September 12, 2018
The most overlooked cause of the economic crash of ten years ago this Saturday is modern America’s most sacred value, diversity.
As far as I can tell, the now-sacred cliché that “Diversity is our strength” traces back to a spring 1992 speech made by Vice President Dan Quayle about a trip he made to Japan during the Rodney King black vs. Korean riots:
I was asked many times in Japan about the recent events in Los Angeles. From the perspective of many Japanese, the ethnic diversity of our culture is a weakness compared to their homogeneous society. I begged to differ with my hosts. I explained that our diversity is our strength.
Whether the Japanese were persuaded by this assertion Dan didn’t mention, but Americans have been agog over Quayle’s insight ever since.
Last week, though, Tucker Carlson broadcast a short segment expressing skepticism about Quayle’s shibboleth:
How precisely is diversity our strength? Can you think of other institutions, such as marriage or military units, in which the less people have in common, the more cohesive they are? Do you get along better with your neighbors and co-workers if you can’t understand each other, or share no common values?
Respectable opinion went berserk with rage at Carlson for his lack of faith in the wisdom of Dan Quayle.
For example, Chris Evans, the movie star who plays Captain America in the Marvel movies, tweeted in response to Carlson:
This is baffling. Diversity shows us where our experiences overlap. It teaches us to recognize commonality before differences. It breeds empathy. It combats fear. It makes us better. It’s what our country is built on. The bigger concern is what would we become WITHOUT diversity.
Granted, Chris Evans has good career reasons to babble about his utter devotion to diversity.
Generally speaking, while we all are supposed to agree on the holiness of diversity, seldom can two people agree on who deserves more diversity points.
For example, Naomi Osaka, the young tennis player who crushed Serena Williams on Saturday, sounds pretty diverse in theory: She’s half-black, half-Japanese, and American-raised. But she found herself cast aside by the diversity-worshipping mob as Serena decided to distract from her losing by picking a fight with the umpire. This ploy generated vast sympathy for the rich bully and a thousand op-eds with headlines like:
Serena Williams Demanded the Apology All Black Women Deserve
But if ever we could all come together to agree on anything in this ever-more diverse land, it’s that Chris Evans is not diverse and is sorely lacking in intersectional Pokémon points.
Evans could see even more reason to pledge fealty to the great god diversity after his uncle, Representative Michael Capuano (D-MA), had his career ended in last week’s primary. After ten terms in Congress during which he had compiled a distinguished antiwar record, Evans’ uncle lost to a black woman with the same ideology as him who campaigned on the argument that Chris Evans’ uncle isn’t a woman and isn’t black.
Diversity actually is an intriguing topic if we ever allowed ourselves any freedom to think about it. For instance, the entertainment industry over the last generation has experimented successfully with having two people direct one movie or TV show, which might be seen as evidence that diversity pays off by allowing multiple perspectives. Two heads sometimes are better than one.
Yet, the most successful of these pairs of filmmakers have tended to be not wildly diverse, as the theory of diversity would predict. Most of the enduring directing teams are brothers (even sometimes identical twins), such as the Coen, Farrelly, Dardenne, Duplass, Duffer, Weitz, Nolan, Polish, and Hughes brothers, along with the Wachowski siblings.
For instance, Evans’ last three Marvel movies have been directed by the Russo brothers. They have made about $4 billion at the box office together, which might suggest that a little diversity, but not too much, could be optimal.
It’s an interesting question, but interesting questions about diversity aren’t allowed much anymore. Evans is a successful man in a highly competitive business, so he’s likely to have some well-considered opinions on what tends to work and what doesn’t. But any non-worshipful mention of the D-word tends to fry the brain circuits of modern Americans, so he merely burbles platitudes on this subject.
Similarly, it’s hard for 21st-century people to notice the role that diversity played in the great financial crash of a decade ago because our minds start suffering crimestop—Orwell’s “protective stupidity.”
Keep in mind that I’m not attempting to explain all the contributors to the Great Financial Crash of 2008, such as the speculative excesses in Iceland and Spain. I’m focusing merely on the Housing Bubble and Bust in the USA.
I will admit that my focus on American mortgages is narrow and simplistic, but it’s not a bad place to start in understanding the events of ten years ago.
