
We Wanted Safer Banks, We Got More Inequality - lisper
https://www.bloomberg.com/view/articles/2018-08-06/inequality-why-bank-rules-and-fed-rates-hurt-middle-class
======
cs702
The main claim is from a financial industry consultant quoted in the article:

 _" As the country becomes more unequal, there are fewer middle class
customers. That means middle class bank products become unprofitable, and
banks follow the money. And banking regulations make it worse because the
capital requirements imposed after the banking crisis make it a lot more
expensive for banks to do a startup small-business loan than go into wealth
management. Startup loans are riskier than wealth management, of course, but
the capital costs have become prohibitive, and banks don’t lose money on
purpose."_

Wait, what? I doubt this is the main or even a top-three _cause_ of income and
wealth inequality in the US.

Other factors strike me as potentially far more important causes of
inequality, including increasing automation of labor, winner-take-all markets,
concentration of corporate and market power, minimal antitrust regulation...
to name a few.

The banking industry wants fewer regulations and lower capital requirements,
as usual. This seems to be its latest rationalization for them.

~~~
solatic
One of the biggest contributors to income inequality is a lack of economic
mobility. Maybe that sounds like a tautology - the difference between rich and
poor solidifies the more difficult that it becomes for poor people to turn
into rich people.

To oversimplify, easy access to capital can allow a poor person to turn a
great idea that solves real problems and a strong work ethic into a
sustainable business that pulls him out into the middle class or higher.
Without access to capital, the poor man is beholden to whichever employers are
in his area, and whatever is on offer from them - odds are, it won't be enough
to allow the poor man to send his children to private school.

~~~
btown
To elaborate, easy access to capital is what allows those employers in his
area to actually hire him. That profitable restaurant down the road, owned not
by a Wall Street mogul but by a passionate middle-class entrepreneur, needs
capital to renovate a second dining room, and if it doesn't get it, it's not
going to be able to hire servers for that new capacity. It's going to
stagnate, maybe remain a profitable small restaurant, but never have a chance
to become a multi-location or multi-state job-creation engine. And this is
where the "middle class bank products" come in. Anything that artificially
discourages banks from making the purely-economic decision to finance that
owner to expand the business - and there's always the tantalizing option to
just cater to silver-plattered large-business loans and wealthy clients
instead - is going to slow growth and make general inequality in the area that
much worse. There's a shrinking middle class of businesses just as there is of
individuals.

Now, sure, the economic decision to finance this person should not be based on
the idea that you could make subprime loans and repackage them to unwitting
buyers. But there are perhaps middle grounds from a regulatory perspective.
And there are also opportunities to address non-regulatory aspects that
discourage capital sources from lending/investing; my company Belstone builds
software to allow lower-middle-market investment bankers, the advocates for
medium-sized businesses in the capital markets (who have the same dynamics
described above), to close deals on behalf of their clients more efficiently,
to support more businesses and more job growth. None of these efforts on its
own is a panacea, but we have to try everything we can to move the needle.

------
core-questions
> What I am saying is that now some lenders — banks — are under rules so tough
> they can’t support equality-enhancing mortgages

What is an equality-enhancing mortgage? My guess is that it's akin to an equal
opportunity / affirmative action campaign. The thing is, actuarial tables
aren't oppressive - they're merely reflective of reality. If a particular
group presents a higher risk profile than another, the only sane course of
action is to be more restrictive when lending to members of that group.

The alternative is for banks to give out easy money again like in the leadup
to 2008 and that didn't work out well. I'm sorry that some people can't get
mortgages but the answer is not to aggregate out their financial problems onto
those of us who do, in fact, pay our bills.

~~~
gammateam
Equality-enhancing mortgages WERE subprime mortgages. Congress pushed the
banks into doing them in the early 2000s to extend credit to marginalized
populations!

oh man, here we go again! I wonder if Y Combinator will fund my Collateralized
Equality Enhanced Swap

~~~
piker
> Congress pushed the banks into doing them in the early 2000s to extend
> credit to marginalized populations!

