Article claims "Political Correctness" led to global crisis

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In the Stratis Times today there is an article by a former professor of economics from the London School of Economics. E.J. Mishan is also the author of Cost-Beneft Analysis and The Costs of Economic Growth, as well as some other books. He wrote the following:

“Just what caused the economic downturn? There is a widespread but vague belief that it was the colossal sums that financial institutions invested in sub-prime mortgaes created chiefly in the United States.

My own understanding, however, is that the cause can be traced to the pressures of “poltiical correctness” in America: Financial institution, habitually reluctant to take the risks involved in lending to minorities – in particular blacks and Hispanics – were charged with racial discrimination. they came under pressure to prove their enlightened credentials by lending to minorities on equal terms. Gradually succumbing to such pressure, they upgraded the creditworthiness of minorities. Soon, hundreds of thousands of houses were being built as mortgage lenders became emboldened to lend 90 percent or more of the purchase price of houses sold to minorities, whose employment prospects were uncertain and whose incomes were relatively low."

The entire article is on page A 18 of the Straits Times Review & Forum (17th March 2009).

Well, I don’t live in America, but the assertion catches me off guard. This is the first time I have heard the accusation being made. There are no references to specific cases given, but I wonder if those of you living in America can shed some light on this. Exactly how accurate are Mishan’s statements?

 
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As far as I know, banks do not look at race, they just look at the financial situation of the person…

 
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Lending on equal terms and upgrading credit worth are mutually exclusive I would believe. If they aren’t, it means they were doomed either way thanks to poor lending practices.

 
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That is somewhat accurate.

The banks don’t look at race, but many minority loan applicants have characteristics (income, employment, credit history) that make them bad credit risks. The federal government decided that Latino and Black home ownerships rates were too low, and asked the banks to find ways of making loans to people who were previously considered poor credit risks. People of all races were able to take advantage of the looser lending and we got the real estate bubble followed by a crash. Breaking news, people who were previously considered to be poor credit risks, actually were poor credit risks. The whole thing was magnified by banks using the loans as collateral for more loans, and by the financial industry packaging the loans and selling them as investments.

Building a house of cards on top of a house of cards is usually a bad idea, although it does look really cool right up until it collapses.

 
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One thing does occur to me though. Given that minority groups are credit risks, the refusal to extend credit to them traps them in a vicious cycle. Home ownership is a step on the road to financial well-being. Minority groups who don’t qualify for loans, and who can’t enter the market on an equal footing, end up using less than orthodox methods of acquring what they need. Predictably, these unstable methods eventually fall apart, thus reinforcing their place as credit risks.

 
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Home ownership is a step on the road to financial well-being.

Actually I have to disagree on this point, but I won’t fault you for saying it. Home ownership is not a cost effective means of living, especially for a small family. Our culture is simply such that people feel a need for individual homes. It makes sense when you think about it, just balance out the cost of owning a home with say the cost of renting an apartment. Here is a case example via side by side comparison of total cost effectiveness.

In short, I think individual home ownership is one of the major factors of financial ruin today (being in the same category as luxuries).

 
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Home ownership is a step on the road to financial well-being.

No. Financial well-being is a step on the road to owning a house. A house is nothing but a pit you throw money into that you will never get back. You pay three times as much for it once you get done paying your mortgage and you have to put money into it for repairs. It’s not an investment. It is an expense, a a durable consumer good that depreciates in value unless you keep it spruced up by throwing more money into it.

I don’t understand this own-a-home craze, what’s wrong with renting?

Also, poor lending standards originated because of government intervention into the market. A bank makes no money if a loan is not paid back so it is not in the banks best interest to practice “predatory lending”. They could sell the mortgage you say? Well, it’s not in the buyers best interest to buy that debt if the debt can’t be paid back, unless of course, you are Fannie Mae or Freddie Mac and are spending the governments money essentially. Then it doesn’t matter cause the government (read, anyone who pays taxes or hold US dollars) has got your back.

Also, money was too easy because Greenspan set interest rates at 1% in 2001 to avoid recession from the dotcom bust (in reality all he did was create a new bubble, real estate, and set the stage for an even bigger bust down the road). This made money too easy, especially given our savings rate. People also got it in their heads that houses were going to gain in value by tremendous amounts every year.

Watch this video series, eight parts, for a much better explanaition: 1 2 3 4 5 6 7 8

The FDIC also plays a part in this whole debacle. It creates moral hazard on the part of banks and depositors. If a bank were too loose with the loans they make, this puts people’s money on the line (sans FDIC). If a person thought a bank was in trouble, they would take their money out of that bank and put it into one they believed to be more responsible with their money. This would cause banks to be more responsible or they would lose all their customers and go under. As it is now, people put more research into plasma TV’s than where they keep their money because there is no risk for them thanks to government.

 
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“renting > buying.” That is a funny statement. Are you aware that there are people who make their living by buying houses, and then renting them out? Here is the basic economic idea. If you can buy a house, you should buy a house. If you can’t, you should rent a house.

EDIT: oh yeah, also Ryan, that statement has truth to it. Some people in charge felt bad for the people who couldn’t afford houses. I dont know if it was racial discrimination per say, but they were definitely charged or thought of as discriminating against people who couldnt afford to buy a house (what have we come to when that now constitutes as discrimination…). This just happened that a majority of these people were minorities.

 
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Here is the basic economic idea. If you can buy a house, you should buy a house. If you can’t, you should rent a house.

To elaborate on this, if you can’t afford to buy a house, you shouldn’t borrow a large sum of money in order to buy one. And a bank shouldn’t lend you that money if there’s a very high chance you won’t be able to pay them back. Home ownership is a goal for after you’re financially secure, not something to aim for as early as possible and worry about money afterwards.

 
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Article sucks.

 
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Hey paco, try reading what I wrote, and following the link for further information. The numbers are explained quite well.

Are you aware that there are people who make their living by buying houses, and then renting them out?

The same people whose out of control spending helped ruin our economy? Yeah, that sure proves the case.

If you can buy a house, you should buy a house.

That’s the thing. Most people can’t. It is a luxury people are trained to think they need.

 
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people will try to blame political correctness for anything, it’s absurd