The main claim is from a financial industry consultant quoted in the article:
"As the country becomes more unequal, there are fewer middle class customers. That means middle class bank products become unprofitable, and banks follow the money. And banking regulations make it worse because the capital requirements imposed after the banking crisis make it a lot more expensive for banks to do a startup small-business loan than go into wealth management. Startup loans are riskier than wealth management, of course, but the capital costs have become prohibitive, and banks don’t lose money on purpose."
Wait, what? I doubt this is the main or even a top-three cause of income and wealth inequality in the US.
Other factors strike me as potentially far more important causes of inequality, including increasing automation of labor, winner-take-all markets, concentration of corporate and market power, minimal antitrust regulation... to name a few.
The banking industry wants fewer regulations and lower capital requirements, as usual. This seems to be its latest rationalization for them.
One of the biggest contributors to income inequality is a lack of economic mobility. Maybe that sounds like a tautology - the difference between rich and poor solidifies the more difficult that it becomes for poor people to turn into rich people.
To oversimplify, easy access to capital can allow a poor person to turn a great idea that solves real problems and a strong work ethic into a sustainable business that pulls him out into the middle class or higher. Without access to capital, the poor man is beholden to whichever employers are in his area, and whatever is on offer from them - odds are, it won't be enough to allow the poor man to send his children to private school.
>> far more important causes of inequality, including increasing automation of labor, winner-take-all markets, concentration of corporate and market power, minimal antitrust regulation
That's true but I think that winner-take-all markets exist in a large part because of the centralization of capital and how new capital enters the economy.
New money from the Fed flows into the system through massive institutions first; the money trickles down from the government to a few big corporations and then it trickles down to a few big private capital and VC firms and then it trickles down to a select few startups... VC firms collectively run an oligopoly; their main customers are big corporations so they don't have much interest in funding too many competing startups. The corporations which are funding the VCs don't want to acqui-hire too many of the same startups otherwise it gets difficult to justify their M&A strategy to shareholders.
> What I am saying is that now some lenders — banks — are under rules so tough they can’t support equality-enhancing mortgages
What is an equality-enhancing mortgage? My guess is that it's akin to an equal opportunity / affirmative action campaign. The thing is, actuarial tables aren't oppressive - they're merely reflective of reality. If a particular group presents a higher risk profile than another, the only sane course of action is to be more restrictive when lending to members of that group.
The alternative is for banks to give out easy money again like in the leadup to 2008 and that didn't work out well. I'm sorry that some people can't get mortgages but the answer is not to aggregate out their financial problems onto those of us who do, in fact, pay our bills.
> What I am saying is that now some lenders — banks — are under rules so tough they can’t support equality-enhancing mortgages
What is an equality-enhancing mortgage?
My wife works at a community bank which has been cited as an important institution for social justice on the west coast. Equality enhancing mortgages could well be mortgages accessible to under-served populations who have the financial means to pay them back, but who face cultural barriers or ethnic discrimination.
Community banks have been railroaded out of the home mortgage business. There are now a lot of timing-dependent requirements and really stiff penalties in the banking regulations. It was sold to the public as a curb on the big banks, but what really it means, is that only banks large enough to write their own software or wealthy enough to license custom software can stay in the home mortgage business. Basically, we the public were sold flowery rhetoric by politicians on the wave of sentiment following the banking crisis, while big banks lobbied to write into law an even bigger advantage.
To be fair even if it literally is 100% reflective of reality that doesn't mean it lacks unjust feedback loops. If after generations of past policies the stats say 100% of people with red hair are bandits and the longstanding policy is that they are to be shot at on sight only redheads with plans to rob or kill you will approach within rifle range.
I think the best that can be hoped for is rigorous justification of lending criteria in non pure correlative ways. As opposed to discrimination laundering bullshit like sentencing based on the size of their yard. Judge them via their neighborhood foreclosure rates as opposed to ethnic make up. There are antidiscrimination in real estate laws on the books but I don't know enough to comment upon the current implementation and its pros and cons.
