May 05, 2008
Those Chickens: The Economic Crisis and America’s Poor and Struggling
Michael Blim
It’s better to be rich – hardly a surprising claim.
But it is devastating to be poor, and this period of economic crisis it is deadly to be poor.
The effects of the crisis have been charted in many ways. There has been barely concealed panic on Wall Street. Big banks have wobbled, and many wallowed in debt. Many have taken on as much capital as anyone will lend them, as well as selling off big chunks of their equity. A major brokerage house failed, and was saved by the Federal Reserve Board.
On Wall Street, record numbers of people in the finance industry are being let go.
On Main Street, states and municipalities, as well as state authorities that back borrowings for universities, public schools, and public housing corporations, are having trouble selling their bonds.
Then there are the homeowners whose economic troubles triggered in part the crisis –apart from a financial sector whose blood lust for ever higher profits created the mess in the first place.
Who are the homeowners? Hard to know. Though you can learn a lot about the latest cure for something on the news every night, followed or preceded by drug commercials selling you pharmaceuticals, the efficacy of which seems to boil down to a smiley face and chocolate Labrador, you can’t learn much about endangered homeowners. A reporter may find one of the 7.2 million of families at risk of losing their home, but the bigger frame amidst the family’s well-earned tears is lost. Try as they might, or try as they don’t, the news industry presents a fuzzy picture. Who are these folks in trouble?
They are many: the 7.2 million households comprise 28% of all American households with mortgages. They owe $332 billion in loans, and 2.2 million have lost or will lose their houses without a federal remedy, according to the Center for Responsible Lending. A majority is white, but a disproportionate number of blacks and Latinos are vulnerable too. For instance, among whites, 17% have sub-prime mortgages; the figure is 55% for blacks.
I have come to the conclusion that only a specialist can understand what the Congress and the Executive are proposing for remedies. It is transparent, however, that they have done nothing yet to assist these vulnerable families.
(Parenthetically, where were the Federal Reserve, financial regulators and the Congress when the crisis had begun to show itself in October, 2006? Where are the US attorneys and the Attorney Generals of 23 states, all of whom are equipped with statutory authority to stop predatory lending and impose civil, as well as in some cases criminal penalties on perpetrators?)
Banks made greater profits on sub-prime loans because they could charge working class and near-power households more for their mortgages. They sold them in packages at higher prices to customers eager for extra profits. Everybody made out – except those purchasing the mortgages. Disaster was just around the corner.
Not even the poor without homes, I expect, would want these troubles. Yet, the poor along with those caught up directly in the sub-prime emergency face even rougher times ahead. Inflation is back. For the past five months, headline inflation, that is, everything we consume, has been 4% above the comparable period last year. Even the so-called core inflation rate, that is what we consumer minus food and energy, has been running at 2% for the last seven months.
I have written about how economic policymakers are attached to a measure – core inflation – that having dropped food and fuel seriously under-estimates the increased burdens on typical American households. (See my column, September, 2007)
But an interesting analysis by Neil Irwin and Alejandro Lazo of the Washington Post (March 21, 2008) suggests how even headline inflation misses a much higher increase in the cost of living. Their analysis of government data shows consumer prices for basics has risen 9% since 2006, and now costs a family making $45,000 a year an extra $972. The poor and near poor consume the basics too.
Fearful that the economic roof was falling in, Congress and the Executive agreed to a stimulus package. The idea is that American families need to keep the economy going by spending money.
Don’t put a down payment on the Prius yet. Individuals will receive up to $600 and couples $1200 depending upon income. Families with children will receive $300 for each child.
These are the upper limits. Being poor entitles you to no more than this, despite inflation and diminished or nonexistent employment opportunities.
Without employment, you may not get the money, even if you are poor because you are unemployed. You must have filed a tax return several weeks back and have declared at least $3000 in income. To get the check, Social Security and Veterans benefits, and low income wages count. But to qualify you must have income, a curious requirement when the easiest definition of poverty is the absence of it.
Thanks to the Clinton welfare “reform” act of 1996, welfare recipients are eventually cut off from further assistance, job or no job. The result a little over ten years later is that 20% of low-income mothers are without work or welfare benefits, a figure that has doubled since the 1996 law. How do they qualify for the “stimulus?”
It’s movie we have all seen before, I know. But the ending is meaner than usual: when times get tough, we make it tougher on the poor, near-poor, and the working class.
