Steven Malanga of Real Clear Markets and the Manhattan Institute tells a convincing narrative about how the notion that it should be "ok" to give loans to people who may not be able to pay them back got a foothold first, in our politics and next, in the banking industry. I don’t know why I am surprised to see that it may have come from the media--in fact, I’m not--but I am surprised to see such a clear and direct link established. Malanga shows that a prevailing journalistic meme from the early 90s regarding the injustice of local banks to minority lenders, gained popularity through the assistance of deeply flawed computerized model. It was developed, primarily, for lazy investigative reporters and a desire to duplicate the Pulitzer Prize winning efforts of The Atlanta Journal-Constitution for it’s story on the theme.
These sets of stories accusing banks of blatant racism took hold--despite severe criticism from academic reviewers who questioned the validity of the model and its use of incomplete data. Eventually, they began to affect the political climate in Washington and a study from the Federal Reserve Bank of Boston seemed to lend some credence to the general theme of these newspaper stories--even as it proved them to be greatly exaggerated. Nevertheless and despite severe criticism even of this study from independent researchers as well as an FDIC economist, government went on a campaign to encourage banks to lower their standards to make more minority loans. Of course, the standards had to apply to all . . . not just minorities.
In the midst of this and to convince banks to accept this new regime, sophistry followed. All sorts of clever arguments were developed to explain why up was down and down was up. Banks bought it--no doubt, in part, because the competition was buying it too and there was a lot of money to be made . . . for the time being. In addition, when Freddie and Fannie began easing up on their standards for mortgage purchases, the housing market boomed and banks were only too happy to embrace these new standards. Moreover, those CEOs who did this with the most gusto, like Angelo Mozilo of Countrywide, were heralded as geniuses and pillars of the community. They were honored and celebrated to such an extent that it is hard to imagine the case of whiplash they must be suffering now.
It would be wrong to say that the media is to blame for the mortgage crisis. But I think Malanga ably demonstrates that what is to blame is a kind of misplaced and compassion-driven logic that patronizes the needy at the same time that it inadvertently victimizes them. It is the story of the last 60 years (or more) of American politics.