"He who writes history determines the future".
So said former Senator Phil Gramm [R-TX] at an American Enterprise Institute panel discussion on "Is Deregulation a Cause of the Financial Crisis?" A condensed version Gramm's speech was published in the Wall Street Journal on Friday, February 21, 2009 with the subtitle Loose money and politicized mortgages are the real villains.
As Gramm suggests, whatever emerges as the conventional wisdom explaining the causes of the current Crash is likely to determine government policy for a generation.
And for Gramm, not just a former Senator but also a one-time Texas A&M economics professor, debating the causes of the Crash is not an academic question: it's both political and personal. His place in history depends on the outcome.
Nevertheless, Gramm still couldn't muster the courage to state his case plainly—for reasons that VDARE.COM readers, but few others, will readily grasp.
Sen. Gramm, who was more or less the economic brains of the Republican Congressional delegation back in the late 1990s, is, of course, not an unbiased observer of this dispute. He coauthored the 1999 Gramm-Leach-Bliley Financial Services Modernization Act, which some are blaming for the current collapse. (Here's a paleolibertarian critique of it from the Mises Institute.) The act repealed the part of the Glass-Steagall Act of 1933 that had legally separated investment banks from regular banks.
(Personally, I don't yet have a strong opinion on Gramm's law, other than that the financial system didn't seem to be broken in 1999, so why fix it? I rather liked the old Glass-Steagall structure where bankers were supposed to be boring and federally insured, while investment bankers were buccaneers, and never the twain shall meet. As an investor, you could pick your poison: low returns or high risk. Back then, you at least had a clue which business a financial institution thought it was in.)
At AEI and in the WSJ, Gramm returned fire against his critics. He pointed out that, while we don't understand the Crash fully yet, we at least all know perfectly well how the disaster started:
"And while there is great debate about what caused it and what the cures are, there is no debate about the fact that the crisis, at least at its beginning … was a crisis in the mortgage industry in general and subprime lending in particular."
I found both the spoken AEI and text WSJ versions of Gramm's argument striking, although not always for reasons Gramm intended.
Like me, he attributes a significant share of the blame to a panoply of federal anti-discrimination policies that push for more mortgage lending to minority and lower income borrowers. See my The Minority Mortgage Meltdown (contd.): How The Community Reinvestment Act Fits In and The Minority Mortgage Meltdown (cont.): Charting The CRA Crackup.
Unlike me, however, he can never bring himself in either his 1,500-word WSJ op-ed or his 5,300-word AEI speech to mention the M Word: "minorities".
Gramm places culpability on both Alan Greenspan's low interest rates early in the decade and "politicized mortgages"—a concept more than familiar by now to VDARE.com readers. He said at AEI:
"Community Reinvestment Act (CRA) requirements led regulators to foster looser underwriting and encouraged the making of more and more marginal loans."
Yet Gramm's description of the Community Reinvestment Act is bizarrely stilted:
"But over time it came to be used as a vehicle to pressure banks to make loans to people with moderate-to-low income."
Well, yes … but talking only about income rather obscures the essential point about the CRA. After all, its supporters always described it as crucial to prevent racist redlining.
If you aren't a regular reader of VDARE.com, you'd need a secret decoder ring to understand what Gramm means by "politicized mortgages". The closest he manages to come to explaining what he's talking about in his Wall Street Journal op-ed is his euphemistic reference to Fannie Mae and Freddie Mac's 35 percent quota that "targeted geographic areas deemed to be underserved".
You know and I know that "underserved" is Diversity Speak for black and Hispanic neighborhoods. Yet Gramm still can't come out and say it in public. (In his oral presentation at AEI, he had used the somewhat more revealing term "inner cities and depressed areas". But he didn't dare be even that clear in the WSJ, or maybe the editors wouldn't let him)
Moreover, that raises a fundamental question: How can Respectable Republicans like Gramm ever hope to persuade the public when they are terrified of saying what they mean for fear of being branded a "racist"?
I guess Gramm would prefer to go down in history as the man who blew up the world than to be accused by the SPLC of uttering hatefacts.
For example, it would strengthen Gramm's case to point out that Crash was kicked off not just by a subprime lending crisis, but one concentrated in merely four states: California, Arizona, Nevada, and Florida. In August 2008, these accounted for 50 percent of all foreclosures and the vast majority of defaulted dollars.
But if Gramm were to mention that, it would also raise the unmentionable specter of Demographic Change.
There was overlending going on all over the world—yet the collapse started in a few rapidly Hispanicizing states in the U.S. Why?
You have to look at both sides of the equation: lending and repayment. In California and Company, not only was too much money being lent relative to past rates (which was happening in lots of other places, too), but, also, the earning capacity of the new homebuyers to pay back their loans was declining—as Americans moved out and Latin Americans moved in.
That double whammy in the Sand States of increasing lending and decreasing human capital is what blew the gasket on the world economy.
Of course, we also needed a third element—political correctness—to keep investors from noticing what was happening.
And that, judging from Gramm's timidity, appears to be as strong as ever.
