Sunday, January 31, 2010

The Global Financial Crisis, not just another Anocrym

It seems that things are tougher in America than we can know. I mean you can watch the news and hear the stats, so many foreclosures, so many factory closures, but until you listen to someone it is happening to, or read the blogs of people who have been hit hard, it doesnt seem real.
down to earth
a homesteading neophyte

I have just read, "The Two Income Trap: Why Middle class parents are going broke," by Elizabeth Warren and Amelia Warren Tyagi. This book was printed in 2003, and predicted there would be problems in the economy in America due to Sub-prime Mortgages. Et Voila, Global Financial Crisis.

The Authors did a study on bankruptcy cases in America, looking at the different causes.
They tried to figure out why American families were worse off financially, now, when they more than likely had two incomes, compared to thirty years ago, when most families only had one income.

They discussed that it wasn't a case of families being greedy, spending on frivolous extras, and racking up irresponsible debt.

They found that increased housing costs caused by stupid school district laws, deregulation of the mortgage industry and high healthcare costs are causing a trainwreck in the finances of the american middle class family.

They found that the main cause of problems was that families need to provide thier children with decent schooling. In America, parents do not get to choose which public (state funded) school to send their children will go to. Instead, a bureaucrat draws lines on a map, forcing children to go to whichever school they happen to live near. So, in districts that are percieved to have a better school, a bidding war for houses starts between families. Warren and Warren Tyagi, claim that thirty years ago, parents were satisfied with the quality of schooling available, and in fact thought that school was better than what they had experienced, now the exact opposite is true.

The need to live in a particular area has limited choice and driven up house prices. This situation was exacerbated by the deregulation of the interest rates. Instead of a 80% homeloan as was normal in the 1970s, lenders were offering 90%, 100%, and even 125% mortgages. If you can't come up with a deposit, the lender will just tack on a hefty mortgage insurance, and you will pay higher fees and extra interest for lack of credit points. So you may be able to obtain a mortgage that might have been impossible a few decades ago, but it is going to cost a heck of a lot more too. In some cases, over the life of the loan, the house will eventually cost triple the principle amount.

Warren & Warren Tyagi cite studies that show compared to people who make a 20% deposit, people who make a deposit of less than 5 % are 15 to 20 times more likely to default.

Interest rate deregulation led to sub-prime mortgages, for people with not so good credit history. This sounds like a good idea in theory... helping people acheive the american dream etc etc.
However, the majority of subprime mortgages (80%) were used for refinancing existing homeloans, rather than firsthomes or investment properties. Another fact, that Warren & Warren Tyagi point out is that nearly half of people sold subprime mortgages could have qualified for traditional, cheaper mortgages. There was no case of having bad credit and taking the extra fees on the chin, to scrape through and get a mortgage.... these people were sold a dodgy, expensive product that they didnt need. Mortgage lenders in America are no better than loan sharks, or used car sales men. See this article from american federal trade commission

The fragile financial situation of families keeping up with massive mortgage payments, mean that if an emergency happens, such as a health crisis, or a layoff, the family is stretched too thin to recover.

Many jobs come with health insurance as a benefit so if one or both family members experience a lost job, they also lose the security of having access to doctors and hospitals. Medical expenses can be astronomical in a country that regards universal healthcare a socialist hand out. If a family member has a heart attack, or has a premature baby, families will have to come up with tens of thousands of dollars, somehow.

(As much as I hate standing in line at Medicare, I love that my son can get the occupational therapy, medication and therapy he needs, and it will never send us broke, ever. Occupational therapy costs $100 a session, I pay $30. Pediatrician appointments cost $1000 last year, I paid $80. And get this, when I gave birth, the hospital and homecare nurse was free, and they paid me the baby bonus. God Bless Australia.)

So basically, the idea of the book is that in 2003, American politicians, academics, and policy makers, if not the general public, were aware of problems in the economy, and the hardships faced by average families, yet they let them flounder.

and flounder...

until the tidal wave of bankruptcies became too big to ignore...

so instead of helping out,
by reregulating interest rates,
launching an inquiry into the mortgage lending standard operating procedures,
or introducing a comprehensive state funded healthcare system,
or even reducing the strain on particular school districts by funding schools, so they were more equal, and abolishing stupid district laws that prevent families freedom to choose the best education facility for them....

the powers that be decided to make it harder to file for bankruptcy.... hmmm, yes i can follow that, wait no i can't.

And now the rest of the world is reeling economically, because due to globalisation,

if a butterfly flaps its wings in America.......... we are all screwed.


  1. Now we gt into some interesting discussion. First, States differ in their rules when it comes to schools. In Kansas we do indeed have a map, we also have a lottery system that you can enter to get into the school of your choice via busing, or you can pay up to $100 to the school a year. That of course is only in the major cities, most towns only have one school. We also have very lenient homeschooling laws. You do still pay into a specific school with taxes.

