How Inequality Drove the Subprime Mess

A few months ago I worried that many subprime borrowers were concerned parents terrified of losing a bidding war for places in good school districts. Today Robert H. Frank, with his usual perspicuity, explains that dynamic in a concise and convincing op-ed:

In a well-intentioned but ultimately misguided move to help more families enter the housing market, borrowing restrictions were relaxed during the [decades leading up to the subprime meltdown]. Down payment requirements fell steadily, and in recent years, many houses were bought with no money down. Adjustable-rate mortgages and balloon payments further boosted families’ ability to bid for housing.

The result was a painful dilemma for any family determined not to borrow beyond its means. No one would fault a middle-income family for aspiring to send its children to schools of at least average quality. (How could a family aspire to less?) But if a family stood by while others exploited more liberal credit terms, it would consign its children to below-average schools. Even financially conservative families might have reluctantly concluded that their best option was to borrow up.

Todd Zywicki faults Frank for failing to acknowledge that rising tax burdens have caused middle income families to lose as much (or perhaps more) financial ground as a home finance arms race. I hope that Prof. Zywicki will take a look at the proposed progressive consumption tax at the end of Frank’s book Falling Behind, which would likely address many of his concerns. We might also query why recent administrations have done so much to alleviate the tax burden of the top 1% and 0.01% of taxpayers, while doing relatively little to reduce the tax burden of the vast middle class. Frank’s work has consistently faulted those policies.

Of course, if school district quality were not so disparate, the desperation that fueled the subprime spree may not have been so intense. But given the stranglehold big donors have over the legislative process currently, I don’t expect the US to move in a Finnish direction any time soon.

Frank Pasquale

Frank is Professor of Law at the University of Maryland. His research agenda focuses on challenges posed to information law by rapidly changing technology, particularly in the health care, internet, and finance industries.

Frank accepts comments via email, at All comments emailed to may be posted here (in whole or in part), with or without attribution, either as "Dissents of the Day" or as parts of follow-up post(s). Please indicate in your comment whether or not you would like attribution, or would prefer your comment (if it is selected for posting) to be anonymous.

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3 Responses

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  2. Andrew J Sutter says:

    I don’t find R. Frank’s article entirely as persuasive as you suggest.

    For one thing, he says, “But while Congress clearly should not rescue borrowers who lied about their incomes or tried to get rich by flipping condos, such borrowers were at most a minor factor in this crisis. Primary responsibility rests squarely on regulators who permitted the liberal credit terms that created the housing bubble.” So regulators were the villains.

    How about lenders, whose questionable practices may have misled many of the borrowers? And also who securitized and sold the bad debts, thus exacerbating the current implosion? They are nowhere mentioned in his piece. Why do they get off so easy?

    For another thing, Frank ascribes buyer behavior to a relentless drive to get the best education for their kids. This seems plausible, in that ultra-tidy economist-style of presentation where everything happens with same inexorability of the water seeking its own level — simple social physics (in hindsight, of course).

    But does he have any data to back this up? How much of a motivator was that really? Did he consider in formulating his neat explanation that one can *rent* a home in good school districts, as well as own one? And does he mention anything about the role of regulators, presidents and other politicians in undermining government support for education, which might also have contributed to the problem, if his explanation is to be believed?

    Concise, yes; but superficial rather than convincing.

  3. Hey Frank – I’m all for alleviating the tax burden of anyone…and one of the biggest tax burdens on the vast middle class – and even more so, lower – is the payroll tax.

    …and if regulators and lenders had been tighter on their standards, who can doubt that many of you would now be complaining about redlining & unfair lending practices which are keeping so many from enjoying the American dream of home ownership.