Gramm does make the subtle but important point that the huge federal push for more lending to minorities gave toxic loan peddlers, such as Angelo Mozilo's Countrywide Financial, "regulatory cover":
"But more than just nudging them on mandating, we gave them an excuse, and we gave them a shield against regulation. It was not just that CRA and federal housing policy pressured lenders to make risky loans—but that they gave lenders the excuse and the regulatory cover.…"
Countrywide, which originated 20 percent of the new mortgages in the country in 2006 before collapsing and being bought by Bank of America last year, is often cited as the ultimate refutation of the theory that the Community Reinvestment Act contributed to the Housing Bubble. [11 Racist Lies Conservatives Tell to Avoid Blaming Wall Street for the Financial Crisis By Sara Robinson, Campaign for America's Future, October 2, 2008.] Countrywide, the poster child of the Bubble, wasn't covered under the CRA because it wasn't a bank. It merely originated, securitized, and serviced mortgages.
But why wasn't Countrywide ever brought under a law that was frequently amended?
Because, as Gramm suggests, Mozilo constantly pledged his devotion to massive minority lending. (And, don't forget, he handed out below-market mortgages to power players like Sen. Chris Dodd). Gramm complains:
"When Countrywide came to Washington and was the first lender to sign an agreement with HUD [in 1994]— … a Declaration Of Fair Lending Principles And Practices—and then set about to eliminate standards in lending and become the largest mortgage lender in the world and the first major casualty of the financial crisis, what regulator after that press conference was going to feel comfortable in moving against Countrywide? Now, Countrywide became HUD's poster child for what a good home lender was like."
For example, during a prestigious Harvard address in 2003, Mozilo announced Countrywide's "commitment to fund a total of $600 billion in home loans for previously underserved Americans in this decade".
After that seemingly magnanimous gesture, he went on in his speech to lobby Washington to eliminate requirements for down payments, to speed approval (i.e., to not check up on the bogus incomes claimed by mortgage applicants), and to thwart various states' attempts to rein in "predatory lending". (Countrywide's high-pressure sales techniques were often straight out of David Mamet's Glengarry Glen Ross.)
One of the recurrent paradoxes you run into when researching the history of the Housing Bubble is that complaints by liberal politicians such as Barney Frank and liberal pressure groups such as the Greenlining Institute about predatory lending are frequently resolved by the lender promising to hand out even more hopeless loans to minorities. (The secret is that the community organizers often wind up with a small cut of the action.)
Mozilo always wrapped himself and his ludicrous loans in the sacred mantle of diversity, just as George W. Bush did. Mozilo orated at the Harvard conference:
"As President Bush said last October: 'Two thirds of all Americans own their homes, yet we have a problem here in America because fewer than half of the Hispanics and half of the African Americans own their home. That's a homeownership gap. It's a gap that we've got to work together to close for the good of our Country, for the sake of a more hopeful future. We've got to work to knock down the barriers...'
"And as President Bush pointed out, the homeownership rate for African Americans is 47 percent and for Hispanic Americans it is 48 percent, a stark contrast to the homeownership rate of 75 percent for white American households. … My friends, that gap is obviously far too wide. It has been far too wide for far too long. And when adding new factors into the equation – like an influx of new immigrants or continued reduction in the supply of affordable housing – it has the potential to become far worse."
Thanks a lot, Angelo and George!
Mission Accomplished! (To coin a phrase.)
Although we are constantly told that "deregulation" caused the Crash, the precise place where the global economy blew a tire and skidded into the ditch was one of its most regulated sectors: American mortgage lending to lower income and minority homebuyers.
The problem was neither with regulation or deregulation in the abstract. The problem was that, in the real world, the federal government was energetically regulating the mortgage industry in exactly the wrong direction.
The government was still fighting the last war—against insufficient lending to minorities—during the years 1999 to 2006 when mortgages to Hispanics for home purchases increased by 691 percent.
The federal government had erected vast regulatory apparatuses to make sure enough money was being lent to minorities—but nothing to measure whether they were paying enough back.
In addition, the Bush Administration's deregulatory efforts in the mortgage industry, such as its attack on down payment requirements, were similarly aimed at getting more mortgage dollars into the hands of minorities.
For example, Bush's Housing and Urban Development (HUD) department proposed in a 2004 press release that:
" 'Offering FHA mortgages with no down payment will unlock the door to homeownership for hundreds of thousands of American families, particularly minorities,' said HUD's Acting Secretary Alphonso Jackson. 'President Bush has pledged to create 5.5 million new minority homeowners this decade, and this historic initiative will help meet this goal.'"
This is not to say we should have no financial regulation. Indeed, Gramm outlined some simple and sensible regulations in his speech, such as a minimum down payment on home purchases of five percent.
What we need is not more or less regulation, per se, but better regulation.
And it can only be arrived at through open, frank, and courageous discussion of reality.
But that, as Gramm's occluded op-ed shows, remains in short supply.
[Steve Sailer (email him) is movie critic for The American Conservative. His website www.iSteve.blogspot.com features his daily blog. His new book, AMERICA'S HALF-BLOOD PRINCE: BARACK OBAMA'S "STORY OF RACE AND INHERITANCE", is available here.]