Most experts would agree that no one has been hit harder by this difficult economy than the middle class. So as part of our series "The Comeback: Saving America's Middle Class," we have reached out to economic experts to get their opinions on what needs to be done to make the middle class as robust as it once was.
We also want to hear from you. What do you think of the solutions provided below? Would they be helpful to you? What do you think needs to be done in order to help the middle class?
Watch "The Comeback: Saving America's Middle Class" all week on "World News with Diane Sawyer" and at ABCNews.com/wn
Responsibilities of the big banks: Help out struggling homeowners who are "under water," owing more on their homes than the homes are worth. The big banks should refinance the mortgages, reducing the principal as well as interest rates.
Help out struggling small businesses, whose jobs are the life blood of the economy. The big banks should establish a revolving credit fund to aid small businesses (and the smaller banks that lend to them).
At the least, stop blocking legislation that would allow struggling homeowners to put their homes into bankruptcy and thereby have special masters oversee orderly repayment schedules.
Stop blocking legislation that would establish a consumer financial protection agency, so consumers in the future weren't misled into taking out loans they couldn't possibly repay.
Lobby government for a bailout of public education – interest-free loans to states and locales to avoid more layoffs of teachers, shorter school weeks, shorter school years, and tuition hikes for community colleges and public universities – arguing that "human capital" in terms of the skills and insights of our nation's people is even more important than financial capital, which got bailed out.
I believe that banks have the same responsibility every business has – to do business ethically. But no business, in my view, should view its role as that of a charitable entity. Banks and other businesses do make charitable contributions but should leave charitable decisions to the charities.
The issue is this: Do we want a bank, or any other business, to make judgments as to which of its customers is deserving of help and which is not? No business is well positioned to make such judgments. And if a bank does provide assistance to certain customers, who should bear the cost? Other customers, in the form of higher fees and other charges? Shareholders, some of which may be pension funds and university endowments, for example, that need dividends to support their own missions? Asking any business to help struggling families has surface appeal, but a deeper evaluation shows how flawed the idea is. Indeed, even the way your question is phrased reveals the weakness of the idea. Why should aid go to middle class families rather than to the very poor?
Banks are obliged to conduct their business with clarity and for profit. That is their role, not giving out grants. They participate in communal ways. But you asked only about "big" banks so you narrowed it to those whose activities are more regional or national or global.
The biggest banks do have an ethical obligation to help alleviate the pain from a crisis they helped to create. After being extended such "grace," because of the fear of an economic meltdown, the banks then failed to extend that grace to anybody else; creating a modern "parable of the unmerciful bankers." Knowing no shame, they then decided to use that public money to make themselves even richer, and then pass out billions of dollars in bonuses to their top executives--while middle-class families were left to fend for themselves. Job loss, unsustainable mortgage payments and exorbitant bank fees are just a few of the problems facing the middle-class. I would suggest four steps that the big banks should take.
First, begin lending again. The big banks have drastically cut lending to small businesses, one of the primary job creators in America. The banks received billions in financial assistance, but instead of helping small businesses, they've used the financial assistance mostly to increase their own wealth. That's just wrong and not in the spirit of how the bailouts were intended.
Second, the banks need to begin to modify mortgages for families facing foreclosure at a much faster rate. Currently, the loan modifications have been taking place at a painfully slow pace – leaving millions of American families in financial distress.
Third, the banks need to curtail their exorbitant overdraft fees. These fees primarily hit the middle class and working poor, who are struggling to make their accounts balance. I was on a radio show a few weeks ago when an unemployed man called in to say he'd miscalculated his bank balance by $15. But because of that slight overage, his bank charged him $60 in fees! Again, that is just wrong. Banks received $38 billion in overdraft fees last year – over half from debit cards.
Finally, and this may be the biggest issue, big banks should actually support common sense financial regulation for the common good, including a robust and independent consumer financial protection agency to make sure that the risky and abusive financial practices that helped precipitate this crisis do not happen again. That would be in the best interests of the country, but also in the best long term interests of good financial institutions. But up until now, the big banks have spent hundreds of millions lobbying against reform.
