Whose fault is it?
Last week, the mainstream conservative punditry finally picked up an idea I had first put forward in August 2007 (and developed with more detail last June): that an underestimated factor in the financial crisis set off by the mortgage meltdown is our reigning ideology of multiculturalism and diversity.
In other words, this is a minority mortgage meltdown—and it may trigger a Diversity Recession.
Unfortunately, not having studied the question as long as I had, some of the conservative talking heads tended to put forward naïve, self-serving, or unpersuasive versions of this theory—such as that the banking crash wasn't the fault of greed in the financial industry, it was the result of the Democrats in Congress passing the anti-redlining Community Reinvestment Act in 1977.
The reality is that blame is very widely shared: among Democrats and Republicans, businesspeople and politicians, Congress and the Executive Branch, borrowers and lenders, and whites, blacks and Hispanics.
There's one man, however, who has so far escaped any blame. Few have realized something that turns out to have been staring us in the face all along: that the mortgage mess was, in sizable measure, an outgrowth of the primary political goal of the Bush Administration.
That man's name is Karl Rove.
And the primary political goal of President George W. Bush's political strategist: to bring Hispanics into the Republican Party.
As you'll recall, Rove's best-known tactic to appeal to Latino voters was repeatedly pushing "comprehensive immigration reform" (i.e., an amnesty for illegal immigrants).
Rove, though, had other arrows in his quiver. One was a plan to turn Hispanics into Republicans by providing them with loose credit so they could become homeowners.
(Rove's belief that there's a connection between being able to afford a home and voting Republican is not totally irrational. As I've documented, since 2004 states with higher degrees of "affordable family formation" do vote Republican more than states where people can less afford to buy houses. That's why the Republican "Red States" tend to be inland, where land for housing is abundant and cheap, while Democratic "Blue States" tend to be expensive because oceans or Great Lakes restrict suburban expansion.)
As part of this plan, George W. Bush made several speeches rallying enthusiasm for his October 15, 2002 White House Conference on Increasing Minority Homeownership. For instance, there was his classic Bushian effort on June 18, 2002:
"The goal is, everybody who wants to own a home has got a shot at doing so. The problem is we have what we call a homeownership gap in America. Three-quarters of Anglos own their homes, and yet less than 50 percent of African Americans and Hispanics own homes. … So I've set this goal for the country. We want 5.5 million more homeowners by 2010—million more minority homeowners by 2010. (Applause.) … "
The five and a half million marginal minority homeowners that Bush bunglingly called for is a big number. At a mortgage of, say, $127,000 each, that would add up to, let me check my calculator, oh…
$700 billion—the size of the current bailout. Well, whaddaya know …
Bush rattled on:
"I'm going to do my part by setting the goal, by reminding people of the goal, by heralding the goal, and by calling people into action, both the federal level, state level, local level, and in the private sector. (Applause.) …
"And so what are the barriers that we can deal with here in Washington?"
Well, there's one obvious barrier to minority homeownership: many American minorities don't earn enough money to be able to afford their own home.
You might think, therefore, that the way to help minorities make higher wages would be to alleviate competition for their jobs by cracking down on legal and illegal immigration. Especially because illegal immigration is, well, illegal. And that's what the Chief Executive gets paid to do—enforce laws.
Nevertheless, Bush and Rove apparently hoped that amnestying illegal immigrants would win over Hispanic citizens, so they did almost nothing about illegal immigration (other than trying to legalize it, of course) until an outraged public forced their hands in the last couple of years.
Bush and Rove didn't have a plan for helping minorities earn more. Instead, they had a plan for helping minorities borrow more.
Bush went on in his June 18th speech:
"Well, probably the single barrier to first-time homeownership is high down payments. "
Traditional standards requiring "high down payments" existed for, as we see now, very good reasons. Being able to pony up 20 percent, or even just 10 percent, was cold, hard evidence of borrowers' credit-worthiness. It showed you hadn't spent every penny you ever earned. And a big down payment meant you instantly had substantial skin in the game. That you had paid out tens of thousands of dollars meant you were likely to do whatever it took to avoid losing your house by failing to pay off the loan.
