Wednesday, September 24, 2014

There is no lending solution to an income problem

Working people need more income, not more debt. Yesterday’s release of Home Mortgage Disclosure Act (HMDA) data revealed that lending to African-Americans slipped to 4.8 percent in 2013 from 5.1 percent in 2012, while whites are taking a bigger chunk of the mortgage market-- 70.2 percent ofborrowers last year, and 69.9 percent of borrowers in 2012. While this new information is terrible and unsurprising, I fear that it could lead to a renewed push for weakening of lending standards, under the banner of expanded credit opportunity.

In my experience as an intern in the Consumer Financial Protection Bureau’s Office of Community Affairs, I regularly interacted with advocates from community, religious, ethnic, and consumer protection groups. They were all lovely people who were smart, passionate about what they did, and tough as hell. The success, and even the existence of the CFPB is testament to their ability to stand up against powerful banking lobbyists, who were usually paid much more than them. And while I agreed or at least sympathized with most of what these folks advocated, there was one issue where I found their means to be questionable. 

While I think the ends  that they were advocating for (equality of opportunity, empowering minority groups and the poor, fair lending) were all fantastic, the means that they advocated for often left me shaking my head, especially when it came to credit availability. The overriding thought process of these advocates was that minorities needed more access to credit, aka debt. Unfortunately, this often meant that these advocates supported weaker lending standards, and found themselves in the odd position of agreeing with banking industry lobbyists. This was especially true during the development of the Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) rules.  

However, I always felt that these folks were advocating for the wrong tools. The economic struggles of the poor and minorities stem from a lack of income, not a lack of debt. It is high levels of unemployment and deterioration of unions that have caused a collapse in incomes, and therefore creditworthiness, in these communities. Therefore, restoring income growth should be the primary focus of minority and consumer advocates.  Lowering lending standards to meet these lower incomes is certainly not the solution to this problem, as we already tried this experiment in the last decade. No amount of lent money can replace a lack of earned money, and deliberately weakening underwriting standards to paper over insufficient incomes is a fool’s errand. As we now know, it was minority groups, especially African-Americans, who lost, and have not recovered, the most wealth in the financial crisis, since most of their wealth was in their homes. And of course, at the height of the bubble, many fly-by-night originators were more than happy to push out ARM NINJA loans to minority communities, who were rarely able to make payments after the teaser periods expired. 

The political implications of this are even scarier. We already know how conservatives love to blame the entire financial crisis on the federal government incentivizing lending, (through the GSE's and Community Reinvestment Act) to “those people.” I fear that trying this experiment again will not only set minorities back, but it will further inflame the lunatic fringe that empowers the very politicians who make income inequality worse.

As far as I know, the MMT community is the only one that clearly elucidates the relationship between national spending, incomes, lending, and debt. I think it’s vital that the ethnic/community/consumer groups come to fully understand MMT and the stock/flows that we describe. Without it, they may continue to walk down the beaten path, and over the cliff once again. 


Ralph Musgrave said...

Hang on now: we can’t give money to the plebs. They’d only do something irresponsible with it, like spend it on food or housing.

Much better to put resources into the hands of bankers. They’re responsible custodians of money as you can tell from the fact that they’d have crashed the world economy had it not been for trillions of dollars of assistance from taxpayers. Further evidence of the probity and wisdom of bankers is the fact that they’ve had to pay $100bn of fines so far for sundry crimes.

Dan Kervick said...

Ultimately, what is needed is a readjustment of annual household income flows up and down the income spectrum, a compression of the distance between the top and bottom incomes, a redistribution of wealth, and an assault on the mechanisms by which the wealthy accumulate more wealth and increase the gap between themselves and everyone else. We also need a commitment to full employment and greater attention to the ways in which, as a society, we allocate resources and human labor effort to the various possible projects and opportunities amoung which we choose.

For some reason or other, most of these concrete matters have become taboo topics in America, which is one reason people are attracted to credit availability fixes, monetary reform fixes, arguing about vague macroeconomic generalities such as "auterity", "demand" etc. People need to get their heads out of the ground and out of the clouds and start talking turkey.

Tom Hickey said...

All true, Dan, the challenge is formulating and promulgating a proposal that can effect socio-economic change through cultural and institutional change which is capable of uniting the left. Things are the way the are because the superior organizers are organizing it that way and the rest of the people don't have the organization to counter it.

Organization = power.

Dan Kervick said...

Agreed, Tom. I think people need to think more in terms of concrete plans, and leave the grand macroeconomic theorizing in the background. For example, people who want to get a job guarantee program going need to be thinking (at least) in terms of a nice looking 20-30 page PDF with a specific program laid out, with the actual proposed legislation, revenue changes, and administrative mechanics, etc.

Ignacio said...

Most of the population still is too comfortable with the status quo for some real talking to happen.

A lot of them are still abducted by the "american dream" and "deserve" narrative and the class bigotry.

Tom Hickey said...

Dan, I agree that economists are resources rather than activists and that activists should use them as resources to give proposals credibility.

The problem on the left is that those concerned with change cannot even agree on diagnosing problems let alone identifying causality, and proposing a solution.

As a result the left has been largely co-opted by the ruling elite through the establishment that controls the Democratic Party, the progressive wing of which has been sidelined and was right from the beginning by Clinton and Obama. I recall Obama hearing Obama say this to Rachel Maddow right that the outset.

The rest of the left is a bunch of splinter groups arguing with each other.

Tom Hickey said...

Ignacio, I agree that in most developed countries people aren't hurting enough to do anything significant about change.

Emerging countries where TPTB haven't solidified their control may be staging areas. But countries like Cuba, Venezuela, and Ecuador are constantly being undermined by the Empire in the name of Freedom and Democracy.They have often also suffered economically from lack of knowledge and organizing power, although Correa seems to be a notable exception.

Anonymous said...

OC, lending money to someone who does not have the income to pay it back is a problem. However, the main way that we create money is by lending. If incomes are too low in general because there is not enough money in circulation, then creating money by lending can be a large part of the solution.

Tom Hickey said...

Wherever there is sufficient lending to those who are in doubtful circumstances of paying it back there is financial instability. Generally, the reason that lenders lend imprudently is owing to either extremely high economic rent that covers defaults or else government bank up.

Ignacio said...

Offtopic but related, recent discussion between PIKETTY and GRAEBER:

Tom Hickey said...

Thanks, Ignacio. Promoted to post.