Credit and Inequlity

Some interesting observations from John Quiggin about easy credit in the United States:

The relatively generous treatment of debtors in the US seems to illustrate, at the national level, a pattern found among US states. Pro-debtor institutions are, in political terms, a substitute for redistributive taxation.

Where credit is easy, and the consequences of non-repayment are not too drastic, households can maintain consumption for long periods even when their income is falling. So, the political resistance to pro-rich policies is much less sharp. The massive increase in income inequality in the US since 1970 has coincided with an equally massive boom in consumer credit.

But as he points out, the equilibrium looks a bit shaky at the moment. The dominance of the pro-rich-people political movement in the United States set the condition for the recent bankruptcy reform which made it much harder for people to get out of their credit card debts. That, combined with declines in the housing market, has led to the increase in jingle mail that we're now seeing. Financial institutions will surely want protection from that, too.

Comments

Via Metafilter:
According to the latest biweekly numbers released last Thursday by the Federal Reserve, for the two weeks that ended January 16th American banks had negative $1.3 billion in non-borrowed reserves. This is, historically, extremely unusual; just two months ago they had $30 billion (positive, of course) in non-borrowed reserves. The only reason some banks haven't been shut due to insufficient -- negative! -- reserve requirements is that the Federal Reserve is currently loaning them enough money through the brand new TAF (Term Auction Facility) program (also running in Canada and Europe) to make up their shortfalls. Today's TAF press release says that 52 American banks or institutions are currently receiving loans totaling ~$40 billion -- but the Fed refuses to name who they are.

Posted by steve duncan | January 30, 2008 9:39 AM

Another factor in the jingle mail phenomenon is the 'financialization' of home ownership. If your mortgage is really just a variety of real estate investment, then there's no shame in walking away from it.

Posted by MattF | January 30, 2008 9:50 AM

MattF is correct. There are a lot of people who are defaulting on their mortgage because it was an investment property, so in the grand scheme of things the homeowner loses very little through this course of action.

Of course then there is Tent City in Ontario California. Maybe we should dub it a "Bushville"?

Posted by freddiemac | January 30, 2008 9:56 AM

Here is an amerature's guess at what's going on here, at least at a very low level. This is a dispute between creditors and debtors. Creditors want deflation (to be repaid in more valuable dollars.) Debtors want inflation (to repay in less valuable dollars.) As Bernanke knows, deflation is a disaster, so slight inflation is usually the answer with higher interest rates creating the financial profit. When creditors become debtors (Countrywide, Societe Generale, negative $1.3 billion in non-borrowed reserves thank you steve duncan) we start to see the nature of the problem with inflated home prices. There are huge deflationary pressures (value leaving the economy) and the Fed's tool is to raise/cut interest rates. People way smarter than bloggers and their commenters are going to struggle with this one. I can't wait to watch.

Posted by Peter Driscoll | January 30, 2008 10:05 AM

Quiggin's invocation of fixed-rate contracts as favoring borrowers seems kind of weird when the mortgage meltdown is being caused by adjustable rate mortgages and failed credit standard policies by lenders.

No one forced lenders to give out money to subprime borrowers and suffer a loss on defaults. The entire issue doesn't have anything to do with bankruptcy protections or "pro-rich" policies. The reason we had the mortage crisis is too much credit chasing too few trustworthy borrowers.

Posted by Helter | January 30, 2008 10:16 AM

amerature's? amateur I can't spell, I knew that. But I ought to read what I can't spell before commenting.

Posted by Peter Driscoll | January 30, 2008 10:29 AM

Something to keep an eye on: many banks who lost big in the mortgage game also have depository lending. The depository side of things are propping up sorry banks like WaMu and Merril Lynch. So watch out for a big push in that industry. I'm not saying another bad lending bubble will spike in that sector because there is too much regulation, but as that is the only lending that is making money these days it is interesting.

Posted by freddiemac | January 30, 2008 11:09 AM

Easy credit allows the elite to take the money of the poor, but unlike real money, offers no way for the poor to increase their status in this society.

To use the old cliche, that's not a bug.

Posted by soullite | January 30, 2008 12:28 PM