Blaming the Poor

You have, no doubt been wondering who to blame for the current market meltdown. Was it the greedy bankers, the venial politician, the Wall Street manipulators? Was it a free market failure? All of the above?

The right-wing blogosphere answers, “It was the poor.” And, of course, their powerful corporate and congressional allies. We all know how powerful the poor are; we just never heard before that they were capable of bringing down the whole financial system. But the right wing has uncovered the nefarious plot. For example, Grant Havers, at, states that the “Democrats insisted on a mass affirmative action program to help the poorest Americans acquire mortgages they could never afford.” Stan Leibowitz of the Independent Institute claims that in the drive to increase homeownership, “particularly by minorities and the less affluent, virtually every branch of the government undertook an attack on underwriting standards.” Neil Cavuto of Fox News laments “Loaning to minorities and risky folks is a disaster.” And National Review Online proclaims “One of the reasons so many bad mortgage loans were made in the first place is that Barack Obama’s celebrated community organizers make their careers out of forcing banks to do so.”

What is the act that has all the right up in arms? It is an obscure law known as the Community Reinvestment Act (CRA) which was passed in 1977. How did this 30 year-old law cause the current crises? According to the mythology, community groups like ACORN used it to strong-arm banks and mortgage companies into the subprime business. Hence, the poor bankers, under threat from community organizers like Barrack Obama (yes, “that one”) were forced into a business they had no intention of entering.

The interesting thing about this claim is that none of the bankers and mortgage bankers are making it. In fact, most of the loans were made by organizations not even covered by the act, as Business Week points out. The CRA was originally passed to combat “red-lining,” the practice by which credit-worthy applicants were denied loans because they lived in certain neighborhoods which the banks had “red-lined.” In fact, loans made under the CRA “loans made under the CRA program were made in a more responsible way than other subprime loans,” according to Business Week.

So why the effort to blame the poor in this matter? The reasons are partly political and partly ideological. For the defenders of the free market, the subprime meltdown has been a big embarrassment. The fact that the market could err as badly as it did contradicts the theory of an all-wise and all-knowing market. “If only the market is unregulated, everything will work out fine.” Well, no, actually. The market is capable of great errors, errors the rest of us are expected to pay for.

The other reason is that the right is desperate. McCain's campaign seems to have stalled, and the economy is the biggest reason. Having someone to blame, and especially “minorities.” absolves the right and the Republicans of any responsibility.

Which is unfortunate. Understanding a problem is the first step towards fixing it, and misunderstanding guarantees that the “fix” will only make it worse. The left is out to blame the greed of the bankers, and the right the venality of the poor. Both answers are wrong. To be sure, there are those who are greedy, or venial, or both. But this is not the root cause of the problem. The real root concerns the way we create money.

Money is created by the banks (not, as the myth has it, by the government), who must keep creating money, even when there is no need for it. Ideally, banks would only lend to solvent borrowers for productive purposes. But suppose there is a shortage of productive investments. Suppose that the productive economy was actually shrinking, that jobs were being shipped overseas and not being replaced. Suppose that wages were stagnant or shrinking, so that demand was actually diminishing. In such circumstances, there would be little need for new money. But the banks must keep creating money in order to stay in business. In such circumstances, they will be forced to lend to weaker consumers to prop up demand and to speculators, whose demand for money is infinite.

This is, in fact, the circumstances in which the American economy finds itself. Median wages have been stagnant for the last 30 years and have actually shrunk since the start of the Cheney-Bush administration. The banks had to find borrowers, and the pool of prime quality borrowers was insufficient. So they went to subprime borrowers.

This actually worked pretty well. One thing must be clearly understood: the subprime market did not fail; it had a higher rate of foreclosures, but that was already priced into the higher interest rates. Most subprime borrowers are paying their notes, and will likely continue to do so until the economy collapses and they lose their jobs. They not the cause of the problem. Rather, the problem is caused by the vast market for “derivatives,” a series of side bets on the mortgage markets (See Economic Truth and the Bailout.)

One can legitimately critique the CRA on a number of grounds. One can certainly critique ACORN, or Obama, or the Democrats, or whatever. But to say that the CRA forced even a single subprime loan simply ignores the facts and keeps us from addressing the real problem. It may soothe our ideology, and may be useful in our politics, but it is sure to prevent us from addressing the very real problems we face. These problems have to do with rebuilding the real economy. Even the banks are victims in the current system; they did what they had to do to stay alive, and it killed them.

