In recent decades, market-based solutions such as financial inclusion have become more popular in developed countries to reduce inequalities and boost wealth and incomes of the poor. There is no better example of this than the recent thrust of low-income families, women, ethnic minorities, and the young into the subprime mortgage lending expansion in the USA since the early 2000s. Higher access to formal loans for these households was argued to enable them to climb the magical ladder of homeownership and achieve their American Dream. But as we know, the picture didn’t turn out to be quite so rosy.
10 years since the Great Recession, many families are not seeing recovery as the impact of the crisis was substantially harsher for the subprime borrowers (Young 2010; Henry, Reese, and Torres 2013). Financial inclusion in the subprime period turned out to be predatory. In this post, I explore how things went wrong when policy makers failed to account for the institutional conditions in the US economy, which led to dramatically different experiences of financial inclusion across social classes, gender, race, and generations.
Financial inclusion meets institutions
It is well known that the richer you are, the more access you have to different forms of wealth. Ownership of assets allows you to earn returns as their value appreciates over time, while access to mortgages provides a more effective help in building up wealth than unsecured types of debt  (as argued by Williams 2016 and shown by Wolff 2014).
But it is simplistic to say that just by providing access to certain types of wealth, low-income families can automatically improve their financial situation. The Great Recession has shown that while access to mortgages and homeownership is vital for improving one’s position in the income distribution, families whose wealth is dominated by housing are more volatile to economic shocks. This is because changes in house prices swing the value of household wealth beyond the control of individual families. Instead, house prices – and so household wealth – are largely determined by institutional conditions in the economy.
Economic institutions are reflected in what kind of incentives financial institutions have when extending loans to households, and what types of policy objectives are chosen by the government. Modern financial institutions are more often than not interested in profit – not altruism – and so have incentives to give credit to those who cannot afford it, knowing that they are guaranteed to recover part of their investment from loan collateral (through home foreclosures) or from government bailouts. And for decades, policies have favoured financial investors and capital owners at the expense of workers, as privatisation of public services and liberalisation of labour markets have led to real wage stagnation and rising costs of living.
One size doesn’t fit all
Given economic institutions, not all families will benefit to the same extent from increasing their ownership of wealth provided by profit-oriented markets. I explore these potential differences in my upcoming paper (whose draft is available here as a working paper). In the paper, I look at how patterns of wealth ownership impact on households’ position in the income distribution, comparing different income, gender, racial, and generational groups . I am also interested in whether the subprime lending expansion and the Great Recession changed these relationships in any substantial way.
I find that there are indeed significant differences across different households in the payoffs from increasing their ownership of certain types of wealth . Households in the top 10% of the income distribution and those headed by baby boomers, Whites, and men, benefited significantly more than their counterparts from putting more wealth in profitable assets such as business equity, retirement wealth, real estate other than main residence, and high-yielding financial instruments. What’s more, households owning more of their wealth in these profitable types of assets experienced a faster rebound, or even increase, of the size of these positive spill-overs after the 2007 crisis.
Conversely, in the subprime period and after the Great Recession households who put more of their wealth in main residence and mortgages experienced declines in their position in the income distribution. In addition, Black and Latino households and millennials relied more on getting into excessive indebtedness to improve their position in the income distribution. In contrast, these households, as well as for those in the poorest 20% and households headed by women, were more dependent on unsecured debt, which is more expensive to repay compared to mortgages.
The results show that predatory inclusion of vulnerable households into the financial and housing market prior to the Great Recession did not generate equal improvements in their position in the income distribution. Different households experienced significantly different gains from owning certain types of wealth than others, which sheds critical light on the existing “one size fits all” practices of financial inclusion.
Towards a better policy
The study of how economic institutions interact with financial outcomes for households is riddled with data problems. With the currently available data, it is nearly impossible to directly link these two levels of analysis. While data collected from household surveys are fairly representative of the population, they’re prone to participants mis-reporting their finances or refusing to respond at all. On the other hand, tax data provide less subjective information, but they only capture a limited picture of household finances because of tax avoidance and evasion and the fact that they exclude families who don’t have enough income to pay taxes. In both cases, data need to undergo substantial manipulation to provide meaningful information, which prevents researchers from detecting objective causal mechanisms.
But data problems are not an excuse to neglect the issue that institutional conditions matter for how different families experience financial inclusion. Policies aiming to improve financial wellbeing of families and individuals in a sustainable way need to go beyond universal prescriptions delivered through profit-oriented markets. One size doesn’t fit all. Even if some less well-off households were to increase their ownership of assets and debt provided by private markets and the formal financial sector, not all of them would see equal benefits. As evidenced by the subprime crisis, effective wealth-building policy cannot simply delegate distribution of economic resources to private markets without accounting for how access and stability of household wealth are shaped by broader economic institutions.
 Unsecured debt includes credit cards, student debt, car loans, and other consumer loans. Mortgages face lower repayment rates than unsecured debt, and contribute to building of housing equity.
 In the latest version of the paper, I compare households in the bottom 20% and the top 10% of income distribution (net of debt payments), households headed by single women and by single men, households headed by Blacks or Latinos and by Whites or other ethnicities, and households headed by baby boomers (born between 1946 and 1964) and millennials (born between 1980 and 1995).
 Feel free to get in touch to talk about these results in more detail. The published version of the paper will be available in the next few months.
Henry, B., Reese, J., and Torres, A. 2013. Wasted Wealth. How the Wall Street Crash Continues to Stall Economic Recovery and Deepen Racial Inequity in America, Alliance for a Just Society.
Williams, R.B. 2016. The Privileges of Wealth: Rising Inequality and the Growing Racial Divide, Abingdon, Routledge.
Wolff, E.N. 2014. “Household wealth trends in the United States, 1983-2010”, Oxford Review of Economic Policy, vol. 30, no. 1, pp. 21-43.
Young, B. 2010. “The Gendered Dimension of Money, Finance and the Subprime Crisis”. In: Bauhardt, C. and Caglar, G., eds., Gender and Economics. Feministische Kritik der politischen Oekonomie, Wiesbaden, VS Verlag für Sozialwissenschaften.
This blog post is a part of the blog series Inclusive or Exclusive Global Development? Scrutinizing Financial Inclusion, in which a new perspective on financial inclusion is published every #FinanceFriday of February, March and April 2019.