TPM Cafe: Opinion

Remember the old law-and-order political sally: A conservative is a liberal who got mugged. Maybe there will be a new version. At least one conservative business analyst is warning his political compatriots that their middle class base may melt away when homeowners begin to experience the coming housing crash. Andrew LaPerriere sounds the alarm in the most recent Weekly Standard, telling conservatives to get some answers ready for the people who are going to lose their homes.

Has the housing crash started? And will it bring down the whole economy? LaPerriere travels ground we covered here last summer — skyrocketing home prices that make purchases unaffordable for a growing number of families, the staggering differential between rental prices and purchase prices that signal over-heated speculation, and what happens when $2 trillion of adjustable-rate and interest-only mortgages (one quarter of all mortgages in the US) are reset in the next two years. But he adds a political analysis that is amazingly candid. Calling his fellow conservatives “strangely silent” on the problem and consequently vulnerable to the political fallout when conservatives across the country discover that no one in Washington was watching out for them.

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Allan Carlson gets it. In the current Weekly Standard, he asks if the marriage between social conservatives and the GOP can be saved. His case in point: the bankruptcy bill.  Dr. Carlson makes the point that when Republicans had to make the choice between their big business allies and the millions of hard-working families who put them in office, the politicians enthusiastically chose the financial services giants over the families. And he’s pretty hot about it.

Dr. Carlson frames the issue in terms of party politics, a rip at the center of the Republican alliance between big business and small families. But the central point is even larger: Whether politicians represent corporate interests or family interests is a national question, pervading both Democratic and Republican politics.

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During the bankruptcy wars, advocates for the amendments promised that it wouldn’t hurt any families with incomes below the state median.  But Senator Grassley and Senator Sessions are going back on those promises, quietly trying to pressure the committee that writes the bankruptcy forms to make families jump through needless—and dangerous—hoops.

The new law has many problems, but the one provision that was supposed to preserve some fairness said that anyone with an income below median is eligible for Chapter 7—period.  When someone documents that his income is below-median, he can skip pages and pages of complicated expense calculations on the bankruptcy forms because they are irrelevant.  Why make someone march up the hill, only to turn around and march back down again?

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There are lots of ways to start a revolution.  James Scurlock plans to do it with a movie.  His new documentary, Maxed Out, lays bare how a credit industry is preying on ordinary middle class families.

Scurlock may have the next breakout movie—think, Supersize Me or March of the Penguins.  His story is by turns funny, frightening and so infuriating that politicians should consider whether something that looks as boring as credit reform could be turned into a rabble-rousing stump speech.

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Nothing hits a middle class family harder or faster than the loss of income.  In last night’s seminar on the middle class, Yale political scientist Jacob Hacker showed that over the past generation incomes have become more volatile—specifically, that the odds of a family facing a drop of 20% or more in their annual income has more than doubled since the 1970s.

The impact of Hacker’s data doesn’t stop there.  The more tightly budgeted the family, the more devastating the effects of a loss in income.  The data I developed for The Two-Income Trap show that in the early 1970s, a typical middle class family committed about half of its income to pay the big fixed expenses–mortgage, health insurance, transportation, child care and taxes.  By comparison, today’s two-income family commits three-quarters of their income to meet these basic expenses.  This means that today’s family has less flexibility at exactly the same moment that Hacker shows they are more than twice as likely to hit a serious income disruption.  In effect, the boats have become less seaworthy just as the seas have become stormier.

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Politicians seem to love economics, especially when it tells them that they don’t have to pass laws that would irritate the powerful corporate interests that make big campaign contributions.  The argument is repeated like a mantra:  Any effort to regulate protection for consumers will simply drive up costs and hurt consumers in the long run.  In short, markets impose perfect discipline, the world is a cruel place, and there’s no way for government to make it better.  (Notice how this fits with Grover Norquist’s goal to make government small enough to be drowned in the bathtub.)

The applications of the argument are everywhere.  For example, any proposal to curb predatory lending practices is met with the claim that the ultimate result will be to drive the costs of mortgages even higher and to prevent lower-earning families from ever achieving the American dream of homeownership.  But today research was released showing that maybe the mantra is wrong.  A new study indicates that when states outlaw several predatory practices, costs don’t go up and families still have plenty of access to mortgage money.  In fact, the main measurable effect just seems to be that homeowners are safer.  Gasp!  Does this mean that regulation could actually help someone?

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Last night, in my seminar on the Economics and Policies of the Middle Class, the subect was college.  We had a terrific guest, Dr. Susan Dynarski of the Kennedy School of Government, an economist who is a self-described contrarian on the subject of public support for student loans.  We read data-choked reports on the cost of college and financing college.

Dr. Dynarski’s takeaway was clear:  Sure, the cost of college is skyrocketing, but college pays off in long-term income.  And the policy implication?  The people who go to college should pay for it—without government help.  I read the same data and asked a different question:  Can all families afford to take the risk that college will pay off for their children?

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Two of the most clever ads on the Superbowl were for Ameriquest.  Both showed people in embarrassing positions from which the onlookers drew exactly the wrong inference.  The tag line:  Don’t judge too quickly.

Ameriquest is a predatory lender that got caught—big time.  It has offered a shocking $325 million to settle lawsuits and state investigations in 49 states and the District of Columbia.  Right now, 200,000 homeowners—people who were cheated by Ameriquest—must decide whether to take the money or to pursue their own lawsuits.  And what is Ameriquest’s response?  Not:  “We’re sorry.”  Not:  “We promise to be trust-worthy in the future.”  Not even the all-purpose “mistakes were made.”  Nope, their response is a Superbowl ad that says “Don’t judge too quickly.”  In other words, it is all a joke, and the wink-wink implication is that they didn’t really do anything very bad.

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I have said a lot of pretty strong things about the influence of money on legislative policy and the consequent harm to the middle class.  In one sense, that’s unremarkable.  I am an academic with lifetime tenure, I have spent a professional lifetime studying middle class legal and economic issues, and if I see a problem and I don’t speak out, then shame on me.

And lots of other good people, including people who disagree strongly with me, have spoken out at well.  No surprise.  That’s how we shape our collective vision of how the world should be changed.

But last week someone else spoke out:  a federal judge called out the whole legislative process.  Bankruptcy Judge Frank Monroe spoke openly about the influence of a powerful consumer credit industry on the United States Congress.  In a written judicial opinion noted here, he explained that he was stuck interpreting an “inane” amendment.  Why?  Because the “agenda” of those pushing this legislation was “to make more money off the backs of the consumers in this country.”

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Needed:  Richer Debtors

The first reports on the new bankruptcy law are trickling in, and they are embarrassing those who said that bankruptcy was loaded with deadbeats.  The new law requires everyone–no matter the reason for filing bankruptcy and no matter how low their incomes–must take a credit counseling session before they can file for bankruptcy.  The idea was to pressure those who could repay their debts into debt management plans and away from bankruptcy.

But who is showing up for credit counseling?  A new report from the Washington Post this morning says that credit counselors report that most of the people who come to them before filing for bankruptcy are in terrible financial shape, “people with true hardship, such as lost jobs or disabilities that cut their incomes.”  According to a credit counseling spokesman, “virtually none” qualified to pay anything.  Many couldn’t even afford the $20-75 counseling fee.

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