Inequality Rising

By Karen Petrou

As the COVID crisis continues, some have speculated that wealth inequality will drop because it did in the 1400s during the Black Death.  However, this cure is not only of course considerably worse than the disease, but it’s also no cure.  Economic inequality is a cumulative process – the worse off you are, the worse off you get unless something positive reverses this compound effect.  Conversely, the better off, the still more comfortable unless something comes along to redistribute your gains, however well or ill gotten.  Given how unequal the U.S. was before COVID, it will surely get only more so now, especially if the Fed stays the course with trillions for financial markets and pennies for everyone else. Continue reading “Inequality Rising”

The Low-Income High-Risk Myth

By Karen Petrou

In the wake of the great financial crisis, an axiom of consumer finance is that high-risk borrowers are disproportionately lower-income people.  Indeed, the term “subprime” has become a virtual synonym for the lower-income households generally designated with low credit scores and, thus, the subprime sobriquet.  However, a growing body of research demonstrates conclusively that subprime borrowers were not the villains of the mortgage debacle at the heart of the 2008 cataclysm:  it turns out that prime borrowers behaving in subpar ways defaulted far more often than low-income households trying to become homeowners. Continue reading “The Low-Income High-Risk Myth”

It Wasn’t the Butler

By Karen and Basil Petrou

Summary

In the raft of crisis retrospectives released during the ten-year anniversary of the Great Financial Crisis, general consensus continues the conventional wisdom that subprime mortgages were the spark of the subsequent conflagration.  A new study from the Federal Reserve Banks of Atlanta and New York mobilizes formidable data to show that hapless subprime purchase-money borrowers were victims, not perpetrators.  The borrowers who did the damage that precipitated the debacle were, they find, prime borrowers whipped into a speculative frenzy by the combination of low rates and flagrantly-unwise mortgage lending.  Theoretically, post-crisis reforms have solved for this.  Actually, maybe not given the exodus of mortgage securitization from regulated entities, sharp rise in cash-out refis, and investment-focused borrowing with house prices well above affordability thresholds in many major markets.  Continue reading “It Wasn’t the Butler”

Still Economic Waters Hide Lurking Danger

By Karen Shaw Petrou

On Tuesday, FRB Chairman Powell delivered a strongly-positive statement on the state of the U.S. economy.  Citing factors such as recent wage growth and employment, Mr. Powell is far more worried about keeping the good times going than about how inequitably the good times deliver the goodies across the gaping U.S. income and wealth divide.  This is setting monetary and regulatory policy the same way a diver looking only at a calm, blue surface jumps into a lake and breaks his neck.  Continue reading “Still Economic Waters Hide Lurking Danger”