To Bush and Rove, however, old-fashioned down payments were just keeping minorities from their fair share of the American Dream. Bush burbled on:
"People take a look at the down payment, they say that's too high, I'm not buying. They may have the desire to buy, but they don't have the wherewithal to handle the down payment. We can deal with that. And so I've asked Congress to fully fund an American Dream down payment fund which will help a low-income family to qualify to buy, to buy. (Applause.)
We believe when this fund is fully funded and properly administered, which it will be under the Bush administration, that over 40,000 families a year—40,000 families a year—will be able to realize the dream we want them to be able to realize, and that's owning their own home. (Applause.)"
If you do the arithmetic, you'll see that Bush's silly little American Dream slush fund for subsidizing 40,000 families per year would take, not the eight years Bush promised to add 5,500,000 minority households to the ranks of homeowners, but 137.5 years. But, obviously, subsidizing all 5.5 million new minority homeowners out of the taxpayers' money would be so insanely expensive that white voters would rebel.
No, it had to be done on the sly, through the magic of fractional reserve banking, which, as the Federal Reserve notes, "permits the banking system to 'create' money." By taking more risks, by handing out more mortgages to likely deadbeats, the financial system could simply "create" the cost of 5.5 million homes for minorities.
CNN reported after Bush's June 17 speech at the St. Paul African Methodist Episcopal Church in Atlanta:
"Fannie Mae, Freddie Mac and the federal Home Loan Banks—the government-sponsored corporations that handle home mortgages—will increase their commitment to minority markets by more than $440 billion, Bush said."
In December 2003, when signing the American Dream Downpayment Act, Bush bragged:
"Last year I set a goal to add 5.5 million new minority homeowners in America by the end of the decade. That is an attainable goal; that is an essential goal. And we're making progress toward that goal. In the past 18 months, more than 1 million minority families have become homeowners. (Applause.) And there's more that we can do to achieve the goal. The law I sign today will help us build on this progress in a very practical way."
What was truly significant about Bush's 2002 speeches (including the doozy he delivered on October 15, 2002 at his White House conference, which you should read for the schadenfreude alone) was not the legislation he endorsed—but the unsubtle message he was sending to lenders and, most importantly, to his own employees, the federal regulators.
Bush made clear at his October 15, 2002 conference that he opposed not merely discriminating against borrowers who might turn out to be bad credit risks—he wanted more money to go to documented bad credit risks. He brayed:
"Freddie Mac recently began 25 initiatives around the country to dismantle barriers and create greater opportunities for homeownership. One of the programs is designed to help deserving families who have bad credit histories to qualify for homeownership loans."
Let's put Bush's influence in perspective. I'm not saying that financial institutions would intentionally make hundreds of billions of dollars worth of bad loans just on the President's say-so. But what I am saying is that federal employees, such as financial regulators, do listen closely to what the Chief Executive says about what he wants done regarding those iffy loans.
Let's review: As long as the federal government ends up bailing out lenders, financial regulation is a necessity.
Lenders like to lend. That's what they do. That, typically, is for what they get paid bonuses.
Overly exuberant lending, unfortunately, leads to financial crises. And taxpayers and savers always seem to wind up paying to resolve them, either through formal programs like the Federal Deposit Insurance Corporation, or through ad hoc bailouts (of which we've seen so many in 2008).
Thus, since the government is on the hook for excessive lending, the government regulates lending.
The job of these federal regulators is to "take away the punchbowl just as the party gets going," as former Fed Chairman William McChesney Martin said long ago.
In his many speeches on minority housing, however, President Bush was telling his underlings to keep their hands off the punchbowl. Heck, maybe the regulators should add another bottle of Everclear just to be hospitable.
And if private lenders started worrying that giving mortgages to dubious credit risks could backfire on them, Bush's speeches could be read as hinting that his Administration would try to help them out, to the tune of, say, $700 billion.
Bush summed up:
"And part of the cornerstone of America is the ability for somebody, regardless of where they're from, regardless of where they were born, to say, this is my home; I own this home, it is my piece of property, it is my part of the American experience. "
My emphases. In other words, under the Bush Administration, the American Dream isn't just for Americans. For instance, at his White House Conference on Increasing Minority Homeownership, Bush orated:
"I appreciate so very much the home owners who are with us today, the Arias family, newly arrived from Peru. They live in Baltimore. Thanks to the Association of Real Estate Brokers, the help of some good folks in Baltimore, they figured out how to purchase their own home. Imagine to be coming to our country without a home, with a simple dream. And now they're on stage here at this conference being one of the new home owners in the greatest land on the face of the Earth. I appreciate the Arias family coming. (Applause.) "
This orchestrated push for more minority homeownership wasn't some random caprice of the President. It was part of the master plan of his political Svengali, Karl Rove. As Rove told every reporter who would listen in 2000 and 2001, Bush was supposed to be the new William McKinley, whose 1896 campaign manager Mark Hanna had figured out how to build a Republican coalition combining the business interests with (some) new immigrants to make the Republicans dominant until the Great Depression.