...but didn't push banks to lever the loans 10x, securitize, sell and repeat
over and over again. Fault for those days lied in a lot of places, and sub-
prime mortgages aren't inherently a bad thing.

~~~
gammateam
> and sub-prime mortgages aren't inherently a bad thing.

Correct.

> ...but didn't push banks to lever the loans 10x, securitize, sell and repeat
> over and over again.

Yeah, but I'm not going to pretend like I wouldn't. Worst case scenario is
that my failed bets get paid out by the future productivity of the entire
working population, and the distressed assets get transferred to the balance
sheets of special purpose vehicles also funded by taxpayers.

And I get to keep all the performance fees.

~~~
bendoernberg
If "I would screw over my entire society in exchange for performance fees"
isn't the definition of immoral, what is? Why would you do that?

~~~
jwatte
Ask those that did, and did not go to prison. Our society rewards greed over
conscience.

~~~
s73v3r_
Unfortunately, that behavior was not against the law at the time. Even more
unfortunately, that behavior is still not really against the law.

~~~
rhizome
A lot of actual crimes occurred then that were not prosecuted. Sarbanes-Oxley
violations, for one obvious example.

------
mjevans
Observation: Housing is not affordable (for any but the rich).

Hypothesis: Basic market theory suggests that the need for housing is probably
inelastic (everyone needs it, can't do without it), therefore if housing is to
become more affordable an increase in supply must happen.

Prediction: If additional housing were encouraged (near where jobs are
actually located) prices would eventually stabilize at sustainable levels.

Prediction 2: non-inflated housing prices will also lower the cost of living
in those areas, creating a net benefit for members of society (which are not
of the rent-seeking classes).

Testing: Please vote according to the above logic.

Results: To be determined.

~~~
ThrustVectoring
One big problem with this is that people vote their incentives. If you're a
homeowner in San Francisco, are you really going to vote to halve the price of
your home and immediately put your mortgage underwater?

People voting themselves higher house prices through using local zoning laws
to create housing shortages is a _national_ crisis. We need something pretty
dramatic, like congress using the interstate commerce clause to ensure the
free movement of labor via banning states and local municipalities from
enacting their own zoning. Or a national land-value tax.

~~~
wpasc
Could not agree with this more. I live in SF and the difficulty in building
new housing is so outrageous. To make the housing prices in SF lower, supply
must increase. While it makes sense for voters in a locality to have
control/say in the environment around them, the ability of homeowners to
control land they do not own and prevent new construction and shift the burden
to other districts and public transportation is extremely flawed.

------
skybrian
Seems like the second idea (interest rates should be higher) contradicts the
first (it should be easier for banks to make loans to small business). Higher
interest rates would tend to discourage loans.

Edit: I guess the idea is to increase supply and reduce demand?

~~~
CamTin
It would discourage people from taking loans, but why would it discourage
banks from making them? In fact, higher interest rates would mean that the
cost of liquid capital, a bank's main equipment for making money, were
suddenly more productive, right?

~~~
archbung
Wouldn't it be pointless to make something that nobody buy?

~~~
r00fus
Clearly high interest rates in the 80s didn't prevent banks from making loans.
Lets talk about the inverse of of what you're suggesting - perhaps the lack of
ROI on loans is preventing banks from doing what they're supposed to be doing
- lending to small businesses.

~~~
JamesBarney
How does a low interest rate prevent a bank from making a loan to a small
business?

A low interest rate is not a federally mandated cap on interest it is an
increase in supply which drives down the cost. Which should increase ROI.

------
calyth2018
If you're looking at banking regulation for causes for inequality, you're
looking at the wrong place.

The article pointed out the gulf widened at the 1980s. That should be more
than enough hints as to how to fix it.

There's no political will though.