What I’m arguing is a little bit like saying:
(1) that the Great Depression was set off by the New York stock market crash of October 1929;
(2) or that World War I was started by the assassination of the Archduke Franz Ferdinand;
(3) or that American involvement in World War II was kicked off by Pearl Harbor.
For example, the sneak attack on Pearl Harbor was hardly the sole cause of America getting into WWII. Hitler, for instance, was also involved. Yet the U.S. worked very hard to understand fully why it had been so vulnerable to the Japanese surprise assault, and invested colossally during the Cold War to prevent that kind of thing from happening again, with sixty years of success until Sept. 11, 2001.
In contrast, our society has not invested much attention in studying the interplay of our worship of diversity and the mortgage meltdown.
For instance, when I Google:
diversity great financial crash
These are the first three headlines I get:
Sallie Krawcheck: diversity could have helped avoid the crisis – CBS
Could women have halted the financial crisis? – Telegraph
Wall Street’s Lack Of Diversity Is Putting Us At Risk Of Another Crisis…
After all, how could diversity, the font of all that is good, cause anything bad? If something bad happens, the only conceivable response must be: More diversity, please!
Another reason for our lack of awareness is partisanship and the appeal of dumbed-down laissez-faire economics. Republicans don’t like blaming businessmen or Republican politicians. Democrats don’t like blaming pro-diversity initiatives. Thus, the whole sorry history has gone down the memory hole.
The GOP was in the White House when the Housing Bubble was brewed up in 2002–2005. President George W. Bush strongly pushed the finance industry to lend more to nonwhites at his Oct. 15, 2002, White House Conference on Increasing Minority Homeownership. There he told his federal regulators not to worry so much about traditional credit standards regarding down payments and documentation of income because he wanted to see 5.5 million more minority homeowners by 2010.
Republicans often do a pretty good job of keeping an eye on Democrats trying to hand out rewards to their supporters. But GOP skepticism breaks down when it’s a GOP president calling for easier money for blacks and Hispanics, especially when it’s not tax dollars but mortgages handed out by profit-seeking businesses.
Republican-allied economists have been largely stumped in figuring out how to blame the Bubble and Bust on Democrats.
They focused for a while on the Democratic-sponsored Community Reinvestment Act that was intended to encourage lending in minority neighborhoods. But it was implausible that the government had forced lenders to give out hundreds of billions in what they knew were bad mortgages, especially since most of the lenders had seemed wildly enthusiastic during the Bubble. Moreover, bankers who realized how bad the loans would be could simply have sat out the craziness.
But there is a way that the Community Reinvestment Act groomed the culture of lending over the decades to be overoptimistic about minority borrowers. The CRA acted as a Darwinian filter on which banks got to buy other banks. Banks that didn’t promise to play ball with lending activists could get their acquisitions held up by regulators. Over time, the optimists about minority lending were encouraged to grow bigger while the pessimists were not, so banking came to be dominated by unrealistic enthusiasm.
Consider Washington Mutual of Seattle, which became, via 29 acquisitions, the sixth-biggest bank in the country before it went under in 2008.
CEO Kerry Killinger liked to outbid rival banks for mergers not just in cash but also in CRA pledges. For example, when WaMu competed with Home Savings in 1997 to buy Great Western, Killinger topped Home’s CRA pledge of lending $70 billion to minority and lower-income borrowers by offering $75 billion.
The next year WaMu bought Home Savings itself, and won regulatory approval in part by signing a $120 billion CRA pledge with various leftist front organizations such as the Greenlining Institute.
In 2001 WaMu bought Dime Bank and pledged $375 billion in CRA mortgages.
The informative 2011 book The Lost Bank by Kirsten Grind shows no evidence that Killinger ever thought the government was holding a gun to his head to make these pledges. He felt that WaMu was going to come into Southern California and make a fortune lending to Hispanics. Those local lenders he’d outbid hadn’t been as optimistic about their neighbors’ prospects of repaying their loans as he was because they were prejudiced. They just didn’t understand that diversity is our strength.
Similarly, another central figure in the mortgage meltdown, Angelo Mozilo, CEO of Countrywide Financial, was another diversity enthusiast.