Equality-enhancing mortgages WERE subprime mortgages. Congress pushed the banks into doing them in the early 2000s to extend credit to marginalized populations!
oh man, here we go again! I wonder if Y Combinator will fund my Collateralized Equality Enhanced Swap
This is exactly what lead up to the 2008 crisis. Like, exactly. In the 90s when wage growth was low one of the mechanisms for addressing it was to simply give everybody access to mortgages they couldn’t really afford. By 2008, most banks were levered by more than 30:1. The key result of Dodd-Frank was that it gave the Fed power to influence how leveraged banks were, and now most of them are levered at about 10:1. Changing this would remove the key element of protection against another crisis occurring.
It is so easy to get an FHA loan, if you don't qualify for one -- you really don't deserve it.
This is coming from someone who was able to get a less than 4% FHA $340K mortgage three years after having two foreclosures a short sale, and three additional loans that were settled for less than full value.
Unless you live in an high priced area where rent is going up more than inflation a mortgage isn't really worth it. It ties you to a location and makes it harder to move to where the jobs are.
I think you're reading a partisan meaning into "equality-enhancing" that is not what the speaker intended, and then kicking a strawman down the road. Are you sure that's what she meant, or is it just an easier thing for you to argue against?
Inequality in the context of this interview means wealth distribution. It does not refer to racial equality, as I interpret your reference to affirmative action. "...We Got More Inequality" refers to the ease with which people can borrow money from a bank. New regulations make it more expensive for banks to loan money to people with relatively less capital. So those with less capital have less access to credit. This includes people who are capable of paying off the loans. And those with more capital have easier access to credit, simply because it is less expensive for the bank. So now it is easier for the wealthy to grow their wealth and the result is a less even wealth distribution.
They’re similar to all the government support(subsidized mortgages, education) given to white people post WWII that allowed them to build the generational wealth and greater proportion of middle class standing they enjoy today.
The alternative is to accept we have a lot of people without adequate housing and actively deal with it and quit playing games to satisfy the fetish of spoiled rich people
>> The alternative is for banks to give out easy money again like in the leadup to 2008 and that didn't work out well
It could have worked out well if the Obama administration had just allowed the financial system to collapse instead of bailing it out. The collapse of the financial system would have meant that many poorly run companies would have disappeared and they would have been replaced by newer, smaller and more efficient companies. Europe recovered from WW2 relatively quickly; surely the US could also recover from a partial market collapse.
Before 2008, there were a lot of talented, ambitious people desperately waiting for an opportunity to compete on the marketplace but the government bailouts took away that opportunity and allowed corporations to keep running their inefficient oligopolies uninterrupted. Today, most of these talented, ambitious people have become losers; they're poor and paralyzed by self-doubt. The reality is that they might actually have succeeded if the government had simply allowed capitalism to take its natural course. The carpet was pulled from under them.
Observation: Housing is not affordable (for any but the rich).
Hypothesis: Basic market theory suggests that the need for housing is probably inelastic (everyone needs it, can't do without it), therefore if housing is to become more affordable an increase in supply must happen.
Prediction: If additional housing were encouraged (near where jobs are actually located) prices would eventually stabilize at sustainable levels.
Prediction 2: non-inflated housing prices will also lower the cost of living in those areas, creating a net benefit for members of society (which are not of the rent-seeking classes).
Testing: Please vote according to the above logic.
Seems like the second idea (interest rates should be higher) contradicts the first (it should be easier for banks to make loans to small business). Higher interest rates would tend to discourage loans.
Edit: I guess the idea is to increase supply and reduce demand?
It would discourage people from taking loans, but why would it discourage banks from making them? In fact, higher interest rates would mean that the cost of liquid capital, a bank's main equipment for making money, were suddenly more productive, right?
It doesn't discourage loans. Fast growing small companies are one of the only constituents who can justify higher interest rates. Now giant companies and individuals going on vacation get cheap credit but small businesses mostly can't get any.
Income inequality in the USA has been increasing since the 1970's so whatever theory you have that explains the increase starting in the 1980's is simply incorrect.
“KP: I’m not blaming the banks. I’m blaming the unintended consequences of the rules. I think the rules unduly penalize equality-enhancing financial services.”
