Economic Experts Weigh In on How to Help the Middle Class

But, truthfully, I am not very optimistic about the big banks willingness to change—unless we make some different choices about our own money. That's why my wife Joy and I decided to "fire" Bank of America. We took our little bank account from our branch of Bank of America, and moved it to a local bank that's been more responsible. In fact, there's now a whole movement of people who are taking their money out of the big banks and putting it into smaller, community banks. The big banks say they are too big to fail; so let's make them smaller. I've been talking to families who are doing that, churches who are considering it, and even to large denominations who are seriously examining where their money should be. If enough people began to make that choice, especially in the faith community, such actions would soon become more than symbolic, and perhaps finally get the attention of Wall Street.

When I talk to pastors about these issues, they now tell me that the abusive "usury" policies of the nation's largest banks have now become, for them, a family issue because of what is happening to so many of their parishioners; a moral issue because of the fundamental unfairness and injustice of it all, a theological issue because of biblical injunctions against just this kind of behavior. And because of all the above; this is becoming a faith issue for many of us.

Diane Swonk, Chief Economist, Mesirow Financial

Diane Swonk, Chief Economist, Mesirow Financial

The big help to the middle class came from the excessive credit provided by the shadow banking system, the members of which are either dead or now converted to banks (GMAC was one of largest providers of mortgage credit prior to the crisis. Now it is a bank and faces same constraints as banks.). The shadow banking system was a $10.5 trillion business. This was a huge provider of credit to the middle class, which big banks competed with, but poorly. We can't escape the fact the shadow banking system is dead. Add to that the fact that credit defaults are rising and we are telling banks to give better-quality loans, and helping the middle class is a bit counterproductive.

Separately, we have to remember that the easy credit environment, combined with our insatiable demand for that credit, was driven in part by a shrinking middle class. Income inequalities in 2007, prior to the recession, were at their highest level since 1929.

That said, what can be done? Many smaller banks are experimenting with principal forgiveness to help accelerate deleveraging but keep people in their homes at same time. This is hard for many big banks to do as they do not hold the mortgage debt that they have, but it would be the biggest gift and help to the middle class at a time when people who put 20 percent down on their homes are now underwater and out of work.

This is a huge area, but the issue is less about what the big banks are or are not doing, more about how the primary source of credit for the middle class is gone, and much of it shouldn't have existed in the first place. They key isn't as much to lend more, but to provide a life raft for consumers who did it the right way to stay in their homes and deleverage in a way that forced more costs onto economy as a whole.

Note: The largest TARP recipient was AIG, not a bank. On the list of what is left, you have GM and Chrysler. The Treasury has made a profit from banks who paid back the TARP.

David Wyss , Chief Economist, Standard & Poor's

David Wyss , Chief Economist, Standard & Poor's

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