"Diversification" on Wall Street

I refrained from commenting on the passing of the recent financial reform bill for the simple reason that my reaction was much like that of other undeceived libertarians and conservatives: the people who laid the foundation for the crisis, Geithner and the Fed, are the ones empowered by the bill.

But over the past few days, some lesser known provisions in the bill have come to light that deserve analysis.  As reported by Investor’s Business Daily (and picked up by American Renaissance), the “Restoring American Financial Stability Act of 2010” will require that Washington institute all sorts of new affirmative-action and racial-preference programs in the industry it recently bailed out.

Yes, the bill gives Treasury the power to liquidate banks that pose a threat to financial stability. But it essentially exempts minority-owned banks and those approved by Acorn-style urban organizers.

“The orderly liquidation plan shall take into account actions to avoid or mitigate potential adverse effects on low-income, minority or underserved communities affected by the failure of the covered financial company,” it says.


Sen. Richard Shelby and other GOP conferees moved to strike the language, arguing that making an exception for minority neighborhoods defeats the whole purpose of reform, which is to protect all consumers against systemic risk.

But Sen. Chris Dodd, who’s running the conference committee with his fellow Democrat, Rep. Barney Frank, shot them down by suggesting that they wanted to deny minorities access to credit.


Studies show that CRA home loans have much higher failure rates. {snip}

Another section of the bill requires the proposed Financial Stability Oversight Council (headed by the Treasury secretary) to consider a zombie institution’s “importance as a source of credit for low-income, minority or underserved communities” before winding it down. {snip}


The bill mandates placement of a diversity czar in each federal financial agency—including the Fed and its 12 regional banks.

Establishing a so-called Office of Minority and Women Inclusion within each agency is the idea of Democratic Rep. Maxine Waters, a Congressional Black Caucus leader and conferee.

According to her amendment to the bill, “Each agency shall take affirmative steps to seek diversity in the workplace of the agency, at all levels of the agency,” including:

* Recruiting at “historically black colleges and Hispanic-serving institutions.”

* Recruiting in urban communities.

* Placing ads in African-American and Spanish newspapers.

* “Partnering with organizations that are focused on developing opportunities for minorities.”


Each agency, in turn, is required to report to Congress detailed information describing the actions it took to diversify its staff and contract with minority-owned firms. Which means they’ll do what their diversity officers advise. No official—particularly no regional Fed bank president—wants to be dragged before Barney Frank’s panel and accused of racism.

Still, as insurance, the bill also calls for an audit of Fed “governance” to examine, among other things, “the extent to which the current system of appointing Federal Reserve bank directors effectively represents the public without discrimination on the basis of race, creed, color, sex or national origin.”

What’s most interesting is that “Restoring American Financial Stability Act of 2010” doesn’t just concern itself with affirmative-action hiring on Wall Street but lending as well -- which is potentially more catastrophic. It, moreover, evinces a general schizophrenia in Washington with regard to credit/debt expansion. 

Household debt has been increasing at a parabolic rate since 1950, and it essentially went vertical in the 2000s, doubling from 6 trillion in outstanding debt to just under 14!  (See graph here.) Such a move is obviously unsustainable, and led not only to too much consumption but all kinds of “malinvestments” that (still) need to be liquidated. The most obvious of these was the construction of too many homes for too many “subprime” borrowers -- many of them minorities -- who couldn’t afford them. “The minority mortgage meltdown,” which Steve Sailer coined, is an accurate term for the 2008 crisis in this regard (though the meltdown stretches far beyond the now-proverbial Mexican mariachi singer who defaulted on his half-million dollar mortgage on a SoCal McMansion.)

The “credit crunch” -- the dramatic reduction in credit in the fall of 2008 -- was, in turn, a necessary, though certainly painful, reduction in cheap credit. (And as the graph linked to above shows, the credit contraction is just getting started.)

My sense is that most people -- and even the politicans who wrote the financial reform bill -- understand this business cycle synopsis I just detailed; and certainly one hears calls for regulators to cease the common practice of banks piling up credit-to-reserve ratios of 40 to 1. But when it comes to minorities, it’s 2005 all over again -- blacks need the easy money! Keep it flowin’!

Does anyone think that the results will be any different the next time around? 

As for affirmative-action hiring on Wall Street, what else should we expect? Bailed out by Washington and the Fed in 2008-09, the financial sector will now be treated much like a public utility.

And Diversity really couldn’t have happen to a nicer bunch of people.