Let`s take a fond look back at one of Alan Greenspan`s greatest hits:
Remarks by Chairman Alan Greenspan Consumer Finance At the Federal Reserve System`s Fourth Annual Community Affairs Research Conference, Washington, D.C. April 8, 2005 [i.e., during the heart of the Housing Bubble]It is a pleasure to be here today as you conclude your discussions about our dynamic consumer finance market. Our nation`s vibrant [chain-yanking ahoy!] financial services industry is remarkable in many respects, with myriad providers offering consumers a broad range of transaction and credit options. The industry is central to the functioning of our robust consumer sector. Therefore, it is essential that policymakers, regulators, bankers, researchers, and consumer groups remain fully engaged in monitoring developments in the consumer finance market and continually seek to better understand the strengths and weaknesses of the financial services industry, including how well it serves lower-income and underserved consumers. ["Underserved" is a euphemism for minority.]
Evolution of the Consumer Finance MarketA brief look back at the evolution of the consumer finance market reveals that the financial services industry has long been competitive, innovative, and resilient. Especially in the past decade, technological advances have resulted in increased efficiency and scale within the financial services industry. Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. ...... For example, information processing technology has enabled creditors to achieve significant efficiencies in collecting and assimilating the data necessary to evaluate risk and make corresponding decisions about credit pricing.With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. The widespread adoption of these models has reduced the costs of evaluating the creditworthiness of borrowers, and in competitive markets cost reductions tend to be passed through to borrowers. Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s.For some consumers, however, this reliance on technology has been disconcerting. Credit-scoring models are complex algorithms designed to predict risk. Consumer advocates have raised concerns about the transparency and completeness of the information fit to the algorithm, as well as the rigidity of the types of data used to render credit decisions. Consumer advocates contend that the lack of flexibility in the models can result in the exclusion of some consumers, such as those with little or no credit history, or misrepresentation of the risk that they pose.To address these concerns, some firms have worked to customize credit-scoring systems to include new data and to revalue the weight of the variables employed. Also, new organizations have emerged, developing new systems for collecting alternative data, such as rent payments and other recurring payments that will enable creditors to evaluate creditworthiness of consumers who lack experience with credit. [In other words, lower credit standards.]
Improved access to credit for consumers, and especially these more-recent developments, has had significant benefits. Unquestionably, innovation and deregulation have vastly expanded credit availability to virtually all income classes. Access to credit has enabled families to purchase homes, deal with emergencies, and obtain goods and services. Home ownership is at a record high, and the number of home mortgage loans to low- and moderate-income and minority families has risen rapidly over the past five years. Credit cards and installment loans are also available to the vast majority of households.The more credit availability expands, however, the more important financial education becomes. In this increasingly competitive and complex financial services market, it is essential that consumers acquire the knowledge that will enable them to evaluate products and services from competing providers and determine which best meet their long- and short-term needs. Like all learning, financial education is a process that should begin at an early age and continue throughout life. This cumulative process builds the skills necessary for making critical financial decisions that affect one`s ability to attain the assets, such as education, property, and savings, that improve economic well-being.
ACORN and the like have gotten big into "credit counseling" for mortgage applicants as an alternative to actually having a track record of meeting your obligations. It provides both mortgages for marginal minority applicants and jobs for unemployed activists as "credit counselors."
A reader in New York who is a public high school English teacher says he was telling one of his students that he was in danger of flunking out of school. The student said he didn`t care, he already had a job paying $12 perhour.
"What kind of job pays you $12 an hour?"
"I`m a credit counselor!"
"You know, like somebody wants a mortgage or something, but they be a deadbeat. So, I, like, counsel them about how the bank isn`t just giving them the money. They gotta, you know, pay it back. I show them a video about stuff like points, and then they can get their money `cuz now they`ve been credit-counseled."
Tom Wolfe explained the inner economic logic of an earlier social work counseling fad in Mau-Mauing the Flak Catchers:
Brothers from down the hall like Dudley got down to the heart of the poverty program very rapidly. It took them no time at all to see that the poverty program`s big projects, like manpower training, in which you would get some job counseling and some training so you would be able to apply for a job in the bank or on the assembly line—everybody with a brain in his head knew that this was the usual bureaucratic shuck. Eventually the government`s own statistics bore out the truth of this conclusion. The ghetto youth who completed the manpower training didn`t get any more jobs or earn any more money than the people who never took any such training at all. Everybody but the most hopeless lames knew that the only job you wanted out of the poverty program was a job in the program itself. Get on the payroll, that was the idea. Never mind getting some job counseling. You be the job counselor.
Of course, things have evolved since the Great Society hey-day of job counseling. I wonder how many ACORN-style "credit counselors" decided they had to get in on this homebuying game and have since defaulted on their own mortgages?