September 22, 2008
Will the Financial Crisis Make America Rethink Social Policy for the 21st Century?
I've spent the past few weeks learning about the financial crisis, but it has felt more like a crash-course in economics and society. One thing that stands out to me is that depending on who you read, and his or her ideological leanings, you will get a different explanation for what caused this crisis. But more often than not, the people writing for "typical-slightly-right-of-center-libertarian.blogspot" and the people writing for "left-wing-trending-socialist-progressive.wordpress" write about all the same causes, but then point to this one thing that made the crisis really bad. Everyone is more than ready to recognize the confluence of variables that caused our current problems, but depending on ideology, one of these variables was obviously wrong and a mistake.
Well, I am taking a stand here and now. As a self-proclaimed progressive (or according to facebook, "pragmatic progressive"), I am choosing to write about one of the causes of our financial crisis that I take the least issue with: trying to create pathways to homeownership for people lower down on the economic ladder who wouldn't be able to otherwise.
This noble cause--the endeavor to create pathways to homeownership--led to one of the many variables that causes the financial crisis. Banks gave riskier loans because they knew that Government was pressuring Fannie and Freddie to underwrite more mortgages, which meant that they were more willing to underwrite mortgages to people who would probably not be able to pay these mortgages. This of course, combined with the aforementioned many other and equally devastating variables, created this crisis.
This push on Fannie Mae and Freddie Mac to underwrite more mortgages seems to me to have been really bad thinking. In trying to bend the principles of economics and create capital where there wasn't capital, proponents of the "pathways to homeownership" theory went about enacting this theory really, really badly. Instead of allowing people to achieve homeownership and create more homeowners, this solution gave people the illusion of homeownership and it created the illusion of more homeowners. This was obviously flawed and fundamentally a bad idea.
What furthered this problem is really that we didn't understand how much pushing on our economy would affect capital flow globally. We truly do live in a global economy, and we didn't seem to anticipate that, on the financial side, capital on a global scale was flowing into a national market that was actually a network of smaller regional markets, causing us to overestimate the amount of actual growth that was taking place. Like I said, there are many variables.
There is nothing wrong with trying to create more homeowners as a way of lifting people out of poverty. However, it seems that we went about doing this in a really bad way. Instead of providing people with more opportunities to build credit and accrue savings, we just made it hella easier to buy a house. Hindsight is always twenty/twenty, but looking back we can see just how bad this decision was. As a strategy, getting people who are less-well-off on their way to becoming homeowners is a great way to fight domestic poverty. However, bending the mortgages rules was a bad tactic, and not the way to carry out this strategic vision.
We live in a globalized century with a globalized economy, and the social programs of the past 50 years are not predicated on the same assumptions that we should be using to make new social policy decisions. Dalton Conley, a Breakthrough Senior Fellow, really understand this assertion. A capsule of Conley's wisdom, from a New York Times Op-ed:
"Republicans have long argued that the way to stimulate long-term growth is by promoting investment over spending. Hence their perennial efforts to lower taxes on capital gains, dividends and corporate profits. But whether such policies actually stimulate increased investment is open to debate, since the wealthy folks who gain most from these tax reductions are probably already investing their money. And the tax savings don't trickle down as much as their advocates claim.
Democrats, more concerned with helping working families, consider consumer spending to be the magic bullet, so they favor tax rebates. But this only encourages us to continue our profligate ways.
Why not combine the best of both philosophies and try to stimulate investment by all Americans? The simplest approach would be to seed universal mutual fund accounts for low-income Americans. The best way to do this would be through a so-called refundable tax credit deposited directly into a special investment account for each taxpayer. In future years, the government could contribute an additional 50 cents for every dollar the taxpayer deposited into this account. Think of it as a universal 401(k), but one that could be used not only for retirement but also for things like a down payment on a house, college expenses or unexpected health costs.
Such investment incentives would do more than just help stimulate business growth by providing new capital. They would fundamentally change taxpayers' lives. Some research suggests that asset-holders behave more responsibly and are more civic-minded than those without wealth. After all, they have a stake in the future of the economy and their community. This is why banks in cities don't readily offer mortgages for apartments in buildings in which most of the tenants are renters, not owners. My own research suggests that having savings and investment equity is one of the best predictors of whether someone's children will attend and graduate from college. Investing motivates people of all income levels to defer gratification and become knowledgeable about the economy and society."
Conley really grasps that new social and economic factors need to shape a new social agenda for a new era of American life. In the future, we should use more innovative thinking that responds to the conditions of the times to address the social problems that are a blight on any nation. And on that note, Conley's book about this very subject comes out in January.