Political correctness run amok

IBD on how political correctness created our current credit crisis....

One of the hottest sessions explained how journalists could replicate stories that other papers had done locally using computer tools, including one especially popular project to determine if banks in your community were discriminating against minority borrowers in making mortgages.

One newspaper, the Atlanta Journal-Constitution, had won a Pulitzer Prize for its computer-assisted series on the subject, and others, including the Washington Post and Detroit Free Press, had also weighed in with their own analyses based on government loan data. Everyone sounded keen to learn if their local banks were guilty, too.

Although academic researchers leveled substantial criticisms against these newspaper efforts (namely, that they relied on incomplete data and did not take into account lower savings rates, higher debt levels and higher loan default rates for many minority borrowers), bank lending to minority borrowers still became an enormous issue — mostly because newspaper reporters and editors in this pre-talk-radio, pre-blogging era were determined to make it so.

Editorialists called for the government to force banks to end the alleged discrimination, and they castigated federal banking regulators who said they saw no proof of wrongdoing in the data.

Eventually the political climate changed, and Washington became a believer in the story. Crucial to this change was a Federal Reserve Bank of Boston study concluding that although lender discrimination was not as severe as suggested by the newspapers, it nevertheless existed.

This, then, became the dominant government position, even though subsequent efforts by other researchers to verify the Fed's conclusions showed serious deficiencies in the original work.

For instance, one economist for the Federal Deposit Insurance Corp. who looked more deeply into the data found that the difference in denial rates on loans for whites and minorities could be accounted for by such factors as higher rates of delinquencies on prior loans for minorities, or the inability of lenders to verify information provided to them by some minority applicants.

Ignoring the import of such data, federal officials went on a campaign to encourage banks to lower their lending standards to make more minority loans. One result of this campaign is a remarkable document produced by the Federal Reserve Bank of Boston in 1998 titled "Closing the Gap: A Guide to Equal Opportunity Lending."

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