The volte-face in this post by Robert Reich is a real howler.
When the Fed decides to fight inflation by raising interest rates and
cooling the economy, it’s the poor who are the first to be drafted into
the inflation fight because their jobs are the most tenuous, and
they’re the first to lose them. When the Fed decides to ease up and
reduce rates, it’s the poor who are among the first to get the new jobs
because employers who are most likely to hire at the start are small
service businesses offering jobs at the bottom rungs of the wage scale.
I might not put it that way but nothing crazy so far. He continues:
But the Fed affects the poor in another way, too. It determines their
access to credit. And here as well, the Fed’s decisions can either be a
great boon to poorer Americans or a huge curse, depending on how
responsibly the Fed manages the credit markets.
I agree. So where do you think the argument is going from here? He’s going to make the point that when the Fed reduces rates that helps the poor to get credit and a too quick tightening could increase unemployment and create a credit crunch, right? Nope.
In this respect, it’s done a lousy job in recent years. In the early
2000s, rates were so low that banks didn’t know what to do with all the
extra money they had on hand. But instead of keeping an eye on bank
lending standards, the Fed looked the other way. The result: Credit
standards were disregarded in a tidal wave of sub-prime lending to the
poor home buyers…
Ouch, that one gave me whiplash. The Fed has done the poor a disservice by looking the other way while the poor got loans at really low rates of interest. Thus, high interest rates are bad for the poor because they can’t get jobs and low interest rates are bad for the poor because they borrow too much money.
Reich argues this way, of course, because he thinks that the poor can’t handle their money. I’ll add Reich to the list of credit snobs.
H/T to Steven Bass at Trivial Reasons.
P.S. Person 1, Dave 0.
I have some sympathy for your disdain, credit snobs, etc.
But also think I’ve heard this subext before … just because a 6-year SUV loan is stupid in some cases, that doesn’t mean it is stupid in all cases … so let’s let everybody off the hook (no matter how many of them are “upside down” at the moment).
What I think happened was that human beings, social creatures that we are, adopted a new and dangerous idea for what was acceptable debt management. And yes, some who didn’t really understand their debt (rich _or_ poor) went along with their neighbors and piled it on. As I was told in the suburbs, “debt is good.”
As economists I’m sure you can do the maths, and can make arguments for when debt is really good … but for God’s sake don’t use that skill to make some sophistic argument that everyone else has done the same maths.
It’s possible that he’s somehow arguing that the poor are worst hit by lowered rates because of the inevitability of the rates later rising (combined with getting ARMs). It’s possible that he’s just arguing that the Fed should not raise rates to try to fight inflation as much as it does, that it should let us have a bit more inflation. Given that inflation affects people with money more and the poor and debtors less, he could perhaps be making that argument. Easy money and inflation has been a policy of the Progressive Left before, certainly.
Otherwise, I could conclude that he’s making a simple argument that the poor tend to be least-equipped to face any sort of disruption or hardship. But that’s practically self-evidently true– what else would being poor mean? More importantly, it hardly would argue for any sort of public policy, at least at the Fed.
Alex,
There is a difference between snobbery and prudence.
The snob lender would say, ‘I will not lend to this person because I do not like their footwear/taste in T-shirts/accent, etc. They are obviously not the right sort of person’.
A prudent lender would say ‘I will not lend to this peson because they are looking to borrow more than they can service/they do not have a stable employment history/they cannot display a credit history’.
Reich may or may not be a credit snob, Alex (I don’t think he is, as far as I can see he’s only following the economist’s principal duty of counselling caution); but if he’s a credit snob then I hope you’re happy with the appellation ‘bankruptcy pimp’.
On this side of the ocean (I’m in Eastern Europe) there is a widespread belief that “the poor cannot cope with any sort of change”. If one believes this, deducing how exactly they suffer from falling interest rates or rising interest rates becomes a purely technical task.
While that is no doubt a deductive way of reasoning, with the belief coming first, there is probably some truth to it. Were interest rates stable, handling one’s money would boild down to simple math; yet in an unstable environment it requires continuous flow of information, and the poor surely consume less of WSJ per capita.
“Hello, Mr. Poorman, I’m Robert Reich, and the government sent me here to help you. Now, interest rates are really low, but I want to warn you against borrowing any money. You see, I know you might be tempted to borrow so you can move out of your run-down apartment and become a homeowner in a better neighborhood. Less crime, better schools for your kids (by the way, you probably have too many kids, but that’s another story). But you know, you’re so stupid and lacking in self-discipline that you can’t really be trusted to borrow anything. Why, the next thing, you’ll be borrowing money to buy booze, drugs or lottery tickets. So I want to warn you against this temptation. But does this make it OK for you borrow if interest rates go up? Haha, Mr. Poorman, I think you know the answer to that one! Of course it’s not OK! High interest rates make credit too expensive, and you might get in over your head! So just forget about borrowing! You’re obviously a real dunce, so just stay in your rotten apartment in your crime-ridden neighborhood and forget about ever getting out. After all, I’m a card-carrying liberal, and I demonstrate my moral superiority by feigning concern for poor people while I patronize them and secretly despise them. If you doubt me, just ask Bill Clinton!”