~~~
swagasaurus-rex
I'm not sharp enough to take the hint. What is the proper way to fix it?

~~~
prolikewh0a
Unions [1].

[1] [https://www.epi.org/news/union-membership-declines-
inequalit...](https://www.epi.org/news/union-membership-declines-inequality-
rises/)

------
igravious
“KP: I’m not blaming the banks. I’m blaming the unintended consequences of the
rules. I think the rules unduly penalize equality-enhancing financial
services.”

(1) Bankers (rich people) lobby to have Glass–Steagall taken out back and shot
in the head.

(2) Banks go nuts with financial wizardry leading to a housing bubble.

(3) Bubble bursts which ends up ruining the lives of millions, mostly lower
and middle class folk. Nation enters into the worst recession since the Great
One.

(4) Banks are bailed out with taxpayer money because banks have somehow become
"too big to fail".

(5) Some regulations placed belatedly and half-heartedly on banks because of
(1-4)

(6) Hardly anyone rich loses their shirt and hardly anyone is locked up† and
some make out like bandits.

(7) Wall Street salaries and bonuses through the roof.

(8) Gov Regulations (along with Fed quantitative easing – the Fed is kind of a
collection of banks, no?) exacerbate income and wealth inequality. Where did
the Secretary of the Treasury at the time of the crisis, Hank Paulson, work
beforehand?‡

(9) Banking policy "expert" Karen Petrou says “I’m not blaming the banks”

(0) In the words of Ace Ventura, “Allllrighty then!”

† [https://www.bloomberg.com/view/articles/2017-07-26/why-no-
on...](https://www.bloomberg.com/view/articles/2017-07-26/why-no-one-went-to-
jail-in-the-financial-crisis)

‡ “Before becoming Treasury Secretary, he was required to liquidate all of his
stock holdings in Goldman Sachs, valued at over $600 million in 2006, in order
to comply with conflict-of-interest regulations. Because of a tax provision
passed under President George H.W. Bush, Paulson was not subject to capital
gains tax. This saved him between $36 and $50 million in taxes.”

~~~
JamesBarney
You'll have to explain 8.

From first principles it makes sense that reducing the price of capital would
help workers, and hurt capital owners.

And all the research I've seen backs up this intuition and show that a loose
monetary policy helps inequality.

~~~
pjmorris
QE 'printed' roughly 3 Trillion dollars out of nothing, including at least
1.7T that went to buying Mortgage Backed Securities from banks whose original
mortgage borrowers were never going to be able to pay off those mortgages.
That had the effect of raising house prices for everyone, while turning debts
of many that were never going to be repaid into the profits for the banks who
aggregated these bad loans. Yves Smith over at the Naked Capitalism blog has
called it 'the greatest upward transfer of wealth in history.'

------
ncr100
Reading the analysis of unintended side-effects reminds me of programming, and
contemplating how my system might fail.

------
jwatte
The article starts out with a "correlation causes causation" argument, and the
unsubstantiated claim that the biggest driver of inequality is banking
regulation. Then it implies that business financing matters to the 50-90
percentile of earners. Bullshit detected!

------
howard941
I'm inclined to see this as correlation, not causation. Where is the powerful
coupling between <10 years of tighter bank lending standards and income
inequality?

~~~
WhompingWindows
How would bank lending standards affect income, wouldn't it be much more
likely to affect wealth?

~~~
s73v3r_
In many, not all but many, parts of the country, mortgages are about the same
as or cheaper than rent. And, usually they don't go up every year, and they
come with pretty large tax breaks.

------
WalterBright
> predatory lending

I've often wondered just what people are talking about when they use that
term.

~~~
jeffreyrogers
Lending to people who will likely default, often by misleading them about the
terms of the mortgage. You could also look at it from the other end and say
that the people receiving the loans are predatory borrowers: people who can't
afford to own the home they want but are taking advantage of lax lending
standards to get one.

~~~
mannykannot
Setting oneself up to be prey is not generally considered predatory - though
faking it, as anglerfish do, is.

~~~
jeffreyrogers
In this case they are preying on the lenders, who don't really care because
they are passing off the risk to someone else.

~~~
mannykannot
The issue is really who gets eaten. While the lender, or whoever ends up
holding the loan, might get burned, it is very unusual for the borrower of a
predatory loan to end up better off for it.