(1) Bankers (rich people) lobby to have Glass–Steagall taken out back and shot in the head.
(2) Banks go nuts with financial wizardry leading to a housing bubble.
(3) Bubble bursts which ends up ruining the lives of millions, mostly lower and middle class folk. Nation enters into the worst recession since the Great One.
(4) Banks are bailed out with taxpayer money because banks have somehow become "too big to fail".
(5) Some regulations placed belatedly and half-heartedly on banks because of (1-4)
(6) Hardly anyone rich loses their shirt and hardly anyone is locked up† and some make out like bandits.
(7) Wall Street salaries and bonuses through the roof.
(8) Gov Regulations (along with Fed quantitative easing – the Fed is kind of a collection of banks, no?) exacerbate income and wealth inequality. Where did the Secretary of the Treasury at the time of the crisis, Hank Paulson, work beforehand?‡
(9) Banking policy "expert" Karen Petrou says “I’m not blaming the banks”
(0) In the words of Ace Ventura, “Allllrighty then!”
‡ “Before becoming Treasury Secretary, he was required to liquidate all of his stock holdings in Goldman Sachs, valued at over $600 million in 2006, in order to comply with conflict-of-interest regulations. Because of a tax provision passed under President George H.W. Bush, Paulson was not subject to capital gains tax. This saved him between $36 and $50 million in taxes.”
The article starts out with a "correlation causes causation" argument, and the unsubstantiated claim that the biggest driver of inequality is banking regulation.
Then it implies that business financing matters to the 50-90 percentile of earners. Bullshit detected!
I'm inclined to see this as correlation, not causation. Where is the powerful coupling between <10 years of tighter bank lending standards and income inequality?
Early in my career, I worked at a shop that serviced credit cards for bottom of the barrel subprime customers.
They got slapped by OCC (Office of the Comptroller of the Currency) for offering a card with a $300 limit, that upon issuance, already had $300 in fees billed to it (offering a credit product with no usable credit, or something like that), and settled with them by lowering the fees to $250, and paying a million dollar "fine" — which, IIRC, they were able to both write off, and "earn back" with "good behavior".
I don't think that's exhaustive of "predatory lending", but it's damned well exemplary. And the "punishment" was, too.
Lending to people who will likely default, often by misleading them about the terms of the mortgage. You could also look at it from the other end and say that the people receiving the loans are predatory borrowers: people who can't afford to own the home they want but are taking advantage of lax lending standards to get one.
I think it refers to advertising that your loan is fabulous and easy to get, to people who would be much better off not taking your loan, and who are not sophisticated enough to realise this.
I think "whack-a-mole" might best describe the proclivity for regulation to fix unintended side-effects of previous regulation, causing more unintended side-effects. Or maybe "the cure is worse than the disease?"
Being on a very small governmental body, I witnessed first-hand the tendency to want to "do something" when confronted with a potential problem - And it did come to pass several times that we enacted policy that later seemed to have made the original situation worse or caused another flare-up in issues that had not existed before.
My experience is it can be very difficult to enact good public policy... And frequently an efficient (unfettered) capitalist market will come up with a solution more elegant than what we could contemplate.
Yes and this simple model worked quite well up until the great depression. "But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again" - Keynes
i think your concern about unintended side-effects is very valid, but i disagree with your conclusion.
in most cases, we need more innovative approaches to policy development rather than defaulting to a market as the only alternative.
as an example off the top of my head: using a faster, instrumented, and iterative approach to policy design, as startups are encouraged to do. or, cultivate new methods for finding better, more effective policies quickly (like design sprints, for example).
No, the capitalist market will come up with a solution that is most profitable for business. Occasionally that will line up with what's better for everyone else, but not often.
There are some policies that have lots of unintended consequences. But increased capital requirements is a pretty simple one that we understand. We knew there'd be less lending. That was kind of the point of increased capital requirements.
Freedom is a double edge sword. Some people use their freedom to elevate themselves, others are free to fail. In the West we treat an disinclination to handle freedom responsibly as either a moral failing (the right) or reject the possibility that failing to handle freedom can have anything to do with one's character at all and thus inequality must be blamed on external forces (the left). The truth is it is not necessarily a moral failing to handle freedom irresponsibility and handling freedom irresponsibly very likely has a lot to do with someone's personality.