"Marshall Wittmann of the conservative Heritage Foundation explains: '1896 was the year that McKinley and Hanna tried to redefine the Republican Party. Instead of rehashing Reconstruction and the Civil War, McKinley offered an appealing image to new immigrants, rising entrepreneurs and working folks.
"'The theory of the Bush campaign,' Wittmann continues, 'with the slogan of 'compassionate conservatism,' is to similarly expand the base of the Republican Party, specifically by appealing to minorities and more centrist voters.'"
In 2001, for example, Rove told reporter Ralph Z. Hallow of the Washington Times:
"If you're a Mexican-American … if Mel Martinez comes to town and talks about his life story and this administration's policies to encourage homeownership, and you hear Bush talking a tax cut, education and leaving no child behind, and he's seen with Fox, and the first place he goes when in Europe is Spain—you say, 'Hey, Bush gets it. Our community is important to this guy.'"
Before the 2004 election, Rove boasted:
"[T]here are more people owning homes—particularly in the Hispanic and African-American communities—than ever before. This is a result of wise policies instituted at just the right time."
At the height of the housing bubble, on Mayday 2007, the day of planned pro-amnesty marches, Rove's protégé, Ken Mehlman, the campaign manager (under Rove's guidance) of Bush-Cheney 2004, wrote of how the GOP was wooing Hispanics:
"There are several steps we can take to ensure that America's fastest-growing and most conservative voter bloc joins the GOP. …Home ownership has always been an important element of the American Dream, and Hispanic-Americans have made enormous progress thanks to the hard work of many families and the innovative policies of the president. Hispanic home ownership is at an all-time high with 50 percent of Hispanics owning their homes."
And these increases in minority homeownership due to government initiatives going back decades were true … temporarily.
But now minority homeownership rates appear to be falling as foreclosures hit Hispanics and blacks harder than whites and Asians. [Foreclosure Activity Increases 12 Percent In August, RealtyTrac.comSept. 12, 2008]
Foreclosures appear to be one of the few things in America not tracked directly by race. But the circumstantial evidence that blacks and Hispanics account for a disproportionate share is agreed upon by all who have looked into the question closely.
This map from RealtyTrac shows that the foreclosure disaster is largely regional. There are high rates of foreclosure in states such as Georgia and New Jersey, but the two main default dumps are the Midwestern Rustbelt and the heavily Hispanic Sunbelt.
The first regional meltdown is centered in Detroit, where the auto industry is perpetually dwindling. It's hitting black neighborhoods particularly hard.
There's a certain sense of tragic inevitability to this. In 2006, the New York Times did a sad story on the foreclosure on a single mother of four who had bought a house in the slums of Cleveland paying only three percent down:
"Over the years, Ms. Roberts's monthly expenses rose because of repairs to a dilapidated porch and the birth of two grandchildren, but the $880 a month she takes home after taxes from her job as a home health aide did not. Ms. Roberts, 35, also receives $1,100 in Social Security benefits because two of her younger children have learning disabilities. " [For Minorities, Signs of Trouble in Foreclosures, By Vikas Bajaj And Ron Nixon, February 22, 2006.]
I guess that America losing money on 35-year-old grandmothers who earn $880 per month is what you might call the Slavery Tax, and we're just going to have to keep paying it.
Yet the Rust Belt default catastrophe is dwarfed by what's happened in California, along with its neighbors Arizona and Nevada, and in Florida. And this is much more of a self-inflicted wound, occurring in seemingly prosperous places where immigrants have flooded in.
The highest foreclosure rate is in Nevada. ("Talk about 'moral hazard!'" I can imagine Nevada residents scoffing, "You want your money? Then come get it from me Las Vegas Style. If you're not man enough, Mr. Banker, to dangle me by my ankles off a hotel balcony, then tough luck.")