Once more:
7.2 million families holding sub-prime mortgages, disproportionately lower-income, black and Latino are in danger of losing their little bit of the American Dream.
37 million poor people (the definition of poverty for a family of 4 is an income of less than $20,000) can receive $600 a person and $300 per child if they have an income already. If not, then not.
In a society without justice such as ours, poor people, people with one foot out of poverty, and the working class are experiencing a crisis only guessed at on Wall Street where all the mischief began. Those becoming stricken by the crisis -- they indeed are the chickens that are coming home to roost. Only for them, it is simply for delivery to Tyson’s.
Posted by Michael Blim at 09:41 AM | Permalink
Comments
The biggest losers of all will be ordinary, wage earning Americans, I predict.
When the smoke clears, and the dollar falls to a point to tip our trade balance in the other direction -- probably another 20% I would guess -- we will have a manufacturing-for-export renaissance in America.
Trouble is, real wages adjusted for inflation will be back to where they were in the early decades of the 20th century. Wages in auto plants, for example, will be around $10/hour in today's money -- and you won't see a lot of robots anymore, unless you want to call working-class Americans robots.
We will be exporting tons of steel, capital equipment, even cars to places like China for a change, and bitching about prices in WalMart.
Remember when you could buy a laptop for less than a thousand dollars? Those will seem like the good old days.
This prophecy is not based upon clairvoyance. Rather, it follows on from rule that no unsustainable process will go on forever. In this case our trade imbalance with the rest of the world.
For the next generation we will see truly hard times for everybody except the rich, who will be richer than ever: not from capital gains, however (asset prices will actually fall), but from good, old-fashioned return on investment.
There will be a boom market in maids, au pairs, private chefs, yardmen, the "help" in other words, and status symbols will grow ever more outlandish. Imagine surplus aircraft carriers decked out with a replica of Biltmore House (in real stone!) and a nine hole golf course. When that thing pulls into the harbor at Cannes, people are going to notice!
Solution? Hard to imagine. Anybody got suggestions?
Posted by: lukelea | May 5, 2008 10:55:26 AM
i think left-leaning commentators such as yourself miss a major point when you discuss the outsized impact on minorities.
the fact is, that most of the minorities have poor credit profiles and are not a good risk for lenders. why are they bad risks? because their history shows that they are not good at managing credit and are less likely to fulfill their obligations that they agree to.
this poor behavior shows up in credit scores. credit scores are often accused of being biased against minorities, but the fact is that they only reflect how well someone has met their credit obligations.
in the past, lenders did not loan money to consumers with low credit scores. however, the activists complained so banks were forced to lower their credit standards so taht they could make loans to minorities. of course, because these people with low credit scores were riskier than those with higher scores, they had to pay a higher interest rate (risk/reward).
now, surprise, surprise, these people are not able to make their mortgage payments and its the banks fault (just as the "biased" credit score predicted).
so what were banks supposed to do? only lend to consumers who were likely able to repay their obligations? this was the policy of banks that was decried as racist.
Posted by: rappoporr | May 5, 2008 1:44:01 PM
"so what were banks supposed to do? only lend to consumers who were likely able to repay their obligations?"
This is an extremely childish version of events. The New York Times had an excellent article about a month ago on exactly how banks began to "securitize" mortgages to increase profits. They basically bundled as many sub prime loans together as they could, added just enough high quality loans to get a AAA rating from the bond rating agencies and then sold them to gullible investors on Wall street from the US and around the world, who thought they were getting AAA bonds. The banks and bond rating agencies dumped this junk on investors. The government looked the other way. To paint a picture of banks "helping" minorities into home ownership is laughably inaccurate.
Posted by: Jared | May 5, 2008 1:57:12 PM
"This is an extremely childish version of events. The New York Times had an excellent article about a month ago on exactly how banks began to "securitize" mortgages to increase profits. "
actually, mortgage securitization and origination are separate processes.
securitization allows banks to remove their risk associated with individual mortgages by selling them as a package to investors. without a higher rate being paid on these loans (i.e., a higer interest rate for the consumer), investors would never have purchased these securities because of the risk. the credit agencies, whose job it is to make an accurate assesment of the quality of the loans, ultimately did not do their job.