~~~
WalterBright
If I loan you money, and you don't pay it back, how do I gain?

~~~
mannykannot
As I said, the lender might get burned.

OP appeared to be talking about trying to take advantage of predatory lenders,
and my point is that the borrower would usually be harmed more by attempting
to do so than the lender, whose business model can typically accommodate a
fairly high default rate.

Consider balloon mortgages, which are structured to encourage the borrower to
pay all the interest, then, if they default on the final payment, the lender
repossesses the property. In the lead-up to 2008, when prices all around were
rising rapidly, repossession could look almost as attractive a proposition as
getting the principal back, or possibly more so, and it made it easy to sell
the risk in the secondary market.

~~~
WalterBright
My mortgage documents say that if my house is repossessed due to non-payment,
and the lender sells the house, any value received that is in excess of the
amount owed acrues to me, not the lender.

There is no advantage to the lender in repossessing the house in a rising
housing market.

~~~
mannykannot
In the post I was replying to, you were asking about whether there is a
downside for the lender. As I mentioned, there are scenarios in which the
lender does badly, but in this one, the lender gets what it wants, a stream of
interest income followed by the return of principal. The borrower has, in
effect, and probably inadvertently, flipped the house, but if you were doing
that intentionally, you would be much better off selling the property rather
than allowing it to be repossessed. Of course, someone facing a balloon
payment he cannot afford is probably best advised to sell before repossession,
but if that is not the situation he wanted to be in, it is likely a pyrrhic
outcome at best.

I suppose someone intending to flip a property might prefer a balloon mortgage
if it has lower payments - financing flips is not something I know anything
about - but that would seem to be a win-win situation, at least up to
questions of risk. The important question with regard to so-called predatory
lending is how things usually work out in practice.

~~~
WalterBright
I am not seeing how a lender is better off lending money to people who cannot
pay it back.

~~~
mannykannot
A lender who makes an unsecured or insufficiently-secured loan to a person who
makes no attempt to pay interest or return the principal, and has exhausted
all means to collect on the debt, is indeed worse off than if he had kept the
loaned amount in a risk-free asset (unless, perhaps, there is some
compensating tax advantage, though I wouldn't know anything about that, and it
seems unlikely that such opportunities would be widely available.)

------
raintrees
I think "whack-a-mole" might best describe the proclivity for regulation to
fix unintended side-effects of previous regulation, causing more unintended
side-effects. Or maybe "the cure is worse than the disease?"

Being on a very small governmental body, I witnessed first-hand the tendency
to want to "do something" when confronted with a potential problem - And it
did come to pass several times that we enacted policy that later seemed to
have made the original situation worse or caused another flare-up in issues
that had not existed before.

My experience is it can be very difficult to enact good public policy... And
frequently an efficient (unfettered) capitalist market will come up with a
solution more elegant than what we could contemplate.

I am left thinking this is a basic truism...

~~~
clairity
i think your concern about unintended side-effects is very valid, but i
disagree with your conclusion.

in most cases, we need more innovative approaches to policy development rather
than defaulting to a market as the only alternative.

as an example off the top of my head: using a faster, instrumented, and
iterative approach to policy design, as startups are encouraged to do. or,
cultivate new methods for finding better, more effective policies quickly
(like design sprints, for example).

~~~
sigstoat
> as an example off the top of my head: using a faster, instrumented, and
> iterative approach to policy design, as startups are encouraged to do. or,
> cultivate new methods for finding better, more effective policies quickly
> (like design sprints, for example).

the resulting regulatory uncertainty would probably be worse than bad
regulations.

~~~
clairity
yes, that's possible, but the regulatory environment is already uncertain, and
trending toward less certainty, due to increased partisanship and the ping-
ponging between ideological extremes (accelerated by the money pouring into
politics).

so if citizens & businesses knew that regulations were generally going to
trend toward more fairness, the regulatory environment would be less uncertain
(the cone of future possibilities narrows, even if the path was entirely a
random walk).