Serious question, what is the issue with inequality when low income people are overweight and have iphones?
This is obviously a simplification, but in 1 sentence I think I got my point across.
Standard of living is undisputed the best in human history, not even some 1960s era fantasy has overweight humans. This has nothing to do with 'unhealthy' food, this is abundance.
So back to the serious question, what makes inequality bad? Some ideas
>Political inequality
>multi-generational oppression(which doesnt line up with the whole "First generation makes it. 2nd generation maintains it, 3rd generation blows it")
I'm trying to understand the issue with inequality when everyone is living a fantastic by organic life standards.
It is really hard for some people to get out of poverty. I recommend you read this article from a few days ago posted her on Hacker News: https://news.ycombinator.com/item?id=17230047
[+] [-] cs702|7 years ago|reply
"As the country becomes more unequal, there are fewer middle class customers. That means middle class bank products become unprofitable, and banks follow the money. And banking regulations make it worse because the capital requirements imposed after the banking crisis make it a lot more expensive for banks to do a startup small-business loan than go into wealth management. Startup loans are riskier than wealth management, of course, but the capital costs have become prohibitive, and banks don’t lose money on purpose."
Wait, what? I doubt this is the main or even a top-three cause of income and wealth inequality in the US.
Other factors strike me as potentially far more important causes of inequality, including increasing automation of labor, winner-take-all markets, concentration of corporate and market power, minimal antitrust regulation... to name a few.
The banking industry wants fewer regulations and lower capital requirements, as usual. This seems to be its latest rationalization for them.
[+] [-] solatic|7 years ago|reply
To oversimplify, easy access to capital can allow a poor person to turn a great idea that solves real problems and a strong work ethic into a sustainable business that pulls him out into the middle class or higher. Without access to capital, the poor man is beholden to whichever employers are in his area, and whatever is on offer from them - odds are, it won't be enough to allow the poor man to send his children to private school.
[+] [-] grosjona|7 years ago|reply
That's true but I think that winner-take-all markets exist in a large part because of the centralization of capital and how new capital enters the economy.
New money from the Fed flows into the system through massive institutions first; the money trickles down from the government to a few big corporations and then it trickles down to a few big private capital and VC firms and then it trickles down to a select few startups... VC firms collectively run an oligopoly; their main customers are big corporations so they don't have much interest in funding too many competing startups. The corporations which are funding the VCs don't want to acqui-hire too many of the same startups otherwise it gets difficult to justify their M&A strategy to shareholders.
[+] [-] core-questions|7 years ago|reply
What is an equality-enhancing mortgage? My guess is that it's akin to an equal opportunity / affirmative action campaign. The thing is, actuarial tables aren't oppressive - they're merely reflective of reality. If a particular group presents a higher risk profile than another, the only sane course of action is to be more restrictive when lending to members of that group.
The alternative is for banks to give out easy money again like in the leadup to 2008 and that didn't work out well. I'm sorry that some people can't get mortgages but the answer is not to aggregate out their financial problems onto those of us who do, in fact, pay our bills.
[+] [-] stcredzero|7 years ago|reply
What is an equality-enhancing mortgage?
My wife works at a community bank which has been cited as an important institution for social justice on the west coast. Equality enhancing mortgages could well be mortgages accessible to under-served populations who have the financial means to pay them back, but who face cultural barriers or ethnic discrimination.
Community banks have been railroaded out of the home mortgage business. There are now a lot of timing-dependent requirements and really stiff penalties in the banking regulations. It was sold to the public as a curb on the big banks, but what really it means, is that only banks large enough to write their own software or wealthy enough to license custom software can stay in the home mortgage business. Basically, we the public were sold flowery rhetoric by politicians on the wave of sentiment following the banking crisis, while big banks lobbied to write into law an even bigger advantage.
