Elizabeth Warren The coming collapse of the middle class

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 reasoning....um, 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.