------
jewelthief91
Freedom is a double edge sword. Some people use their freedom to elevate
themselves, others are free to fail. In the West we treat an disinclination to
handle freedom responsibly as either a moral failing (the right) or reject the
possibility that failing to handle freedom can have anything to do with one's
character at all and thus inequality must be blamed on external forces (the
left). The truth is it is not necessarily a moral failing to handle freedom
irresponsibility and handling freedom irresponsibly very likely has a lot to
do with someone's personality.

~~~
genericid
What does one's character depend on in your opinion?

~~~
jewelthief91
Generally an interaction between nature and nurture.

~~~
genericid
So, external factors.

------
mkirklions
Expecting downvotes, but looking for ideas-

Serious question, what is the issue with inequality when low income people are
overweight and have iphones?

This is obviously a simplification, but in 1 sentence I think I got my point
across.

Standard of living is undisputed the best in human history, not even some
1960s era fantasy has overweight humans. This has nothing to do with
'unhealthy' food, this is abundance.

So back to the serious question, what makes inequality bad? Some ideas

>Political inequality

>multi-generational oppression(which doesnt line up with the whole "First
generation makes it. 2nd generation maintains it, 3rd generation blows it")

I'm trying to understand the issue with inequality when everyone is living a
fantastic by organic life standards.

~~~
kartan
> Serious question, what is the issue with inequality when low income people
> are overweight and have iphones?

People is overweight because they can not afford healthy food. Fruits and
other healthier food is more expensive than junk food.

Poor people does not have iPhones. They have cheap Android devices that they
need to work, keep in contact with family, etc.

> Standard of living is undisputed the best in human history

In the USA you can see a difference of life expectancy based on their
economically status. So, people is dying earlier and this can be avoided.

> I'm trying to understand the issue with inequality when everyone is living a
> fantastic by organic life standards.

So this is the end of all progress? We are good now, lets stop improving
health care, education, etc.? Let people die at 70 even when they could have a
more healthy live to be 80? Let a cancer patient die because "on average"
society is better and his suffering is just statistics?

Your argument is based in the misconception that things can not improve
anymore. That people does not deserve better that what they have now.

You will probably get support in the Amish community, for example. But most of
the world moved past that point.

~~~
white-flame
> _People is overweight because they can not afford healthy food. Fruits and
> other healthier food is more expensive than junk food._

While I agree with the sentiment of your post, the meme quoted above needs to
stop. Two bags of Doritos cost as much as a package of raw chicken that can
feed a family, not to mention mass quantities of rice, beans, or even
potatoes. Fruits and vegetables are very often <1 USD per pound. A single fast
food combo meal can hit $10 USD, which can be groceries for one person for a
week.

The problem with bad diets emerge from high stress, transportation issues, and
lack of food education; not price tags.

~~~
orthecreedence
I just had Burger King at the airport the other day. I could have easily
gotten away with spending $3 for an entire meal, with sugar water included.
For a meal, that's pretty cheap. Especially if I work a 12 hours shift and
don't have time to cook.

Also, I grew up in the midwest, and often fruits and veggies look like they
were picked up off the side of a freeway.

Not saying that you're entirely wrong, but neither is the "it's cheaper to eat
shitty food" camp. There's probably a happy medium: less sugar, less meat,
less stress, better education, better prices...all things that would help.

~~~
white-flame
Yes, when I eat fast food, it's always from the value menu. But if you're
strapped for cash, $3 per meal on a consistent basis still adds up, compared
to <$1 meals prepared at home and ready to grab from the fridge.

Certainly convenience & taste is a factor in these decisions as well, but if
the primary pain point is raw cost for your baseline consumption because you
have no money to spare, you really should be kitchen-based.

Of course, all of this assumes that one is being financially sensitive, and
not just impulse spending without realizing how much is trickling out. Too
many people I know who struggle with their meager finances (even if they make
similar or more than I do) are entirely too flippant and just go for the $10
combo meal, not realizing how often they're "treating themselves" and how it's
adding up against their monthly balance.

~~~
s73v3r_
"compared to <$1 meals prepared at home and ready to grab from the fridge."