however, without the boom in sub-prime lending, this would NOT HAVE BEEN AN ISSUE because these loans would never have been made. while it does matter to the investors who bought the securities, the actual ratings given by the agencies do not change the economic impact of consumers not being able to repay their obligations (which, again, would have happened regardless of the credit agency's ratings). the underlying issue is not securitization, but the issuing of loans to consumers who should not have been eligible for such loans.
so, the question, is what were the banks supposed to do? significant pressure was placed on lenders to ease standards (which had been put in place to ensure there would not be a crisis like the one we are facing) so that minorities with poor credit scores would be given loans that, given their previous behaviour (as measured by credit scores), they would likely not be able service.
if the banks did not make the loans, they would be charged with being racist (undoubtedly with the nyt leading the charge). however, now they were forced to make the loans to consumers who did not have the financial ability to meet their obligations and when these consumer can't make their payments, the banks are demonized.
Posted by: rappoporr | May 5, 2008 2:45:42 PM
These numbers are a bit muddled. The $332 Billion Subprime debt was from 2003.
Now? A Paltry 1.3 Trillion
A Snapshot of the Sub Prime Market
This means that the average Sub Prime debt is $181,000. By way of comparison, the median house price (not median mortgage) is $213,000.
Posted by: Carlos | May 5, 2008 2:54:12 PM
"they were forced to make the loans to consumers who did not have the financial ability to meet their obligations"
This is classic "blame the victim". In reality, the banks did not care whether the customers would ever repay the loan because they immediately bundled the loans, had them AAA rated and sold them. The profits were huge, the risk off-loaded. Of course the house of cards had to fall sometime. But it was banks and bond agencies who had the sophistication to game the system, not some subprime borrower with grade 11 education. And it was the bank and other financial executives who took home million dollar bonuses for doing it. And it is the taxpayer who, thanks to the Federal Reserve will have to bail out the banks for their greed.
Posted by: Jared | May 5, 2008 4:05:57 PM
If not the lawyers, as Shakespeare aptly suggested (Henry VI):
First let's kill ALL the politicians who are responsible for this mess, starting by ?
Meanwhile don't pay any more attention to hysterical "Billary". For, the poor woman, if not sick, is sickening!
Posted by: Felix E F Larocca MD | May 5, 2008 4:27:48 PM
This is classic "blame the victim".
i still don't have an answer to my question - what should the banks have done?
Anyway, in an attempt to address your comments, it sounds to me like you are saying is that the mortgage crisis was caused by banks securitizing these loans. This is ridiculous. The banks did what they were pressured to do and then attempted to profit from it. Undoubtedly, they made profits a large portion of which went to executives.
However, the fact of the matter is that these loans SHOULD NEVER HAVE BEEN MADE IN THE FIRST PLACE. To ignore this key fact is to obfuscate the underlying issue. Without these loans being made, the sub prime crisis would never have reached its current magnitude and there wouldn't be this outsized impact on minorities.
You can't have your cake and eat it, too. Activists were saying banks are racist because they didn't lend to minorities who, based on prior behaviour, were not good credits. Now, after the banks were forced to make these loans against their better judgment, they are being demonized because these same minorities, who have not been fiscally responsible in the past, are -- surprise, surprise -- unable to pay their mortgages.
i feel for these people and i can only imagine how tough they are having it now. however, to blame the banks for this is missing the forest for the trees.
Posted by: rappoporr | May 5, 2008 4:34:07 PM
what this comes down to, in my view, is that the government/activists interfered with the mechanisms of the lending market.
while not absolving the banks of their ratings machinations, this is the underlying driver of the credit crisis.
and, to go on a bit of a tangent, the real problem is the lack of personal responsibility in society. if you can't afford something, don't buy it. don't run your credit card bill up if you can't pay it.
Posted by: rappoporr | May 5, 2008 4:45:22 PM
As jared suggests, rappoporr sounds like an apologist for top dogs in implying that those with the most know-how are the least culpable; as if they didn't know what they were doing.
This banking fiasco is not a bottom-up failure, but a top-down rip-off.
When a savvy con-man who knows the intricacies of the game relieves a naif of a bundle, the police usually chase the grifter. But when a banker who knows the ropes cons a hungry mortgage applicant, pockets his fee, and scoots before the S hits the F, we're supposed to blame the ignorantly hopeful.
You don't concoct a scheme to subvert the law without know exactly how to do it. That's why bankers and investment firms hire battalions of pricey lawyers.
