The Glade 4.0

For 97 years the 12 regional banks of the Federal Reserve system have operated relatively free of political interference from Washington. The looming financial reform bill threatens that independence, not least through an effort to impose new presidential appointees at the regional banks.

The biggest underreported threat comes from Subtitle I, Section 1801 of the House financial reform bill titled "Inclusion of Minorities and Women; Diversity in Agency Workforce." Sponsored by California Democrat Maxine Waters, the provision requires each federal financial agency, the Fed Board of Governors and the 12 regional Fed banks to "establish an Office of Minority and Women Inclusion."

So what else is new, you say? Don't the feds already dictate racial and gender hiring? Yes, they do, through the Equal Employment Opportunity Commission and assorted other federal laws. As a matter of racial and gender diversity, the Waters provision is at best redundant.

But Ms. Waters and the House are hunting bigger game—to wit, the political allocation of credit. They want to put a network of operatives at the highest level of government who are responsible for making sure that regulators put the hiring of, and lending to, minorities at the top of their priority list. The House provision makes that very clear by making each diversity officer a Presidential appointee who must be confirmed by the Senate. The post, says the bill, will be "comparable to that of other senior level staff."

The law says this diversity czar will "ensure equal employment opportunity and the racial, ethnic and gender diversity" of the work force and senior management of these institutions. More ominously, this creature of Congress and the White House will also be charged with "increas[ing] the participation of minority-owned and women-owned businesses in the programs and contracts" of each agency and conducting "an assessment" of stated inclusion goals.

Mull over that one for a minute. Having recently lived through a financial mania and panic caused in part by political pressure for "affordable housing," Congress will now order regulators to allocate credit by race and gender. Isn't the point of this financial reform supposed to be to make regulators better judges of systemic risks, which means focusing on financial safety and soundness? If the Waters provision passes, federal regulators will have to put racial and gender lending at the top of their watch list when they do their checks on the banks and hedge funds they are regulating.

This is especially pernicious at the Fed regional banks, which have long operated independently of political intrusion. Federal Reserve bank presidents aren't appointed by the President precisely to avoid Treasury and White House control. They are appointed by their regional bank boards.

However, in another threat to Fed independence, the Senate bill departs from that tradition by making the president of the New York Fed a Presidential appointee. Blame for this Congressional intrusion goes to Treasury Secretary Tim Geithner and former Goldman Sachs executive Stephen Friedman for orchestrating the selection of former Goldman economist William Dudley as Mr. Geithner's replacement at the New York Fed.

Mr. Friedman chaired the search committee to replace Mr. Geithner even as he increased his ownership of Goldman shares. Though this violated Fed rules, Fed Vice Chairman Donald Kohn and the Board of Governors gave Mr. Friedman a conflict-of-interest waiver. Congress has now seized on this to justify putting the New York Fed chief on a Washington political leash.

The Waters provision will also give Congress and the White House a new and powerful lever to influence the operation of the 12 regional Fed banks. Accusations of racial or gender indifference, much less outright bias, are politically deadly. With the threat of such an accusation in their holster, the Waters czars will have enormous clout to influence Fed governance and regulatory decisions, perhaps including monetary policy.

Fed regional presidents are often the main proponents of tight monetary policy. The presence of a diversity czar is one way Congress and the White House can intimidate these regional presidents to go along with the policies they favor. No Fed bank president will want to take the risk of being hauled before Congress to answer a report that the banks under his jurisdiction aren't racially or gender sensitive enough in their lending.

This political sway is already clear from how meekly the Fed as an institution is bowing to the Waters provision. The Senate bill doesn't have the same provision, so it could be removed in the House-Senate conference that begins this week. But we're told that Fed officials in Washington have told the regional banks to keep quiet because it can't be stopped and Ms. Waters and the House might punish them if they try. In other words, the political intimidation is already obvious even before the provision becomes law.

The public debate over Fed independence has focused on Congressional demands for an audit, but that's benign compared to the threat of political appointees sitting on the senior staff of the regional banks and Board of Governors. While masquerading as reform, the Waters and New York Fed provisions are the most brazen attempt to hijack central bank policy since its founding nearly a century ago.

The law will make it harder for regulators to do what ought to be their main job, which is making sure that they don't again let a credit mania run out of control. It's one more way in which this much vaunted reform will make the financial system even more politicized, and thus more vulnerable to another panic.

In comic strips the person on the left always speaks first. - George Carlin

The diversity crap is obviously stupid, but I'm torn about the larger issue of Fed independence. On the one hand, I want monetary policy made based on sound, expert analysis. But on the other hand, I want such a powerful government entity to be accountable to the elected branches. I've read persuasive arguments on both sides, and I really just don't know which option I favor.

The real issue is that in the absence of any government interference, simply being black would most certainly be a detriment to getting any kind of loan.

Not if the person asking for a loan is able to show creditworthiness sufficient to get the loan, and the lender's interest is to make money.

But that's the whole point. The guy making the loan has no idea if the person in front of him is trust/credit worthy or not.