They're never "ready to grab". They take time and effort, and do require
knowledge to prepare. They also require you to then do the dishes after. For
someone who's working multiple jobs, that may be time they just plain don't
have.

~~~
white-flame
They're ready to grab if you sensibly prepare a bunch of food ahead of time,
once or twice a week. Nobody who's strapped for time starts from scratch every
meal, and our American fridges are plenty large.

Besides, if I may rant a bit: If you have no money, then time, effort,
knowledge, and social currency is what you _have to spend_ to get by. Either
you're going to spend those things, or spend money you don't have which will
make your immediate future _immediately worse_. This is a situation that sucks
to be in, and the only way to have any sense of even partially managing this
is discipline. Many of us have grown up in and/or lived through these sorts of
situations as adults, and you simply do what you have to and try to be smart
about it. _Obviously_ you need to put in time and effort, and do the dishes.
But you can buffer things a bit to match your schedule, or establish specific
routines, and any little lessening or organization of crunch is a huge
affirming step. If you step back for a bit you also see that _maintaining your
health_ (including having mental and physical energy) is super important when
you have no money and are working hard, and so making food at home hits
multiple critically important facets. It does not matter that it takes effort,
what matters is that you put forth effort commensurate to what you're facing.

And to position this back to the initial contentious point, it reaffirms my
position that it is not an issue of healthy groceries being somehow priced
higher, but rather that of stressful life situations that people turn to
convenience food (with the time sink of shopping/shorter-prep/cleanup or
driving/ordering/waiting at restaurants still intact).

~~~
orthecreedence
I think this is a bit out of touch. People in the situation you're describing
are generally coming from a place of desperation, not of careful
contemplation. And yes, it would behoove them to plan meals and pinch pennies,
but when you and your spouse are working 50+ hours a week _each_ to make ends
meet, the type of self-reflection it takes to make those decisions is in very
limited supply.

I've not been in a working-poor situation since my late teens, but I can say
that there are times when I was working 60+ hours a week, and I _did not_ have
any energy to think about meal planning or healthy eating or investing in my
future besides dumping some extra money in a savings account. Luckily, I _did_
have the money to eat healthy, and luckily my wife was (sometimes) in a
position where she could meal plan for the both of us, but oh man...if I was
in the same situation and making < $30K/year, I would NOT have been able to
even think of these things.

It's not about being intelligent or even about resource management, it's about
having the energy to think about it, and if you're working your fingers to the
bone, _you don 't have the energy_. So it's easy for us to sit around on a
forum while there's a lull in our cushy jobs ranting about how poor people
should manage their time better, but I can tell you that it's not easy.

~~~
white-flame
Let me state this absolutely directly, for all other responses as well:

I'm talking about _me_ and _my life_ , and _my family_ , and _my friends_. In
various desperate situations, without money or time or car, working multiple
jobs, and things in life going bad on top. Some made reasonable decisions
about life, others not thinking and just muddling through, and others just
checking out. Nobody's "meal planning", you grab whatever's cheap at the store
(and that'll be grains, vegetables, and some meat) and make a pile of it at
home to feed from or take along to work, so you don't have to cook often or go
out much.

I don't know why everybody jumps to "You don't understand the people you're
talking about!" Lots of people (even here on HN) have been there, or know
people who have been there. There are tons of ways that life plays out, and
having horrible situations is not some guarantee that your life is cemented
into a perpetual downhill and that any other thinking is "out of touch".

It's just a lot harder, and sucks a lot more. But it becomes the new normal in
your life. You do what you need to do, and you'd better figure out what you
need to do, because tomorrow is staked on it. Plus, any little progress is
still progress; even if you're not a millionaire at the end, at least it's not
as bad as it was last year, and work to continue that at any scale for the
next.

------
Someguywhatever
Why can't people just improve their credit rating by doing credit worthy
things?

~~~
xutopia
It is really hard for some people to get out of poverty. I recommend you read
this article from a few days ago posted her on Hacker News:
[https://news.ycombinator.com/item?id=17230047](https://news.ycombinator.com/item?id=17230047)

