in auction frequency helped push up borrowing costs by nearly 20 percent.

Bar chart of United States population growth since 2006 and its projected trajectory over the period 2022-2051

Graphic courtesy of The Congressional Budget Office

“Inflation at current levels poses a clear risk to 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 in major advanced economies are withdrawing their monetary support faster than expected in April, while many emerging and developing countries had already started raising interest rates last year. The resulting synchronized monetary tightening across countries is historically unprecedented, and its The effects are likely to be felt, 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 difficulties. central banks that have started to tighten should stay the course until inflation be under control”, says Pierre-Olivier Gourinchas, Chief Economist, International Monetary Fund.

“Targeted budget support can help cushion the impact on the most vulnerable. But with government budgets stretched by the pandemic and the need for disinflationary global macroeconomic policy, offsetting targeted support with higher taxes or lower government spending will ensure that fiscal policy does not make monetary policy work again. more difficult. As advanced economies raise interest rates to fight inflation, financial conditions are tightening, especially for their emerging market counterparts. Countries should make appropriate use of macroprudential tools to safeguard financial stability. When flexible exchange rates are insufficient to absorb external shocks, policymakers will need to be prepared to implement foreign exchange interventions or capital flow management measures in a stress scenario.


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