As history is written by the winners, rappoporr wants justice to lean their way as well.
Posted by: J | May 5, 2008 4:47:51 PM
Dear Rappoprr:
In Latin America, blame our politicians, the World Bank and the IMF! The unfortunate way that we, south of the border, have of resolving these kinds of problems, is by pulling the trigger --- not too neat --- yet effective approach --- some times.
In the US, let's get rid of the BASTARDS! by the use of the ballot box --- or else let's pull --- not that again!
Too gruesome!
Posted by: Felix E F Larocca MD | May 5, 2008 4:48:42 PM
"...if you can't afford something, don't buy it. don't run your credit card bill up if you can't pay it."
And if you can't make a living as an honest banker, get out of the game and become at least an honest plumber.
Posted by: J | May 5, 2008 4:52:52 PM
J-
Please re-read my posts. What I am saying is the THESE LOANS SHOULD NEVER HAVE BEEN MADE IN THE FIRST PLACE. The banks were forced to do so by the government. If you make loans to people who have shown in the past that they cannot manage to meet their obligations, you have to expect issues like this.
The role the banks had in this is secondary. Did they engage in questionable behaviour? Yes. But, again, this would never have happened if the loans were not made in the first place.
Posted by: rappoporr | May 5, 2008 4:57:56 PM
Nice that there are so many comments. They suggest, as usual, a perspective from the Right and another from the Left.
If talking about the overall economy and not just the housing mess, then oil prices, the Iraq war, outsourcing of jobs etc should figure into the overall view of what seems to be going on.
Posted by: fred lapides | May 5, 2008 7:05:47 PM
rappoporr,
Your understanding of the crisis is childish and you really should do more research. In simplest terms, the mortgage market failed because of a severe risk disconnect between those who originated the loans and those who eventually assumed the risk. The banks weren't forced to lend to poor minorities. Instead the banks were eager to make loans to everybody and anybody because there was tremendous profits in it for them and very little risk. The idea that "political correctness" is responsible for the crisis is just more stupid Republican propaganda and you should be ashamed of yourself for disseminating it.
Posted by: jake | May 6, 2008 1:09:49 AM
"What I am saying is the THESE LOANS SHOULD NEVER HAVE BEEN MADE IN THE FIRST PLACE. The banks were forced to do so by the government"
I have been reading on the sub prime crisis for the past six months as an outside observer.Living in India, I don't know what the repercussions are, but the above comment(s) is the first one I came across. I have not yet read any story where the Bush(ironic isn't it?) government forced the banks into making such loans available (if such kind of predatory lending practices started or intensified from initial years of his presidency) to the minorities.
Posted by: Akash | May 6, 2008 7:02:28 AM
First of all, let's forget the idea that this crisis is just about the United States. I'm in Great Britain and it is here too. Exacerbated by the US crisis, because of the global nature of finance. Banks here have also been following a dangerous policy of sub-prime lending, and are being castigated for theri greed: there are borrowers who were granted mortgages of more than the value of their homes! And 100% mortgages only dried up last month. Since the Thatcher years the obsession with owning your own home has become all-consuming and both borrowers and lenders have worked together to realise the utopia of universal home-ownership. Rappoporr, if this were brought on by one policy of one government the situation would not be as advanced as it is. The whole developed world is in the same soup here: credit card debt, mortgage debt, debt debt; the consumer is the one who bears the most risk wherever you go. We are definitely feeling the ripples of the American crisis here, with record numbers of repossessions predicted in in the coming "perfect storm".
Regulators in the UK are coming under fire for not having stopped unfair practice on the part of lenders, particularly sub-prime lenders.
But thank God the UK's welfare benefits are not yet as draconianly capped as America's: it's hateful to think of a policy which deliberately creates destitution.
Posted by: Ms Baroque | May 6, 2008 7:27:50 AM
jake et al.
i am not addressing why the mortgage crisis has spun out of control -- that undoubtedly has to do with the securitization process.
what i am addressing is the comments in this post (and in other media) of why minorities have been disporoportionately impacted and how this has been a key part of the overall crisis. no one forced these people to buy houses that they could not afford.
all of you are childishly avoiding answering my question - what should the banks have done overall to avoid this and what should they have done so that minorities would not be disproportionately impacted?
are you waiting for the nyt to write an article about it so you can comment? i'm really shocked at the low quality of comments on this site.