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.
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.
I think the biggest responsibility is not to make them loans they can't afford to pay back. More foreclosure relief should be undertaken, but I think the biggest obstacle is the existence of multiple mortgages on the same property, since the second lien holder has little incentive to join in the agreement.
My response to the question is that the first responsibility of banks getting federal assistance is to pay back that assistance. While many have already done so, more need to.
I do think we need to keep a balance in mind on the topic of expanded lending. As the housing bubble/bust and resulting foreclosures demonstrated, we don't do families a favor getting them into a home they can't sustain. Nor do we do a favor to small businesses giving them loans they can't repay. So government policy should refrain from pushing banks to make loans based on political need rather than sound business practices.
That said, lenders should be encouraged to make responsible, sustainable loans. I am not sure I would call that "help." I don't think banks should be giving subsidies or making loans at a loss; after all that's one of the reasons we are in this mess.
For many loans, such as mortgages, the bank is often just the servicer, not the actual owner/investor in the loan. As the taxpayer is currently the largest investor in mortgages, the taxpayer should not be asked to take any more losses (I'm opposed to the notion that since banks got taxpayer-funded bailouts, everyone should then get a taxpayer funded bailout).
I'm no expert in this area, but would say they could probably help in making sure the design of products sold to middle-class people are well-constructed and understood by the people they are selling them too. This is the thesis behind the CFPA about to be proposed out of Senate Banking Committee.
Think they ought review their whole interface with so-called middle-class customers that would be partially providing services that fit with the resources of middle class clients. Conversely, they would be well-advised to make sure that the kinds of transactions and relationships they are offering are fair and, most importantly, well-understood by the people proposing to buy them.
Banks have all sorts of obligations to treat all customers, not just middle class, in a fair way. After all, they are in business to make money, but any well run organization, banks included, should have an ethic, if you will, that recognizes it is a part of their responsibility not just to make a sale, but run an ethical business.
The Wall Street, Main Street issue has been, in a way, overemphasized. I think a lot of the blame for difficulties rests not just with Wall Street, but with other players, most particularly legislators and regulators who interpreted the rules perhaps not strictly enough to head off the problems that we had.
As students of the business cycle (not to be confused with economists) we understand it is normal for non-financial credit growth to continue easing well into the recovery, and only turn up in the wake of the business cycle upturn -- after lenders are less scared and people are eager to borrow again.
I think banks are vital part of our society. Without them we have no business, we have no jobs, we have no growth potential. If the banks are taking something out of society without giving back, in terms of outrageous fees and expenses, that has an equally negative impact.
It should be a balanced relationship, as members of the community, prepared to do good for society. Banks have to lend, but they have to lend responsibility. Forcing them to lend to get money out there as they did in the case of bad loans is counterproductive. We ought to involve them to develop programs to lend, to create jobs, to help communities. I for one am a supporter of the Community Reinvestment Act, very important program.
But the banks have got to be partners in any effort to restore economic stability and to grow the American economy. They have to act responsibly, but that doesn't mean they have to give away money just for the sake of giving it away. There has to be a sense of responsibility for lender and borrower.
Banks, along with other elements of society, have a responsibly to help average Americans who are struggling, yes. We are in a desperate situation today and the banks are one of those elements in our society that are critical to the restoration of economic stability. Do the banks have to do more than usual? Yes, but so do we all.
Banks have got to be creative in terms of lending that stimulates business and creates jobs. I personally believe banks need to take a more active role in cultural institutions because I have never seen a community where the death of the cultural institution hasn't been bad for business. There is an amazing parallel between the health of cultural institutions and growth of business in that community. Communities with healthy cultural institutions are the best ones in which to do business.
In our polarized society today where politicians are playing blood sport to kill one another, it is essential that banks and communities begin to work together rather than throwing bombs at one another. I think it is a responsibility of banks to reach out to communities, not only for the community's survival but the banks' as well.