But even more importantly, this myth-making breaks the solidarity with the poor, and solidarity should guide all of our policy decisions.


Anonymous,  Saturday, October 11, 2008 at 7:01:00 PM CDT  

In as much as this whole economic rigmarole is a consequence of the choices our society has made, I don't think it's absolutely inappropriate to blame "the poor," if by "the poor," we mean the people who did not have the income to be able to afford mortgages on expensive houses, and who bought on credit the lifestyle they wanted but could not afford.

I'm not saying that blaming the poor makes any more sense than blaming just one of the groups that were involved in this...politicians, bankers, and whomever else you choose to name. I don't think that the poor need a pass just because they're the poor.

Which I feel entitled to say, belonging by technical definition to the aforementioned demographic. :)

Anonymous,  Sunday, October 12, 2008 at 6:54:00 AM CDT  

The evidence that CRA did not play any role in this mess is the huge advertisement spending made by the financial institutions in order to gain more clients. Of course they were not under threat or any form of intimidation from the State or from community organizations to do such moves but Republicans will make anything before admitting the failure of their beloved neoliberal and neocon doctrines. Fortunately this time most of the electorate is aware of their corrupt and dishonest tactics and fabrications.

Anonymous,  Sunday, October 12, 2008 at 12:10:00 PM CDT  

Sure, I can't argue that the baring the of the flaws of the system is a good thing...but the problem is that we live in a universe of horribly flawed political options. I really, really don't think that the solution to this problem is to put Obama in the White House, and at least for me a Republican administration usually has the advantage of being pro-life. I'll also grant that the current option is flawed even in that department though, so you see before you a very unsatisfied Wolfanwalt.

DBC Reed Sunday, October 12, 2008 at 3:25:00 PM CDT  

I think you are exonerating politicians a little. Being on the side of home ownership plays well electorally and George W Bush still has A Fact sheet America's Ownership Society on the Net which is almost Distributist in its idealisation of homeownership, except that it does nothing to help people pay for the houses!In the UK there is little pretence of ending institutional racism (such as redlining).Fixing up people with houses that appreciate in unearned value is just easier than fixing people up with well-paid jobs and gets you elected,so it was fallen into, possibly by accident, by the Conservatives then taken up by Liberals and most enthusiastically by New Labour.A lot of people see it as bribery but using the people's own money.

Anonymous,  Monday, October 13, 2008 at 11:55:00 PM CDT  

For the "poor" utilizing easy credit becomes more of a rational decision when it is advertised to saturation and all your neighbours are living beyond their means. In the midst of an orgy, chastity is maligned. The public discourse of the rich nations has been dominated by greed for too long. Like any other human enterprise, the "wisdom of crowds" is quite fallible.

Anonymous,  Tuesday, October 14, 2008 at 7:49:00 PM CDT  

I touched on this issue during a recent program, but the focus was far more various initiatives advanced by President Bush.

Steve Sailer, a movie critic and contributor to The American Conservative magazine, has written extensively on this issue for quite some time. While I am not in lock-step with his assessment, I think some of his points are worth careful consideration.

Anonymous,  Thursday, October 16, 2008 at 11:21:00 AM CDT  

I'm all for blaming capitalism for the failures of Wall Street.

After all, capitalism is an inherently exploitative system.

However, blaming markets does not seem, to me at least, correct either.

I think you first need to define what you mean by market.

Anonymous,  Friday, October 17, 2008 at 12:57:00 AM CDT  

This chart, taken from the US Census Bureau, seems to contradict the "no growth in median income in the last 30 years" thesis. It shows 31% growth over about 38 years. Still nothing spectacular, to be sure, but not quite so bad as the 'flat' hypothesis would argue.

Is there any reason to distrust this chart?

John Médaille Friday, October 17, 2008 at 9:34:00 AM CDT  

Anonymous asks /wiki/Image:Household_income_65_to_05.png

Is there any reason to distrust this chart?

The chart deals with a different subject, and in fact reinforces the point. The chart deals with household income, not median income. In the years since 1967, many wives entered the workforce, or went from part-time to full-time work. The $11,000 increase came at the expense of the family giving a lot more hours to paid work. I don't have the exact figures to hand, but the amount of work/household has increased dramatically in that timeframe, yet the increase in income has been relatively modest.

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