Phil Gramm And The Respectable Right Flinch From Minority Mortgage Meltdown

“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?
condensed version Gramm`s speech was published in the
Wall Street Journal
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

for the current collapse. (Here`s a
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repealed the part of the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
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

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:

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 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


If you aren`t a regular reader of, 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

depressed areas
. But he didn`t dare be even that
clear in the

, or maybe the
wouldn`t let him)

Moreover, that raises a fundamental question: How can

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


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
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

Americans moved out
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

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
toxic loan peddlers, such as Angelo Mozilo`s Countrywide
“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

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

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

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
. (Countrywide`s high-pressure

sales techniques
were often straight out of David
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

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

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
mortgage dollars into the hands of minorities.

For example, Bush`s Housing and Urban Development (HUD)

in a 2004

press release

” `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

discussion of reality.

But that, as Gramm`s occluded op-ed shows, remains in short

[Steve Sailer (email
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