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The Shiny Side of Subprime

There may be an unintended positive consequence of the mortgage fiasco: an actual economic dialogue between the rich and poor

Whitehaven and Hickory Hill are two struggling neighborhoods in Memphis. Many community residents are fighting to stem the downward spiral, but it isn't too hard to spot signs of hard times, including cars parked on lawns and piles of trash. What's really striking, however, is the huge number of subprime lending outlets offering everything from payday loans to rent-to-own furniture to lease-to-own homes. And like so many troubled neighborhoods around the country, growing numbers of people with low incomes and poor credit who bought a home in recent years with a subprime mortgage are in foreclosure (Read more about the subprime mortgage mess in "The Business of Poverty.")

My guide is Sheila Terrell. She grew up in south Memphis and teaches personal finance to low-income Memphians for the RISE Foundation. It's an antipoverty initiative that encourages poor families to save. She's upset at how financial predators took advantage of low-income minority households. These low-income folks bought homes to raise their families and leave their kids a legacy. "They wanted to leave them something that will help them create wealth," she says. "A lot feel that it's too late for them, but they want better for their kids."

Isn't that a bedrock definition of the American dream, the powerful idea that our children will enjoy a higher living standard than their parents? And that's the real tragedy of the subprime mortgage debacle. Subprime loan sharks dangled in front of low-income borrowers what seemed a genuine ladder into the U.S. mainstream, but it was nothing more than a hologram designed to hustle the poor out and dash their dreams. The failure of subprime lenders, losses on securities backed by subprime mortgages, lawsuits by aggrieved customers, an incipient regulatory backlash, and lawmakers at both the state and congressional level contemplating a crackdown are small consolation.

The Historical Perspective

Yet there's a glimmer of an opportunity. The subprime mortgage daisy chain linked poor families in distressed neighborhoods to Wall Street's money bazaar. Sure, the contracts were mendacious, but now we know that it's possible to build financial bridges between the high-octane pinstripe suit set's vast pool of capital and aspiring inner-city entrepreneurs and homeowners. Done right, capital market innovators could package securities for investors that would raise capital for U.S. emerging domestic markets, especially struggling inner-city neighborhoods. This has been a dream over the years of a number of scholars, activists, and policy makers.

Take Peter Dougherty, a top economics book editor. Several years ago he wrote a book called Who's Afraid of Adam Smith?. In one section of the book, he wondered how the famous Scottish economist would confront poverty in America. He imagined Smith walking on two streets, Manhattan's Wall Street and North Philadelphia's Diamond Street. The former is thriving, vital with money and business, while the latter is downtrodden, lost in depression and despair.

"In [Adam Smith's] characteristically philosophical way, he would worry first about Diamond Street. He would think about how to make every North Philadelphian a merchant, for in doing so he would provide the key not only to greater wealth for the unlucky and deprived, but also the basis for community—for enriched social capital and for greater democratic engagement. The key he would identify would be that of new ownership—of homes, of jobs and businesses, of financial assets," wrote Dougherty. "Smith, in his economist's intellectual style, would set himself to figuring out how to harness the financial horsepower of Wall Street in the interest of Diamond."

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