[+] [-] Nasrudith|7 years ago|reply
I think the best that can be hoped for is rigorous justification of lending criteria in non pure correlative ways. As opposed to discrimination laundering bullshit like sentencing based on the size of their yard. Judge them via their neighborhood foreclosure rates as opposed to ethnic make up. There are antidiscrimination in real estate laws on the books but I don't know enough to comment upon the current implementation and its pros and cons.
[+] [-] gammateam|7 years ago|reply
oh man, here we go again! I wonder if Y Combinator will fund my Collateralized Equality Enhanced Swap
[+] [-] AmericanChopper|7 years ago|reply
[+] [-] scarface74|7 years ago|reply
This is coming from someone who was able to get a less than 4% FHA $340K mortgage three years after having two foreclosures a short sale, and three additional loans that were settled for less than full value.
Unless you live in an high priced area where rent is going up more than inflation a mortgage isn't really worth it. It ties you to a location and makes it harder to move to where the jobs are.
[+] [-] beat|7 years ago|reply
[+] [-] maxhallinan|7 years ago|reply
[+] [-] ypzhang2|7 years ago|reply
This leads to a segment of the population (usually lower income, but not always) without broad access to credit or leverage.
[+] [-] florabuzzword|7 years ago|reply
[+] [-] mindslight|7 years ago|reply
[+] [-] unknown|7 years ago|reply
[deleted]
[+] [-] knuththetruth|7 years ago|reply
[+] [-] bofh1d10t|7 years ago|reply
Edit: https://www.cnbc.com/2018/08/08/gop-congressman-chris-collin...
I’m sure things like this are isolated incidents given that members of Congress have a level of immunity from such laws.
Let’s keep discussing market solutions in a market that has been and always will be rigged and rerigged as needed coughpanamapaperscough
[+] [-] grosjona|7 years ago|reply
It could have worked out well if the Obama administration had just allowed the financial system to collapse instead of bailing it out. The collapse of the financial system would have meant that many poorly run companies would have disappeared and they would have been replaced by newer, smaller and more efficient companies. Europe recovered from WW2 relatively quickly; surely the US could also recover from a partial market collapse.
Before 2008, there were a lot of talented, ambitious people desperately waiting for an opportunity to compete on the marketplace but the government bailouts took away that opportunity and allowed corporations to keep running their inefficient oligopolies uninterrupted. Today, most of these talented, ambitious people have become losers; they're poor and paralyzed by self-doubt. The reality is that they might actually have succeeded if the government had simply allowed capitalism to take its natural course. The carpet was pulled from under them.
[+] [-] mjevans|7 years ago|reply
Hypothesis: Basic market theory suggests that the need for housing is probably inelastic (everyone needs it, can't do without it), therefore if housing is to become more affordable an increase in supply must happen.
Prediction: If additional housing were encouraged (near where jobs are actually located) prices would eventually stabilize at sustainable levels.
Prediction 2: non-inflated housing prices will also lower the cost of living in those areas, creating a net benefit for members of society (which are not of the rent-seeking classes).
Testing: Please vote according to the above logic.
Results: To be determined.
[+] [-] skybrian|7 years ago|reply
Edit: I guess the idea is to increase supply and reduce demand?
[+] [-] CamTin|7 years ago|reply
[+] [-] sbinthree|7 years ago|reply
[+] [-] calyth2018|7 years ago|reply
The article pointed out the gulf widened at the 1980s. That should be more than enough hints as to how to fix it.
There's no political will though.
[+] [-] winstonewert|7 years ago|reply
[+] [-] cm2187|7 years ago|reply
But agree, there are probably other reasons, starting with outsourcing to china, automation, under supply of highly skilled workforce, etc.
[+] [-] swagasaurus-rex|7 years ago|reply
[+] [-] hippich|7 years ago|reply
[+] [-] igravious|7 years ago|reply
(1) Bankers (rich people) lobby to have Glass–Steagall taken out back and shot in the head.
(2) Banks go nuts with financial wizardry leading to a housing bubble.
(3) Bubble bursts which ends up ruining the lives of millions, mostly lower and middle class folk. Nation enters into the worst recession since the Great One.
(4) Banks are bailed out with taxpayer money because banks have somehow become "too big to fail".