    The State of Kansas has a Insurance program ran by the State. Called Health Wave. You do not have to be poor to have it, and pay into the system to use it if you make over the Sate Medium. Just about all our hospitals are ran by the Catholic Church, and you can make a deal to get you bill reduced, or forgiven.

    I have not had insurance since my husband was laid off 2 years ago. We pay all are doctor visits out of pocket. And because we pay cash, are doctor has reduced our bill, every time.

    Now I an not talk about how the other states do things. This is just Here in Kansas. We have a good system that people tend to abuse, but still a good system. I don't really want the Federal Government running all of the States, that isn't what they are for.I could go on and on about why I don't like the Idea of having a FORCED Universal Health care here, but I will just Say that the State is suppose to have more power over their citizens than the Federal does. That is how the system is set up.

    As for them knowing we were in trouble, sure I bet they did. Never waste a good disaster.

  2. Everything you said is true, but there is more to the picture. The average home is much larger now than it was 30 years ago and much more expensive. Young couples think they should have homes as nice as the ones their parents worked 30 years to get. Most families eat out several times a week and have a vehicle for every licensed driver in the house. When I was growing up, we ate out several times a year (not counting the occasional Saturday burger).
    Kids have multiple pairs of $100 sneakers, thousands of dollars in electronic equipment and buy their mountains of clothes at mall stores that charge high prices for sub-standard clothing made in third world countries.
    Your jaw would drop at the quantity and quality of goods that are in our thrift stores.
    I love the USA and wouldn't want to live anywhere else, but I can see where the old-fashioned values of thrift and independence have been replaced with greed and a sense of entitlement.
    I had the premature babies, gave up the job for them and was still able to pay the medical bills and the house payment because we lived knowing that disaster can be around the corner and we needed to be prepared for it when (not it) it came our way.
    If you need a 125% mortgage, you can't afford a home, period.

  3. thanks for commenting guys.

    phelan: medicare (australia's government funded healthcare) isn't forced, it's just the default system, if you have private healthcare, which is what we call insurance, you can choose to get a refund from either your healthcare fund or from medicare. Most things are completely covered by medicare, except for dentistry (i don't know why). Private healthcare and state healthcare are almost exactly the same here. The waiting lists are the same, there isn't one queue for rich people and one for poor people, for example. The main difference I have found, through the experience of having both is choice, with private you can shop around for an obstetrician, for example. However, in an emergency, chances are your chosen doctor won't be available, so private healthcare doesn't mean anything in those circumstances.
    Medicare is huge relief for families living on the pension (welfare). When i had my appendix out, as a teenager, it cost my mother nothing out of pocket, it was free for me to have surgery and stay in hospital for two weeks. Except for tv, that cost money to watch, so i had to read and do homework instead, lol.
    In an emergency room, everyone is equal, everyone gets seen to in order of physical need, not ability to pay. Which I am led to believe is not the case in some american hospitals.

    Lindy: I think that Warren and Tyagi's research proves that people are not spending more on incidentals and luxuries than 30 years ago. For example, families may eat out more, but it is cheaper now, so actual dollars spent haven't changed. The same goes for other expenses. The main expense that has risen for families is the cost of homes, and Warren and Tyagi looked into the causes of this. They also looked at the fact that the vast majority of Sub-prime mortgages were second mortgages sold to people who already owned their home. They had good credit and could have been sold a proper cheaper mortgage, yet they were criminally sold a sub-prime mortgage. The deregulated lending industry has turned lenders into loan sharks.
    So yes, if you need a 125% mortgage to buy a house in the first place you can't afford that house, but if you are between a rock and a hard place and your kid needs chemo, you are going to need a second mortgage and you are vulnerable to criminals in the industry.
    Maybe you could write more about how your family survived with medical bills and mortgage payments on only one income, because that is the very thing that can send a family into a spiral of problems ending in bankruptcy, and that knowledge is obviously needed by many people.

    Dee: I hope things look up. Your story just happened to come to my attention as i was reading Warren and Tyagi, and they dispelled so many myths that i held. Especially the fact that Americans are greedy, living a lifestyle of debt and consumerism. It is easy to make judgements without knowing all the circumstances. For example, living with free healthcare, I had no idea that a heart attack could ruin a family, beyond the obvious fact of losing an income. It would never occur to me that someone would have to choose to risk their house in order to get access to treatment.

    Also anyone can go to any school, here, I have a choice of about 4 state and 3 private primary schools within a 3km (a bit more than a mile) radius, and if i chose to drive, my choices go up exponentially. They are all quality schools with not much gap between private and state, too.