Yup, you're right, no idea why my credit rating of ~780 now qualifies me for many more loans than 15 years ago when my credit rating was much lower. They must have just looked at where I lived and my skin color when they turned me down.

But that's the whole point. The guy making the loan has no idea if the person in front of him is trust/credit worthy or not. He has to go by the statistics, and the statistics clearly show that blacks are a higher credit risk in general. So the black person must therefore display a higher degree of creditworthiness than a white person to make up for the fact that he's black. Why do you think redlining happened? Was there absolutely no one in those communities that was credit worthy? Of course not, the banks were just playing the odds, they knew that most weren't and it wasn't worth it to find the few that were.

A high credit score doesn't mean you won't default, it just makes it statistically less likely. The black person would need a higher credit score to qualify because being black pushes the odds against him.

A high credit score doesn't mean you won't default, it just makes it statistically less likely.

He has to go by the statistics...

The black person would need a higher credit score to qualify because being black pushes the odds against him. Come on, you know this.

There are plenty of arbitrary factors used in credit scores simply because the statistics bear them out.

A 50-year old has a better credit score than a 30-year old simply because he's 20 years older.

No it doesn't. Being black doesn't have any causal effect that makes it any more likely that an individual with a high cedit score will default. All it means is that more blacks have lower credit scores to begin with. That's how he got the high credit score int he first palce; by not defaulting on payments.

Really? I know more than one person older than 50 who has filed bankruptcy in the last couple of years and many, many 30 years olds who haven't - who do you think has a better credit rating?

X, you're using examples of automobile insurance rates being adjusted for age and then following it up with "I don't see any reason why it wouldn't work the same way for race when it comes to loans." Do you really think that's persuasive or illustrative of a well-thought out logical position?

Using your postings on this subject as a baseline I've got to ask, are you just "going with your gut" on this?

Why do you think banks would be any different?

Xeq, you do realize you're referencing the SPLC a hugely discredited organization because of the massive lies they tell?

Sorry, they just funded the study, the actual study was done by MIT researchers. It certainly looks professionally done to me. While I cannot prove that banks would discriminate based on race the evidence clearly suggests to me that they would, since there is demonstrable discrimination in hiring based on race only.

For ease of exposition, we refer to the effects uncovered in this experiment as "race" differences. Technically, however, these effects are about racial soundingness of names.

Finally, these audit studies are extremely expensive, making it difficult to generate large enough samples to understand the nuances and mitigating factors of discrimination. In fact, these budgetary concerns worsen the problem of mismatched auditor pairs. Cost considerations for the use of a few pairs, meaning that any mismatch will easily drive the results. In fact, studies generally tend to find that outcomes significantly differ across pairs.

Our study circumvents these problems. First, because we only use resumes and not people, we can be sure to generate comparability. In fact, since race is randomly assigned to each resume, the same resume will sometimes be associated with an African America name and sometimes with a White name. This guarantees that any differences we find are due solely to the race manipulation. Second, the use of paper resumes also insulates us from demand effects. While the research assistants also know the purpose of the study, our protocol allows little room for conscious or subconscious deviation from the set procedures. Moreover, we can objectively measure whether the randomization occurred as expected. This kind of objective measure is impossible in the case of the previous audit studies. Finally, the relatively lower cost of sending out resumes means that rather than a few auditor pairs, we can send out a large number of resumes. Besides giving us more precise estimates, it also allows us to examine the mechanics of discrimination from many more angles.[6]

[6]A similar "correspondence" technique has been used in a few U.K. studies (Jowell and Precott-Clarke (1970), Brown and Gay (1985), Hubbock and Carter(1980)). These earlier studies had very limited sample size and focused mainly on documenting gap in call-backs between the minority and non-minority groups. Some of these studies also failed to fully match skills between minority and non-minority resumes by imposing differential education background by racial origin.

Facism is not a school of thought, it is a racial slur.

That's true, but it's irrelevant from the bank's point of view. For example. a 25-year old, even if he's never driven a motor vehicle before, will have vastly lower insurance rates than an 18-year old. But as you know, being 25 doesn't automatically make you a better driver, it's just a lot more likely that you are one. Even if the 25-year old has a (not massively) worse record than the 18-year old, his rates are still probably going to be better simply because he's 25. I don't see any reason why it wouldn't work the same way for race when it comes to loans.

I'm not claiming that race will suddenly be the end-all. It will just be a negative factor. Of course they're not going to deny a black guy with sterling credit while approving a white guy with a bankruptcy and tax liens and no income. Being black will just make the "cutoff" for whether or not you get the loan somewhat higher.

While I cannot prove that banks would discriminate based on race the evidence clearly suggests to me that they would, since there is demonstrable discrimination in hiring based on race only.

Sorry, they just funded the study, the actual study was done by MIT researchers. It certainly looks professionally done to me. While I cannot prove that banks would discriminate based on race the evidence clearly suggests to me that they would, since there is demonstrable discrimination in hiring based on race only.

I want monetary policy reflective of market realities which means it must be apolitical and allow competing currencies.