Posted by: rappoporr | May 6, 2008 8:46:39 AM
Rappopor,
Why did poor people take on mortgages they can't afford? In many cases, because they were living in low-standard rented accomodation which they could barely afford, and were told that for the same monthly outlay ("or just a little bit more") they could acquire a "home of their own" (i.e. the bank's home) 'Investing' in a home is generally judged to be the epitome of middle class foresight and responsability, but when this is turned into a massive bubble then home-buying becomes a dangerous gamble.
You don't have to be a leftist to realise that banks like to make profits by squeazing money of the poor with this kind of caper.
Posted by: aguy109 | May 6, 2008 9:53:19 AM
rappoporr,
"...what should the banks have done overall to avoid this..."
You say the loans should never have been made in the first place. But they were. Who made them? The poor, or financial experts who knew better?
You say nobody made borrowers assume loans they couldn't afford. Then you exonerate the bankers who were "forced" by government to make the loans. Bankers made billions of dollars worth of bad loans because government made them do it? The Son of Sam said, "God made me do it." It's an old cover.
Any honest and competent banker would have refused. A nascent crook, however, would likely barge ahead under cover of government pressure. These loans were made because creditors knew they didn't have regulators breathing down their necks, and there was some good money to be made by making them. Creditors made the loans because the could.
Another obvious angle is that the banking crisis is the result of the symbiotic relationship that now exists between business and government.
The typical procedure when a crook cons a naif is that the the cops chase the grifter not the rube. Though the rube may have been stupid, the grifter who knew the intricacies of the game has always been held more culpable.
You gloss over the banker's behavior as if it had been inevitable. The borrowers made uninformed choices and were not steered away from them by bankers who knew better. The bankers made informed choices. But they both chose.
Posted by: J | May 6, 2008 12:53:30 PM
"the banking crisis is the result of the symbiotic relationship that now exists between business and government"
In the US, the relationship between business and government is more like that between a lapdog and its owner. The lapdog will never bite the hand that feeds it. The taxpayer's role is to pay all the owner's and dog's expenses.
Posted by: Jared | May 6, 2008 1:19:18 PM
Rappopor,
you bring up the reduction of loan origination standards and posit that the reason for the reduction of standards is activist pressure on behalf of "minorities" with low creditworthiness.
Others have pointed out that
1) the reduction of standards was not due to whatever the activists were saying and was done in the originators own myopic self-interest due to the ability to obtain fraudulent bond ratings of securitized loan packages.
2) there have seemingly been no reports of governmental pressure or encouragment to reduce standards for the benefit of uncrediworthy people, and it would seem that this would be against Bush-administration financial policy.
So, if we put aside the positive feedback mechanism that has led to financial crisis, we are left with the debate as to whether the credit score for minorities is unfairly low. You seem to take, as an axiom, that the credit rating is a fair score, and make the conclusion if the standards had been upheld and poor minorities had not been given a break at the behest of activists, we would not have a problem. A couple of comments
1) It has been documented that a significant number of the subprime mortgages were issued to those with credit scores that would qualify for a normal mortgage. This supports the idea that there was malfeasance among the loan originators, and that they may not have been very motivated by activists.
2) There is some evidence that standard credit rating algorithm do not apply to disadvantaged, poor communities that do not participate in the economy in the same way as the middle class. Specifically, the history of Grameen Bank indicates this and was recognized by a Nobel prize in economics.
So your premise is erroneous, and even if we overlook the erroneous premise, the essence of what you are claiming (kind of a Bell-curvesque explanation) is suspect.
In fact innovative loan programs are likely to help people in disadvantaged communities with reduced credit repay loans at levels higher than would be expected from the credit score. The innovations needed however, are not the kinds performed for the benefit of the banks (i.e. the subprime mess), but those done for the benefit of the borrowers (e.g. Grameen), including counciling, financial planning, and a flexible payment schedule as a part of the overall loan package. It would require some capital investment on the part of the banks to implement such programs, but it is plausible to claim that the overall revenue streams resulting from such a process would be of higher quality than one would guess from the credit worthiness rating alone.
Posted by: sifta | May 6, 2008 7:46:38 PM
Rappopor, vesti la giubba!
Posted by: Felix E F Larocca MD | May 6, 2008 8:26:44 PM
Great stuff. Thanks.
Posted by: oliviab | May 7, 2008 7:31:50 AM
Post a comment