Mozilo wanted to boost Countrywide’s share of the national mortgage market from 10 percent to 30 percent. He believed he could safely do that by increasing lending to marginal customers, especially Hispanics. As an Italian-American who had felt himself the object of WASP disdain, Mozilo believed that lenders traditionally underestimated Latinos’ ability to pay back mortgages due to their bigotry.
In 2003, Mozilo, citing Bush’s push for minority home ownership, pledged to a Harvard audience that Countrywide would lend $600 billion to minority and lower-income borrowers by 2010. In 2005, he boosted that promise to one trillion dollars.
But a trillion here, a trillion there, pretty soon you are talking about real money. Countrywide went under in 2008.
Bush had a not-implausible political plan in mind behind his “ownership society”: By giving the green light to lenders to take more risks with nontraditional borrowers, he hoped to attract Hispanics to vote Republican.
And indeed, the 2004 economic boom among Hispanics in construction and Spanish-language mortgage lending jobs probably helped Bush up his share of the Latino vote from about 35 percent in 2000 to about 40 percent in 2004.
If Bush had cynically put the brakes on immediately after winning reelection, the housing bubble wouldn’t have metastasized the way it did in 2005–2007. Unfortunately, the president actually believed diversity is our strength.
One reason Bush failed to see what was going so disastrously wrong with the housing market in the “Sand States” of California, Arizona, Nevada, and Florida was that in his home state of Texas, where local regulators rapidly approve new home construction, increases in demand are quickly met by increases in supply, so prices don’t rise for very long. The Bush Bubble barely inflated in Texas.
But in California, unexpected demand sets off a regulatory endurance struggle, causing prices to rise through the roof in the meantime. (The other three Sand States are in-between California and Texas in time to construction.)
Eventually by 2007–2008, massive new subdivisions were on the horizon in the Sand States, just as the lending industry discovered that there had actually been perfectly rational reasons why those evil old racist bankers had been reluctant to lend to blacks and, especially, Hispanics.
But ten years later, right- (and left-) thinking Americans remain in thrall to the dogma of diversity. Hence, it’s been difficult for people to grasp the mounting academic research showing the various ways diversity helped set off the landslide that began with the U.S. mortgage market.
For example, a 2015 paper by Lin, Liu, and Xie found that in a sample of 18,000 households:
The difference in the mortgage delinquency rates between immigrants (15.7%) and natives (4.4%) is significant.
That’s more than 3.5 times the native rate.
Similarly, a 2013 paper by Luea, Reichenberger, and Turner revealed 2009 default rates for whites of 3.4 percent, blacks 11.3 percent (3.3 times the white rate), and Hispanics 16 percent (4.7 times the white rate). When the economists adjusted for every available personal statistic, blacks still defaulted at 1.44 times the white rate and Hispanics at 1.88, suggesting that some ethnic prejudice was justified.
A 2013 paper by Reid featuring data from the fifty largest metro areas for mortgages originated just in 2005 shows that foreclosure rates by 2009 were twice as bad for blacks as whites and almost three times as bad for Hispanics as whites. By 2010, 10.5 percent of Hispanics were in foreclosure versus 4 percent of whites.
Blacks weren’t much to blame for 2008 because their mortgages tended to be small because black neighborhoods have low housing prices. Not many immigrants were clamoring to move to Detroit.
But Hispanics tend to live in expensive states such as California, where immigration drives up prices.
According to Zillow, Hispanic neighborhoods nationally exploded in price by 280 percent from 2000 to 2006 versus about 160 percent for white neighborhoods. Remarkably, by the peak of the Bubble, the median home in a Hispanic neighborhood was worth almost a hundred thousand dollars more than the median home in a white neighborhood.
Not surprisingly, the decline in home value from peak to trough was almost twice as severe in Hispanic neighborhoods as in white neighborhoods.
In summary, immigration was seen as a vast boon to the housing market until it turned out that Hispanics tended not to be able to afford the huge mortgages they had been given. At that point in 2008, housing prices in several high-priced Hispanic-heavy states, such as California and Florida, plummeted, taking down financial institutions like Lehman Brothers, Washington Mutual, and Countrywide Financial. This carnage set off a national recession even in places without a Housing Bubble.
Santayana famously said, “Those who cannot remember the past are condemned to repeat it.” But what if you haven’t forgotten it because you never had a clue in the first place?