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The New York Times ran a front-page article about the 2006 Federal Reserve Board meetings—transcripts of the meetings are released after a standard five-year delay. In short, the board was unconcerned about the housing bubble, even though they discussed how the then-howling housing market was starting to teeter. As The Times put it, "The problem was not a lack of information; it was a lack of comprehension, born in part of their deep confidence in economic forecasting models that turned out to be broken."
"Models" are broken on a regular basis, usually when one or more parameters of the model exceed the experts' opinions on its range. For example, the Jim Crow enforcement arm, so aptly characterized by Bull Connor, could not have been expected to successfully put down Dr. King's movement because nonviolence was not anticipated by violent, hate-filled men. Presidents Eisenhower and Kennedy didn't take the civil-rights movement all that seriously—but President Johnson met with Dr. King as the publicity became unacceptable when photographs of "Bloody Sunday" appeared in newspapers around the world in 1965. It's not a stretch to link the civil-rights era to the broken economic model the Federal Reserve Board was using. The Fed Board itself had (and still has) an astounding lack of diversity coupled with, in my observation, a negligible diversity-management structure.
In 2006, The Federal Reserve Board of Governors and Federal Reserve Bank presidents were fourteen white men and four white woman. In 2011, some of the people were different, but the demographics are basically the same: A stunning lack of diversity.
Also in 2006, I had a speaking engagement at an American Bar Association function. After my talk, a woman came out of the crowd and told me that she had a "diversity" story for me. She asked me if I had ever been in a Philadelphia row house. I told her I had. She went on to tell me that people were refinancing their row houses for $250,000. I was astonished, and she said, "That's right, they're $80,000 row houses; they'll always be $80,000 row houses. Something's wrong." What was wrong was that the market demand for collateralized mortgage bundles had outpaced the normal housing market, so one had to be created if the banks were to continue to make money from this cycle. The mortgage-broker predators descended on lower-middle-class people—diverse and financially unsophisticated—and sold them on a deal that was too good to be true: Take "equity" out of your house to go on vacation, buy a boat, finance college for your kids, whatever, and never have to worry, because the housing market will continue to zoom up forever.
Frankly, I didn't know what to do with the story. Like the Federal Reserve Board of 2006, I would have done a few things differently from the perspective of retrospection.
Business Case for Diversity
But what if the Federal Reserve Board members had those kinds of feelers out in the market? What if they were supported by a diversity-management structure, chairing their diversity-council meetings, meeting regularly with employee-resource groups and mentoring people who were not from their background? What if they organized and personally involved themselves with philanthropic endeavors that didn't serve their own kind?
Could we have avoided this horrible recession, which has put more than 18 percent of our population into unemployment or underemployment for more than three years (U-6 unemployment)? Could we have avoided more than doubling the divide between Black and Latino household wealth (now at one-twentieth and one-eighteenth of white household wealth, respectively, according to Pew Research)?
My two visits to two Federal Reserve banks tell me that their current culture would exclude that possibility. Like most federal agencies, the Fed is very formal, starchy and full of pomp and circumstance. It's a culture that reveres its self-created hierarchy, a queasy blast from the past. It's not all bad—in my opinion, we do not yet fully appreciate the action of the Fed Board once the crisis unfolded. I believe that they, along with President Obama, prevented the entire world's economy from falling into the abyss and creating a depression that would have made 1933 look like a walk in the park.
The board members are good Americans, serving our country as best they can, but their lack of diversity management and stunning lack of results sharply limits their ability to perceive reality—and it limits their ability to anticipate when the next model is broken.
But it's not just the federal government. Half of the companies on the 1997 Fortune 500 list were not in existence by 2007, in many cases overcome by circumstances that exceeded their models. Does your organization have the vulnerability of a limited perspective at the top? Now you have yet another business case for diversity.