printWSJ: “The democratization of credit began decades ago. Federal legislation in the late 1970s required banks to avoid discriminatory lending and meet the needs of local communities, spawning a wave of home buying and entrepreneurship in lower-income neighborhoods. The rate of homeownership in families with incomes in the bottom two-fifths rose to nearly 49% by 2001 from below 44% in 1989, according to Fed data analyzed by Mr. Mann at Columbia.”
[This is not what that ignoramus Michael Moore claims. The sad thing about the man’s propaganda is that nobody among the so-called conservative MSM can refute it with reference to First Principles.]
“But the financial crisis and recession have reversed … the ‘democratization of credit,’ forcing a tough adjustment on both low-income families and the businesses that serve them.”
‘We saw an extension of credit to a much deeper socioeconomic level, and they got access to the same credit instruments as middle-class and mainstream Americans,’ says Ronald Mann, a Columbia University law professor. Now, ‘it will be harder for families at the bottom of the income ladder to get credit cards,’ he says.
The financial crisis has forced lenders to be especially cautious with the riskiest borrowers, a category that low-income families often fall into because their debt tends to be higher relative to income and assets. The ratio of credit-card debt to income is 50% higher for the lowest two-fifths of Americans by income than for the top two-fifths, Federal Reserve data show.”
[SNIP]
The following aside is beside the point, but my guess is that if a multiple regression analysis were conducted, IQ would be the underlying variable that would stubbornly crop up to account for this alarming, yet ostensibly unintuitive, ratio of debt to income in low-income individuals.
IN ANY CASE, do you agree that the democratization of credit is on the wane? I find that a dubious statement. The latest legislation described has not eliminated the imperative to lend to risky entities and individuals, so much as it has created, as ever, unintended consequences. These contingencies have, so far, caused banks to twist like pretzels in order to find legal ways around eliminating risky borrowers.
I work in a sector where we issue credit, and, no, I have not seen a drastic reduction in the extension of credit to a lower income demographic. The credit is issued usually with a lower limit but it is still issued. After all, those who can barely pay are the most profitable customers. Those who can easily pay the least so.
Don writes
“After all, those who can barely pay are the most profitable customers. ”
I will bet any Loan Shark will agree LOL
With the government essentially underwriting 100% of all mortgages and keeping alive several of our largest financial institutions as “zombie banks”, I would take issue with the cited article.
When you combine ownership of the lenders with the power of the printing press Washington can simply order the banks to lend money to whomever they please. I expect Washington will order the commencement of one final blast of lending next year (along with a big surge in government hiring) to try and improve the economy ahead of the ’10 elections.
This of course will deepen the already considerable difficulties the nation faces, but allows the day of reckoning to be pushed back a bit further. The endgame approaches, and it’s not going to be pretty.
What we see in South Africa is that banks will not shut you out, but rather slap you with a ~30% interest rate on credit. The best deal you can get is from Virgin Money that charges you a “mere” 19%. This does go a long way in subsidizing risk, but it’s damned expensive for us normal folk.
“caused banks to twist like pretzels in order to find legal ways around eliminating risky borrowers.” We get a call every couple of weeks from our bank asking us if we want to borrow some money. We’ve been customers for thirty years and once in a while borrow a few dollars to keep up our credit rating in case of an emergency. By contacting us a possible good risk, they can show the government auditors that they are trying to give it away but not getting any takers, thereby ignoring the high risk borrower.
Implicit in the article is that credit, or at least “cheap” credit, is yet another right conferred by the government. “Professor” Mann seems puzzled by this and perhaps even upset.
Too bad he never worked in sub-prime mortgages as I did. Many of the applicants I dealt with were “victims.” That is, they had poor credit scores primarily because they refused to pay their debts! Or they had poor self-control. They would go out and buy a boat/car/ATV on credit soon after being qualified for a home mortgage. What they didn’t realize was that lenders pull a second credit report immediately before closing. They do this to confirm nothing has changed in regards to a borrower’s ability to pay. Sometimes the changes would be positive. For example, a borrower could off old debts or have a lien released. But many times the changes on the credit report were negative.
“Credit” under our current government backed fractional reserve banking system is THEFT of purchasing power.
Don’t be so proud of your high “credit” scores then. [Most certainly DO!]
Ilana, is this too controversial a point or do you disagree? Rothbard’s The Mystery of Banking makes this clear,IMO.
Meanwhile, feel smug toward the victims who have been tossed a few socialist crumbs to corrupt them. [Come again?]
I believe Jamie is on target. With the CRA combined with Fannie and Freddy, I’m not sure how much more “democratic” lending can become. Talk about First Principles, where did we get the notion that lending should be democratic? Barney Frank is still harping about “relaxing” lending standards. Do we have any standards at this point? Let’s not mention the debate about whether or not people are actually “helped” through obtaining loans for which they really do not qualify. That’s another good discussion to have on the basis of First Principles.
“IN ANY CASE, do you agree that the democratization of credit is on the wane? I find that a dubious statement.”
Dubious, and gullible.
A Congress without the compunction to investigate its own members’ unethical and criminal behavior (see Charles Rangel, Nancy Pelosi & husband, et al – well, perhaps the “et al” explains it all) will not hesitate to buy themselves more seat time in the halls of power by distributing ever more credit – but first, debt relief.
Barney Frank’s “cramdown” legislation is not likely to go anywhere or garner any White House support for being too transparent. The president has shown himself to be fonder of obfuscation in the pursuit of the obvious.
Oh, I’d completely forgotten re the democratization of credit this:
“Community Reinvestment Modernization Act of 2009.”
There’s no end to the stupidity/perfidy – or the credit/debt.
[Most certainly DO!]
[Come again?]
fractional reserve banking in a nutshell:
1. Banks create credit (temporary money) out of thin-air by lending it out in exchange for IOUs as collateral and for interest. This is inflation. The purchasing power comes from all dollar holders including the poor. This is theft by inflation for the sake of banks and borrowers and the government. Here is where the boom part of the boom/bust cycle originates.
2. As loans are repaid, the credit (temporary money) goes back to thin-air except for the interest paid to the banker (BTW, where does the interest come from?) This is deflation which forces prices to drop for businesses. This is the bust part of the boom/bust cycle. Does it repay those whose purchasing power was stolen during the boom phase? Perhaps. Perhaps not! But in the very best case, it is an involuntary “loan” of purchasing power. But also it threatens their jobs via falling prices.
Fractional reserve banking has lasted a long time partly because it spreads the corruption widely.
Hence, don’t be so proud of your high credit scores. You have been suckered into theft by a corrupt banking system. [Not living on credit does not a thief make. G-d knows where you get this from.]
The poor are tossed a few crumbs in compensation via socialism and some people complain.
Let’s abolish the government backed banking cartel and the number of poor would soon be minimized. [Agreed, but this is not an argument for personal debt or irresponsible conduct.]