The Inequality Under-Belly of “Sound” Consumer Finance

By Federal Financial Analytics

In remarks on Tuesday, Karen Petrou will lay out two reasons why post-crisis financial regulation makes America less equal: rules are is aligned with real-world business incentives and capital standards unduly penalize equality-critical lending.  Basing her views on Federal Reserve research, Petrou focuses on the Durbin Amendment, qualified-mortgage standards, small-dollar/short-term lending, and subprime mortgages.  Continue reading “The Inequality Under-Belly of “Sound” Consumer Finance”

SIFIs and Sisyphus: The Latest Bank-Regulation Rewrite

By Karen Petrou

Starting in 2010, U.S. regulators erected a pyramid of complex, costly, and stringent safety-and-soundness, resolution-planning, and conduct regulations for the largest U.S. banking organizations that have come to be called SIFIs (i.e., systemically-important financial institutions).  Starting in 2018, the agencies began to demolish the still-incomplete SIFI pyramid, issuing on October 31 two sweeping proposals (here and here) not only to implement new U.S. law, but also to go farther.  Bankers say this is nice, but not enough; critics lambast the proposals as forerunners of the next financial crisis.  Either could be right – the proposals repeat the most fundamental mistake of post-crisis financial regulation:  rules piled upon rules or, now, rules subtracted from rules without even an effort to anticipate how all of the revised rules work taken altogether in the financial marketplace as it exists in the real world, not in a set of academic papers or political edicts. Continue reading “SIFIs and Sisyphus: The Latest Bank-Regulation Rewrite”

Can We Create Equality Insurance?

By Karen Petrou

Much of the work posted so far on this blog centers on the traditional pillars of financial policy:  monetary policy and the sweeping post-crisis framework of bank regulation.  But, awesome though the Fed’s reach may be and as critical as banking is to income and wealth equality, these financial-policy channels are not the only ones that determine economic equality.  In this blog post, we assess another policy channel:  health, property-and-casualty, and life insurance.  With almost no research in this sector, we pose questions based on what we’ve read and what we think we know based on all our other works.  At the least, insurance requires equality evaluation and, quite likely, significant changes so it makes low-and-moderate income and wealth families healthier, readier to retire, better positioned to bequeath wealth to their children, and all around more equal. Continue reading “Can We Create Equality Insurance?”

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”

Hard Work, Low Pay, High Costs: Life on the Ground in a “Well-Performing” Economy

By Matthew Shaw and Drake Palmer

Recent jobs data sparked excitement as news reports talked of how America is finally going back to work.  This is understandable optimism, based as it was on a concurrent rise in labor-force participation and a drop in the government’s preferred measure of unemploymentHere, we assess whether the Fed’s “solid” and “very well performing” economy has finally allowed low-and-moderate income (LMI) households to share the prosperity rapidly pooling at the very top of the income and wealth distribution.  In short, and sad to say, it isn’t – hourly pay for low-wage/low-skill workers has declined in real (i.e., inflation-adjusted) terms over the past four decades and is essentially flat since 2010.  As we noted in our last blog post, wealth concentration has soared since the financial crisis.  Even if a corner has now been turned for everyone else, it’s just a very tight one at the bottom of the equality canyon. Continue reading “Hard Work, Low Pay, High Costs: Life on the Ground in a “Well-Performing” Economy”