Development Economics

Did the Poor Cause the Financial Crisis?

“There are two things that matter in politics. The first is money. I can’t remember the second.” – Mark Hanna
In December, a group calling itself the Republican Commissioners on the Financial Crisis Inquiry released a report titled the “Financial Crisis Primer,” which provides an explanation for economic crisis.  According to the report’s authors, the big lenders, including the government, gave too many high-risk loans as part of a government-directed strategy to increase home ownership in the country.  Because the price of housing never goes down (allegedly), creating a financial environment where everyone can afford to buy a home is a no-brainer, since the asset is guaranteed (almost) to increase in value over time. Once all the credit-worthy, middle-income customers received loans to buy a house, lenders started to look to low-income population as a viable market.  They started pushing subprime loans with introductory “teaser” rates that would eventual re-adjust and send the person who couldn’t really afford the house in the first place into bankruptcy.  And the driving force behind this whole sequence of events was a social policy to increase asset ownership among the low-income segments of the population, otherwise known as the poor.   This dynamic is explained here in the introduction to the Primer:
(more…)