Great post. Reich reminds me of the old joke about the NYTimes headline: “Blackout Hits City, Jews and Blacks Suffer Most”
Reich argues this way, of course, because he thinks that the poor can’t handle their money.
And what if that’s true, and they can’t? It’s not a foregone conclusion that offering people loans is in their best interest. Rather than name-calling, how about seeking out evidence one way or the other?
Funny that those who would most often attack political correctness practice their own form when convenient.
It does not imply policy in my mind to make the simple connection that financial skills might correlate with wealth. Though, I guess that is the fear, and the reason for the selective blindness. Do you fear that if you admit that correlation you will be endorsing a nanny?
It’s laughable really, because people otherwise speak of financial best-practices must suddenly argue that wealth is random, and that the distribution of skills (in mathematics or risk assessment) is even across income levels.
Oh, and another thing: isn’t the fact that someone took a 10+ percent loan (in the current environment)
itself prima facia evidence of irresponsibility? How can you justify paying that high of an interest
rate on a home? Your loan rate has *beaten the S&P for the past seven years!* At that point, a home is
no longer an investment, it’s consumption.
“What should I be called if I think that Reich is correct (at least in a large number of cases) that the poor will mis-manage their credit, but I think that this situation is preferable to the alternatives?”
One free-market friendly alternative would have been a little more fear and a little less debt willingness.
Do economists love and encourage debt? Just enough? Or too often? To what degree did Federal economists create debt-love?
Nicely put, Hamilton.
Rich,
For your position to be reasonable, the average mortgage delinquency rate must be 15% at all times and under all circumstances.
Is it? Or is a 15% default rate a disease of easy money? To my eyes that does not look a healthy number…
Ned,
Your contention is a fallacy. That money is cheap does not mean it should be borrowed for its own sake.
I leave some money at CountryWide Bank, only because they assure me (they jump out of their chair to assure me!) that they are FDIC insured. Unintended consequences?
Reich is wrong about the cyclicality of demand for low-skilled labor. When the Fed raises rates, the sectors that are hurt the most, and also the earliest, are residential construction and manufacturing of business capital goods. Both of these sectors pay above-average wages. The sectors that pay below-average wages, retailing and consumer services, tend to be more stable. (That’s not to say that the low-skilled are immune to harm from cycles, just that they are not the most sensitive to cycles.)
Ned @ 11:42 am — That was really funny! Thanks for the laugh.
Sucks to be poor. . .
Earlier today, attempting to boil down to a bite sized nugget what it is that made a person “Left” or “Right” it seemed to settle on one thinks a governing body has a right and a need to “assist” or interfere – depending on one’s perspective – in the lives of individuals. Whereas the other side says, to varying degrees, mind your own business.
While the none of your business crowd may be derided as selfish, at least they’re not screamingly arrogant. And besides, that kind of selfishness also gives rise to philanthropy, kinder religions and subsequent charities. (The bothersome religions are ran by the arrogant types.)
Almost all surveys in OECD countries show that the level of financial education among the public is quite low. On the other hand, households are confronted with increasingly broader and more demanding financial choices. One needs not to be a credit snob to think that there might be potential for suboptimal outcome here. Enhancing financial literacy should be a government priority.
Martin-
The subprime market is only a small part of the overall market (I think it was around 7%) so that 13% being behind in payment is approximately 1% of the total market. Given the consequences for subprime lenders who are poor underwriters – disappearance – I expect that the market will correct most of the mistakes that were made. The market is a great mass of experiments and ventures that are constantly being refined and corrected.
Let’s not forget the other 87% of subprime borrowers (about 6% of the total market) who are not behind in payments and certainly benefited from the availability of credit. So much of the negative portrayal of the subprime situation is based on the supposed bad outcomes and ignored the other much larger and positive side of the ledger. But then, isn’t that how most government regulation gets its start?
I bought my current house in 1986, near the peak of a housing boom in Northeast NJ. After 1986, prices actually declined for a few years and then began a slow increase into the late 1990s. Only in the last 5-6 years has appreciation quickened. I think the peak was hit in 2005-06. Based on other sales in my area, I suspect the potential sales price of my house is 10-15% below what it would have sold for at the peak. So what? I estimate that the appreciation rate of my house over the 20-year period is about 4-4.5% per year, through boom or bust. A little better than inflation.
My economic knowledge is pretty rudimentary, and I considered my string of posts here yesterday to be an infrequent lapse. I figured it was justified by my low posting history, and my plan to fade away again ….
But LOL Mark, with respect to “Loan Sharks,” if those definitions make it to top-level, why not “bankruptcy pimp?”
When I read Reich I hear voices. Actually, just a voice – his. And that’s annoying.
So it sounds like Mr Reich would agree with Mr Rothbard that the Fed can only do harm and should be abolished ASAP. I didn’t think converting him over to the Austrian bandwagon would have been nearly that easy.
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