(5) Some regulations placed belatedly and half-heartedly on banks because of (1-4)
(6) Hardly anyone rich loses their shirt and hardly anyone is locked up† and some make out like bandits.
(7) Wall Street salaries and bonuses through the roof.
(8) Gov Regulations (along with Fed quantitative easing – the Fed is kind of a collection of banks, no?) exacerbate income and wealth inequality. Where did the Secretary of the Treasury at the time of the crisis, Hank Paulson, work beforehand?‡
(9) Banking policy "expert" Karen Petrou says “I’m not blaming the banks”
(0) In the words of Ace Ventura, “Allllrighty then!”
† https://www.bloomberg.com/view/articles/2017-07-26/why-no-on...
‡ “Before becoming Treasury Secretary, he was required to liquidate all of his stock holdings in Goldman Sachs, valued at over $600 million in 2006, in order to comply with conflict-of-interest regulations. Because of a tax provision passed under President George H.W. Bush, Paulson was not subject to capital gains tax. This saved him between $36 and $50 million in taxes.”
[+] [-] JamesBarney|7 years ago|reply
From first principles it makes sense that reducing the price of capital would help workers, and hurt capital owners.
And all the research I've seen backs up this intuition and show that a loose monetary policy helps inequality.
[+] [-] mendelsd|7 years ago|reply
[+] [-] prolikewh0a|7 years ago|reply
[1] https://www.nytimes.com/2015/03/14/upshot/wall-street-bonuse...
[+] [-] ncr100|7 years ago|reply
[+] [-] jwatte|7 years ago|reply
[+] [-] howard941|7 years ago|reply
[+] [-] WalterBright|7 years ago|reply
I've often wondered just what people are talking about when they use that term.
[+] [-] rosser|7 years ago|reply
They got slapped by OCC (Office of the Comptroller of the Currency) for offering a card with a $300 limit, that upon issuance, already had $300 in fees billed to it (offering a credit product with no usable credit, or something like that), and settled with them by lowering the fees to $250, and paying a million dollar "fine" — which, IIRC, they were able to both write off, and "earn back" with "good behavior".
I don't think that's exhaustive of "predatory lending", but it's damned well exemplary. And the "punishment" was, too.
[+] [-] jeffreyrogers|7 years ago|reply
[+] [-] tokai|7 years ago|reply
[+] [-] bboreham|7 years ago|reply
[+] [-] raintrees|7 years ago|reply
Being on a very small governmental body, I witnessed first-hand the tendency to want to "do something" when confronted with a potential problem - And it did come to pass several times that we enacted policy that later seemed to have made the original situation worse or caused another flare-up in issues that had not existed before.
My experience is it can be very difficult to enact good public policy... And frequently an efficient (unfettered) capitalist market will come up with a solution more elegant than what we could contemplate.
I am left thinking this is a basic truism...
[+] [-] petermcneeley|7 years ago|reply
[+] [-] clairity|7 years ago|reply
in most cases, we need more innovative approaches to policy development rather than defaulting to a market as the only alternative.
as an example off the top of my head: using a faster, instrumented, and iterative approach to policy design, as startups are encouraged to do. or, cultivate new methods for finding better, more effective policies quickly (like design sprints, for example).
[+] [-] s73v3r_|7 years ago|reply
[+] [-] JamesBarney|7 years ago|reply
[+] [-] jewelthief91|7 years ago|reply
[+] [-] genericid|7 years ago|reply
[+] [-] mkirklions|7 years ago|reply
Serious question, what is the issue with inequality when low income people are overweight and have iphones?
This is obviously a simplification, but in 1 sentence I think I got my point across.
Standard of living is undisputed the best in human history, not even some 1960s era fantasy has overweight humans. This has nothing to do with 'unhealthy' food, this is abundance.
So back to the serious question, what makes inequality bad? Some ideas
>Political inequality
>multi-generational oppression(which doesnt line up with the whole "First generation makes it. 2nd generation maintains it, 3rd generation blows it")
I'm trying to understand the issue with inequality when everyone is living a fantastic by organic life standards.
[+] [-] Someguywhatever|7 years ago|reply
[+] [-] xutopia|7 years ago|reply