Sunday, September 28, 2008

Housing Crash: Karl Rove partly to blame???

Steve Sailer makes his case:

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.
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.
(Thomas Allen wrote a must-read article on Fannie Mae's push for more—and more dubious—lending to immigrants way back in 2004.)

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.
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.

In 1999, the Washington Post reported on the McKinley Mania launched by Rove in Republicans Admire Bill … McKinley, That Is:

"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.
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.
As of August 2008, California alone, with 12 percent of the national population, accounted for 29 percent of all foreclosures. Add in the two California wannabes, Nevada and Arizona, and states with just 15 percent of the population are responsible for 36 percent of the foreclosures. Add in Florida, and four states with 21 percent of the population are home to half the foreclosures.

This is not to say that Hispanics account for most of the defaults in those four states. Plenty of white speculators bought homes figuring they could rent them out to all the Latino laborers who had flocked across the border to build exurban homes. And other whites wanted to move to the exurbs to get their children out of public school systems overwhelmed by the children of illegal immigrants. (Notice the circularity of the economic logic of this decade—which Dennis Dale aptly calls “The Blunder Years”?)

The foreclosure rate per capita in California is 2.9 times that of the other 49 states. And because houses are so much more expensive in California than elsewhere, the tarnished Golden State by itself probably accounts for something approaching half of the value of all foreclosures in America. The median house price in California is currently about twice the national average. At the peak of the bubble was closer to triple the national average.

In defense of Bush and Rove, as Texans they may have had a misguided sense of the scale of what they were unleashing. Texas Republicans are prone to blame the limited supply of housing in California on Not In My Back Yard eco-politics used by homeowners to raise their home values and keep out undesirables. And some of that is true. But there are topographical reasons for limiting development in mountainous California—such as smog and traffic. They aren't easily understood on the Texas prairie. The result: in California, unlike in Texas, it takes many years for increases in housing supply to catch up to increases in demand. That's why the loose credit policies of the Bush years turned into higher home prices in California than in Texas.

To be precise, a Los Angeles home averaged 2.56 times the price of a Dallas home in 2001 and 4.69 times in 2005. Even in 2005, the median Dallas home only cost 2.8 times the local annual income, while the median Los Angeles home cost 12.7 times what the median Angeleno was making.

Most white pundits can't believe that minorities had an impact on the mortgage meltdown because they don't really grasp the number of minorities now in the country. After all, there aren't a lot of Hispanics at dinner parties in Georgetown and the Upper West Side. (At least, not sitting down.)

The National Association of Realtor's webpage entitled "Diversity Is Good Business" quantifies where we're headed. Minorities are expected to comprise 64 percent of the net new households over the next decade and 54 percent of first-time homeowners by 2010.

 USA Today reported in 2007:

 "Across the nation, black and Hispanic borrowers helped fuel a multiyear housing boom, accounting for 49% of the increase in homeowners from 1995 to 2005, says Harvard's Joint Center for Housing Studies. But Hispanics and African-Americans were far more likely to leverage the American dream with subprime loans — higher-cost products for buyers with impaired credit — that are now going bad at an alarming rate. About 46% of Hispanics and 55% of blacks who took out purchase mortgages in 2005 got higher-cost loans, compared with about 17% of whites and Asians, according to Federal Reserve data."

In retrospect, it might have been less costly to the taxpayers and savers if the Bush Administration had just given every Hispanic voter in America a giant flat screen TV inscribed: "A gift from the Republican Party. Vote for George P. Bush Garnica for President in 2016!"

The only problem was that they just don't let you do that.

They do let you hand out racial preferences, but there are limitations. For example, you have to include African-Americans. Rove is not a stupid man (he's not as smart as he thinks he is, but he's not stupid). So he never thought the GOP had much chance to get black voters. Still, you can't just hand out affirmative action to your targeted immigrant group and exclude the descendents of slaves.

Worst of all, the Bush-Rove assault on credit standards meant that the white majority could qualify for doubtful debt, too.

White people sometimes get up in arms when the quotas get too obvious. Thus, it's often easier for politicians just to toss out all the standards, such as substantial down payments. And that often makes the effect more pervasive than if a straightforward quota had been used.

Attacking down payments and the like is the same as when the National Organization for Women protests as discriminatory against women a fire department making job applicants perform a minimum number of pull-ups to show they can carry unconscious smoke-inhalation victims out of burning buildings. One alternative is to impose upon yourself a simple quota of female firefighters (or, as they are known in the heroic New York Fire Department, "firewatchers"—there is a reason 343 firemen died on 9/11, but zero firewomen). At least with a quota you can keep your upper body strength test in order to still get strong men. Unfortunately, some fire departments respond by eliminating the strength test to stop N.O.W. from whining. That way, the fire department ends up hiring both women and men too weak to save your life.

 Similarly, the Bush jihad against traditional credit standards meant that not only more Hispanics and blacks could get loans they couldn't pay back—but more whites could, too.

Why didn't the financial institutions realize what was going on. Were they greedy?

Of course they were greedy. Greed is an omnipresent constant on Wall Street. Greed and fear, famously, drive the markets.
The relevant question is: Why wasn't greed balanced by fear? Why did the Wall Street financial engineers concoct a mountain of leverage on the back of the pebble of probability that these California mortgages would be paid off?

One reason is obvious: political correctness, enforced by anti-discrimination lawsuits. Expressing "prejudices" about the likelihood of protected minorities paying off loans violates anti-discrimination laws.
It's now legally dangerous to express fear in writing. Imagine that an executive in a financial firm had sent an email to a fellow executive saying:

"I see that the median home price in California is heading toward a half million bucks. Isn't California full of Mexicans? How can a bunch of poor Mexicans afford to pay off half million dollar mortgages once the price of homes stops going up and they can't refinance anymore. Aren't we headed for disaster in California if we don't go back to traditional credit standards?"

An email like that would wind up in the hands of plaintiffs' attorneys during discovery in discrimination lawsuits. The author would be fired. The CEO would have to go apologize to the National Council of La Raza and promise to give a whole bunch more zero down payment loans to people whose names end in Z.

You can only mutter heresies like that over drinks to close confidants.

Anyway, if you'd asked about how Californians could pay off their monster mortgages, you'd probably just hear that the firm's rocket scientists had taken everything into consideration in their immensely complicated calculations. They've got decades of data on California mortgages! What could possibly go wrong?

Unfortunately, one little thing had changed over the decades that the Wall Street quant jocks didn't include in their numbers: the Californians themselves.

The current average resident of California just doesn't have the same human capital as in the old days. In the 2007 National Assessment of Educational Progress test, California's 8th graders came in 49th out of the 50 states in reading. A United Way study recently found that 53 percent of the adult residents of Los Angeles are functionally illiterate in English.

If you stopped and thought about it, you might wonder how they would earn enough to pay back those massive mortgages. But stopping and thinking about the shortcomings of minorities is the road to legal ruin in modern corporate America.

In summary: for eight years, I've argued in that the Bush-Rove plan to convert a majority of Hispanics into Republicans would not work politically. (By the way, the latest poll of Hispanics in seven swing states shows Barack Obama with a 63-26 lead over John McAmnesty.)

Latinos, I've argued, will remain mostly conventional tax-and-spend Democrats. On average, they simply aren't going to make enough money to make it rational for them to switch to the party of cutting taxes and spending. The main reason they won't make enough money: they typically lack the human capital to earn enough.

But now, for similar reasons, Latinos have turned out to lack the earning power to pay off enough California-sized mortgages.

Still, never mind that political correctness has ignited this financial apocalypse.

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