TPM Cafe: Opinion

Senator Jim Talent, R-MO, gave a preview of his Fourth of July speech, replete with his stirring support for the flag-burning amendment. But the speech started with something far more immediate in the lives of many military families: The senator and his co-sponsor Bill Nelson, D-FL, managed to amend the Armed Services appropriations bill last week to insert a provision to protect military families from predatory lenders. This is a Fourth of July speech worth cheering.

The Talent-Nelson amendment is the first real progress at the national level since payday lenders have descended on hard-pressed working families like a plague of locusts. Effectively freed from usury caps that once protected borrowers, the payday lending industry has grown into a multi-billion dollar enterprise by lending money at rates that routinely reach 800%–or higher. For the first time, the U.S. Senate has said, Enough!

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The CPI news is just in: core inflation (without food and energy) is up for the third straight month, and it is now clear that the Feds will raise interest rates. The big question for the money gurus is whether the next hike will be another quarter-point or a half-point. Debtors are caught in a vice: Their incomes are stuck at ground level, but their payments float like balloons. The last increase in interest rates translated into higher credit card bills in a matter of days. Every hike in interest rates translates into bigger house payments down the line for anyone with an adjustable rate mortgage. And the college students taking out new loans can expect their costs to go up too.

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Jon Gertner wrote a terrific piece, Forgive Us Our Student Debts, in tomorrow’s NYT Sunday Magazine (link not available yet). I said my piece in it: A college diploma is the necessary ticket for a CHANCE to launch a young person into the middle class. But, for many kids, the debt that accompanies those diplomas erodes the very middle class safety and security that a diploma once promised.

What are the solutions? I want to use Warren Reports today to ask you to consider an option: An absolute guarantee that every young person in the U.S. can go to college on a government loan (regardless of family income), and that for every year of public service following graduation, a year of college debt is forgiven. Four years in college, four years in public service, and the student is 26, debt-free and ready to begin an adult life.

I have the faith of a teacher. If we want to strengthen the middle class, we must grow the economy so that there are good jobs for millions more Americans. Our best hope to accomplish that is a well-educated workforce that will create new opportunities in the US. We can remain competitive internationally only if we have a well-educated workforce that can out-innovate the rest of the world. We will be able to pay for health care and for the retirements of millions of our citizens only if we have a highly productive, high-earning cadre of young people. College is a collective investment that pays off for the whole country.

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As we export jobs to China, is their middle class getting stronger? Amid the happy-face stories of a new generation of Chinese buying cars and designer sneakers, Andy Mukherjee offers a grim glimpse of ordinary Chinese families living with risk. He tells about patients in hospitals wearing stickers to identify “how much they can pay to get well” and parents paying illegal bribes to keep their children in schools that are nominally public.

State owned businesses once provided the social safety net — lifetime employment, education, health care and pensions. Mukherjee observes: “Those days are over. As part of their ‘reform,’ the state enterprises have been curtailing their social responsibilities.”

Ah, the familiar question of who should build the safety net.

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The data have been accumulating for a while now: Blacks and Hispanics are far more likely to get trapped in high-priced mortgages than are whites. But lenders always had a ready response: the real reason loan rates are higher for blacks and Hispanics is their low credit scores, their low incomes, etc. In other words, the high-priced mortgages are correctly priced for risk. The Center for Responsible Lending has now completed a powerful study to test the lenders’ excuses. What did they find? Race matters. When they control for all the other factors, African Americans and Hispanics are about a third more likely to end up with higher rate loans than their white counterparts. In other words, the fact of being black or Hispanic costs a potential homeowner big time.

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So long as no one tells the story of a middle class under siege, every American family in trouble experiences flat incomes, rising costs and increasing risks as their own problem — not a systemic problem. And every politician is off the hook: No need to do anything, if the problems stay hidden.

Investigative journalists — the ones who dig deep to collect data and tell the stories that someone wants hidden — are crucial to the ultimate safety of the middle class. And that’s why I felt sick when I learned that reporters Don Barlett and Jim Steele had been laid off. I remembered their extraordinary work on the bankruptcy bill — a seven-page article in Time Magazine that Senator Ted Kennedy laid directly on the desk of President Bill Clinton. When Clinton later vetoed the bankruptcy bill, Barlett and Steele could take as much credit as anyone for exposing this terrible bill.

Chuck Lewis, also an investigative journalist extraordinaire, offers his thought for Warren Reports:

I first began reading the peerless work of Don Barlett and Jim Steele in the early 1970s, when they were producing computer-assisted reporting about the criminal justice system in Philadelphia, about the 1974 OPEC oil embargo and allegations of price manipulation by the U.S. oil companies. Their work at the Philadelphia Inquirer for approximately a quarter century was nothing short of stunning, winning two Pulitzer Prizes.

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When the fed raised the short-term interest rates on last week, it took about two hours for the credit card companies to raise rates on their customers. Banks increased the prime rate to 8% in a matter of hours, and that difference is already showing up in this month’s credit card statement. Surely this is an efficient market in its full glory.

So how efficient was that market just a couple of years ago? From 2001 to 2003, the prime rate fell from about 8% to 4% (more than 400 basis points for those who thin slice). In the same period, customers realized a rate reduction of about half of that decrease — 2 percentage points (about 200 basis points).

As I read it, this efficient market just created a terrific wealth transfer: 2 percentage points better return than in the pre-2001 days. Perfect markets give way to perfect profits.

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The Center for American Progress issued a grim report yesterday showing that household debt grew by a staggering 33% in just three years from 2001 to 2004. In 2001, debt stood at a shocking 78.1% of income. Today those numbers look small. In three years, debt reached a 108.4% of household income.

What’s our exit strategy? When — and how — does the debt get paid down? Think of it this way: If debt is 108.4% of household income, then the average family has spent more than a year’s worth of tomorrow’s earnings. Someday in the future, that average family is supposed to cut spending enough to make up for all the interest payments and principal due on this debt. How will that happen — and what will it mean for the economy?

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I promise I won’€™t keep talking about this forever, but it is worth pausing to note that foreclosures across the country are up 72% over last year–and 38% in just the last quarter. At this rate, foreclosures will likely hit 1.2 million this year.

It isn;€™t the super-heated markets on the two coasts that are cracking first. I was knocked out by the increase in Boston, but it seems Massachusetts is behind the curve. Instead, Georgia, Colorado and Indiana lead the country in foreclosures per household, with Nevada, Michigan, Texas, Ohio, Tennessee, Utah and Florida rounding out the top ten. Check out your home state.

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The bust has hit Boston. Foreclosures are growing at a staggering pace. The once hot-hot-hot Boston real estate market has seen a 63% increase in foreclosures in the first quarter this year. Some of those “creative mortgages” are starting to look “creative” in the horror-movie way that spurting blood and slow-mo death were once hailed as creative film-making.

So is the industry cutting back? Heck, no. It’s full-steam-ahead, more creativity, more loans and more spurting blood to come.

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Want to contribute to TPM Cafe? Email ideas for your pieces to us at talk@talkingpointsmemo.com

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