The Mortgage Crisis and Affirmative Action
Quick: What do current and past mortgage crises have in common with affirmative action?
There is a good deal of irony in the current financial crisis, if it is that. Home mortgage foreclosures have increased and some major lenders are in financial difficulty. The reverberations that have hit the world's stock markets are headline material. Predictably, some politicians favor bailouts in the form of subsidies to homeowners in difficulty. And just as predictably, the reaction of (these and other) politicians is that the lenders are at fault, and that regulation is needed because these lenders were careless in lending to borrowers who could not really make payments. It is even possible that solvent lenders will be penalized for making too many loans of certain kinds. Memories are short. In most atmospheres, politicians are quick to complain that lenders are insufficiently generous when it comes to qualifying borrowers. When real estate prices are rising, it is likely that the complaint will be that more working people should have owned property. When real estate prices fall, the complaint will be that lenders profited by exploiting over-optimistic borrowers.
It is possible, of course, that both criticisms are correct. A government should worry that lenders use rough signals to judge risks and that these approximations might be nasty in effect or even in intention. So-called redlining is one such area of concern. But my concern here is that when we regulate from both directions, so to speak, we should realize that what seems like light regulation becomes central control-and-command regulation because those who are regulated do not want to be in a position where they are second-guessed and held to be wrong no matter what they do. If a bank responds to one set of criticisms by encouraging its agents to approve loans to customers who might previously have been turned down, then it does not want to find itself subject to criticism for lending to optimistic borrowers. At some point the free market disappears, and the bank is either told to whom it should/must lend or the bank will find a way to exit from the activity.
Regulating from two directions is something we do often. We have maximum and minimum speed limits, for example. The point is not that regulation from two directions is always bad, but rather that we should recognize that it can come close to command-and-control regulation. If not, the regulated industry may come to ask for more regulation, rather than less, as it seeks a safe harbor for its activities.
And so the answer to the opening question is "regulation from two directions." In the case of affirmative action, employers and universities were first pushed to diversify their workforces and student bodies. Later on, reverse discrimination cases succeeded, so that these institutions are now "caught" between these forces from two directions. Again, finding a balance might be a very good thing, and we might find our way there through competing regulatory moves, but we need to beware that the less room we leave in the middle, the more two-direction regulation is really command-and-control government - but without the information necessary to comply in the first instance.