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Brown Swan

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Karl Rove writes in the Wall Street Journal that the Mortgage Meltdown wasn’t Bush’s fault:

President Bush Tried to Rein In Fan and Fred:
Democrats and the media have the housing story wrong.

… Some critics blame Mr. Bush because he supported broadening homeownership. But Mr. Bush’s goal was for people to own homes they could afford, not ones made accessible by reckless lenders who off-loaded their risk to GSEs [Government-Sponsored Enterprises]….

As one of those critics, let me point out to Mr. Rove that Mr. Bush didn’t attempt to rein in Fannie Mae and Freddie Mac when it came to minority lending. In fact, he egged them on. From Bush’s June 17, 2002 speech to St. Paul’s African Methodist Episcopalian church:

Now, we’ve got a problem here in America that we have to address. Too many American families, too many minorities do not own a home. There is a home ownership gap in America. The difference between Anglo America and African American and Hispanic home ownership is too big. (Applause.) And we’ve got to focus the attention on this nation to address this.

And it starts with setting a goal. And so by the year 2010, we must increase minority home owners by at least 5.5 million. In order to close the homeownership gap, we’ve got to set a big goal for America, and focus our attention and resources on that goal. (Applause.)…

I want to thank Franklin Raines, of Fannie Mae and Leland Brendsel of Freddie Mac. Thank you all for coming. (Applause.)…

Three-quarters of white America owns their homes. Less than 50 percent of African Americans are part of the homeownership in America. And less than 50 percent of the Hispanics who live here in this country own their home. And that has got to change for the good of the country. It just does. (Applause.) And so here are some of the ways to address the issue. First, the single greatest barrier to first time homeownership is a high downpayment. It is really hard for many, many, low income families to make the high downpayment. …

And let me talk about some of the progress which we have made to date, as an example for others to follow. First of all, government sponsored corporations that help create our mortgage system — I introduced two of the leaders here today — they call those people Fannie May and Freddie Mac, as well as the federal home loan banks, will increase their commitment to minority markets by more than $440 billion. (Applause.) I want to thank Leland and Franklin for that commitment. It’s a commitment that conforms to their charters, as well, and also conforms to their hearts.

This means they will purchase more loans made by banks after Americans, Hispanics and other minorities, which will encourage homeownership. Freddie Mac will launch 25 initiatives to eliminate homeownership barriers. Under one of these, consumers with poor credit will be able to get a mortgage with an interest rate that automatically goes down after a period of consistent payments. (Applause.)

Fannie Mae will establish 100 partnerships with faith-based organizations that will provide home buyer education and help increase homeownership for their congregations. I love the partnership. (Applause.)

(Republished from iSteve by permission of author or representative)
 
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My critique in VDARE.com of Nassim Nicholas Taleb’s bestseller “The Black Swan: The Impact of the Highly Improbable” tries to walk the delicate line of giving the book credit while explaining some of the ways it will be misinterpreted — especially its title phrase.

In From Dawn to Decadence, 94-year-old historian Jacques Barzun offered a dozen dictums on pp. 655-656 summarizing what he’s learned from three quarters of a century of scholarship. One was:

“The potent writings that helped to reshape minds and institutions in the West have done so through a formula or two, not always consistent with the text. Partisans and scholars start to read the book with care after it has done its work.”

(By the way, this is certainly true of Barack Obama’s autobiography, which has “done its work” without being carefully read!)

A reader explains how Taleb’s new catchphrase “Black Swan” is being rapturously greeted on Wall Street by the very people who poured billions into subprime mortgages in Compton. Hey, it’s not their fault they didn’t see all those defaults coming: it was a Black Swan!

I would emphasize, that in my opinion the Black Swan is a timely rationalization for the gross incompetence seen across finance (both the more private part and their governmental overseers) regarding very predictable events. That is, it is wrong in principal, because, and as you state, the disaster(s) should have been expected (or rather, the ‘black swan’ event would have been loaning to bad credit risks and having them actually paying the loans back, not the other way around).

Furthermore, you focus on residential mortgages and minority ownership (i.e., given VDare’s emphasis), but, of course it also applies to commercial mortgages, credit card debt, etc. In short, Taleb has given incompetent and/or corrupt finance types (especially “quants”) an easy out. For example, let’s say you are a risk manager at [gigantic but inept financial institution] (which I was), and you missed seeing, as you point out, that based on a normal distribution the default rate for Mexicans is on average X% (which is significantly more than for your typical founding stock American). Basic probabilities based on normal distributions would suggest you were a fool for not seeing a wave of defaults coming, but then you now have Taleb’s ‘black swan’ event to explain yourself.

I will now give you personal insight into this. I worked at [humongous Wall Street money pit] (until February of 2008) on what was called a “credit specific risk” add-on to their Value-at-Risk model. My focus was covering Credit Default Swaps (“CDSs”) and related credit derivates (CDOs, CDO-squareds, etc.) and non-derivatives. After the financial markets began their meltdown (which continues predictably to this day, and beyond) in late July/early August of 2007, the head of the Market Risk asked me if I had read The Black Swan. I told him that I had not, and asked if he had read [Taleb's earlier book] Fooled by Randomness. … By Thanksgiving almost every high level risk manager on Wall Street had read (or said they had read) The Black Swan. In hindsight, it is all so clear, here is a book that essentially goes on and on about what is normally a true but normally trivial point, by definition.

In effect Taleb gave the elites that screwed up on a monumental scale an easy out For example, “yes, I’m head of risk for Merrill and some say I should have seen it coming, but surely you have read ‘The Black Swan’ and now understand how that would have been impossible.” In short, Taleb has given all of finance the copout they need when they most needed it (i.e., everyone – practitioners, academics, regulators, etc.).

Attributing the worthlessness of your mortgage-backed security full of 2006-vintage Sand State subprime loans to a “Black Swan” is, in effect, a lot like blaming it on “Sh*t Happens,” but it makes you sound erudite rather than stoned.

As today’s WSJ article “Housing Push for Hispanics Spawns Wave of Foreclosures” suggests, the mortgage meltdown wasn’t an unpredictable Black Swan at all. That rapidly Hispanicizing regions (the great majority of defaulted mortgage dollars came from just four states — California, Arizona, Nevada, and Florida) turned out to be full of people who couldn’t pay back their giant mortgages wasn’t impossible to forecast: instead, it was, to coin a term, a Brown Swan — a predictable disaster that goes unforeseen due to pervasive political correctness.

(Republished from iSteve by permission of author or representative)
 
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Steve Sailer
About Steve Sailer

Steve Sailer is a journalist, movie critic for Taki's Magazine, VDARE.com columnist, and founder of the Human Biodiversity discussion group for top scientists and public intellectuals.


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