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.
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