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 Takimag.com, 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.