Mr. Bernanke cast his net rather wider in a speech last month. He addressed the question of income inequality in the US, and found plenty to concern him. “Earnings in the middle of the income distribution rose by 11.5 per cent between 1979 and 2006; near the top, they rose by a third, and near the bottom, they rose by just 4 per cent in nearly three decades. The increase in inequality was particularly rapid during the 1980s (President Reagan, who taught us that greed is good) but it continues today.” (Financial Times)
Some types of inequality are not worrying at all, yet some economists fear that income mobility has fallen since the 1970s, meaning that those whose heads are underwater are unlikely ever to make it to the deck of a yacht.
Equally worrying is that the children of poor parents are more likely to grow up poor themselves (Financial Times). It is one thing to tolerate in-equality of outcome, but as Mr. Bernanke rightly observes, it is quite another to “shrug our shoulders at in-equality of opportunity.” (Financial Times)
For confirmation of the old adage that the rich get richer and the poor get poorer, just look at the US housing market. Excessive Wall Street bonuses mean that apartments and houses for the well-off in New York are still rising in value. Meanwhile, in the poor US city districts where many blacks and Latinos live, something very different is going on.
For example, take a man who is married with two children and who has a low-paying job as, say, a schoolteacher. It is 2004. He has rented all his life and has watched as property prices and rents have risen sharply. He decides that, for the first time, he should be part of the “American dream” by owning property.
“Your credit score’s not great and your income’s not high but we can deal with all that. He then explains that there are many new products in the mortgage business. The 30-year fixed rate loans are no longer the best way to go. He should choose a loan that starts with low payments. He needs to buy furniture, and paint the place, so this new loan gives him breathing room for a couple of years.
“As for the income, don’t worry: just tell me you’re paid rather than coming up with the paperwork. There are some fees but we can just wrap all of those up in the loan so you don’t have to pay the money upfront. Here’s what your monthly payments will be. Not bad, is it? Just sign here, here, and, oh, here, and we can get things going with the bank.
Our teacher has just acquired an exploding Arm (adjustable-rate mortgage), which is as painful as it sounds. His interest payments were fixed at 7 per cent for two years, since short-term interest rates were low in 2004, but he got into arrears on property taxes, because the bank did not follow the customary practice of collecting them monthly.
“No problem,” says the broker, when he returns the next year with his tale of woe. “Great to see you again. You were wise to buy that house because it’s gone up in value. We’ll just refinance the mortgage to cover some of these bills. Just sign here, here, and, oh, here.”
By 2006, house prices have started dropping in his city and, in the middle of the year, the mortgage payments are reset. His 6 percent fixed rate jumps to 10 per cent, with a further rise to 12 per cent in prospect: his Arm has exploded. He cannot pay and goes back to his broker. But he is not greeted warmly this time: there is no home equity left to support another refinancing.
Once thriving by making loans to millions of spotty-credited consumers who otherwise wouldn't be able to realize the American dream of home ownership, the industry has seen an estimated 30 lenders close shop since late 2006, amid a rise in delinquency and foreclosure rates, felled by their own lax underwriting or by borrowers unable to keep up with mortgage payments from 2 points to 5 points above prime. (Chicago Tribune)
In Illinois, the percentage of sub prime loans in foreclosure at the end of 2006 was 6.22 percent, up from 5.04 percent a year ago, according to the Mortgage Bankers Association. (Chicago Tribune)