Republicans claim the poor caused the global financial collapse. New economic evidence proves they're wrong.

Commentaries on economics and technology.
Jan. 19 2011 4:52 PM

Did the Poor Cause the Crisis?

Republicans claim that poor homeowners are to blame for the global financial collapse. New economic evidence proves they're wrong.

85_ps
Did poor homeowners cause the financial crisis?
Did poor homeowners cause the financial crisis?

The United States continues to be riven by heated debate about the causes of the 2007-09 financial crisis. Is government to blame for what went wrong, and, if so, in what sense? In December, the Republican minority on the Financial Crisis Inquiry Commission, weighed in with a preemptive dissenting narrative. According to this group, misguided government policies, aimed at increasing homeownership among relatively poor people, pushed too many into taking out subprime mortgages that they could not afford.

This narrative has the potential to gain a great deal of support, particularly in the Republican-controlled House of Representatives and in the run-up to the 2012 presidential election. But, while the FCIC Republicans write eloquently, do they have any evidence to back up their assertions? Are poor Americans responsible for causing the most severe global crisis in more than a generation?

Not according to Daron Acemoglu of MIT (and a co-author of mine on other topics), who presented his findings at the American Finance Association's annual meeting in early January.  (The slides are on his MIT Web site.)

Advertisement

Acemoglu breaks down the Republican narrative into three distinct questions.

First, is there evidence that U.S. politicians respond to lower-income voters' preferences or desires?

The evidence on this point is not as definitive as one might like, but what we have—for example, from the work of Princeton University's Larry Bartels—suggests that over the past 50 years, virtually the entire American political elite has stopped sharing the preferences of low- or middle-income voters. The views of office holders have moved much closer to those commonly found atop the income distribution.

There are various theories regarding why this shift occurred. In our book 13 Bankers, James Kwak and I emphasized a combination of the rising role of campaign contributions, the revolving door between Wall Street and Washington, and, most of all, an ideological shift toward the view that finance is good, more finance is better, and unfettered finance is best. There is a clear corollary: The voices and interests of relatively poor people count for little in American politics.

Acemoglu's assessment of recent research on lobbying concludes that parts of the private sector wanted financial rules to be relaxed—and worked hard and spent heavily to get this outcome. The impetus for a big subprime market came from within the private sector, not from the poor: "innovation" by giant mortgage lenders like Countrywide, Ameriquest, and many others, backed by the big investment banks. And, to be blunt, it was some of Wall Street's biggest players, not overleveraged homeowners, who received generous government bailouts in the aftermath of the crisis.

Second, Acemoglu asks whether there is evidence that the income distribution in the U.S. worsened in the late 1990\s, leading politicians to respond by loosening the reins on lending to people who were "falling behind"? Income in the U.S. has, in fact, become much more unequal over the past 40 years, but the timing doesn't fit this story at all.

For example, from work that Acemoglu has done with David Autor (also at MIT), we know that incomes for the top 10 percent moved up sharply during the 1980s. Weekly earnings grew slowly for the bottom 50 percent and the bottom 10 percent at the time, but the lower end of the income distribution actually did relatively well in the second half of the 1990s. So no one was struggling more than they had been in the run-up to the subprime madness, which came in the early 2000s.

TODAY IN SLATE

Politics

Talking White

Black people’s disdain for “proper English” and academic achievement is a myth.

Hong Kong’s Protesters Are Ridiculously Polite. That’s What Scares Beijing So Much.

The One Fact About Ebola That Should Calm You: It Spreads Slowly

Operation Backbone

How White Boy Rick, a legendary Detroit cocaine dealer, helped the FBI uncover brazen police corruption.

A Jaw-Dropping Political Ad Aimed at Young Women, Apparently

The XX Factor
Oct. 1 2014 4:05 PM Today in GOP Outreach to Women: You Broads Like Wedding Dresses, Right?
Music

How Even an Old Hipster Can Age Gracefully

On their new albums, Leonard Cohen, Robert Plant, and Loudon Wainwright III show three ways.

How Tattoo Parlors Became the Barber Shops of Hipster Neighborhoods

This Gargantuan Wind Farm in Wyoming Would Be the Hoover Dam of the 21st Century

Moneybox
Oct. 1 2014 8:34 AM This Gargantuan Wind Farm in Wyoming Would Be the Hoover Dam of the 21st Century To undertake a massively ambitious energy project, you don’t need the government anymore.
  News & Politics
Politics
Oct. 1 2014 7:26 PM Talking White Black people’s disdain for “proper English” and academic achievement is a myth.
  Business
Buy a Small Business
Oct. 1 2014 11:48 PM Inking the Deal Why tattoo parlors are a great small-business bet.
  Life
Outward
Oct. 1 2014 6:02 PM Facebook Relaxes Its “Real Name” Policy; Drag Queens Celebrate
  Double X
The XX Factor
Oct. 1 2014 5:11 PM Celebrity Feminist Identification Has Reached Peak Meaninglessness
  Slate Plus
Behind the Scenes
Oct. 1 2014 3:24 PM Revelry (and Business) at Mohonk Photos and highlights from Slate’s annual retreat.
  Arts
Brow Beat
Oct. 1 2014 9:39 PM Tom Cruise Dies Over and Over Again in This Edge of Tomorrow Supercut
  Technology
Future Tense
Oct. 1 2014 6:59 PM EU’s Next Digital Commissioner Thinks Keeping Nude Celeb Photos in the Cloud Is “Stupid”
  Health & Science
Science
Oct. 1 2014 4:03 PM Does the Earth Really Have a “Hum”? Yes, but probably not the one you’re thinking.
  Sports
Sports Nut
Oct. 1 2014 5:19 PM Bunt-a-Palooza! How bad was the Kansas City Royals’ bunt-all-the-time strategy in the American League wild-card game?