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.