by Jeff Vidrine

Created on: November 06, 2008   Last Updated: February 10, 2009

The housing bubble and credit crisis has multiple causes but it definitely is not the result of actions by "the poor". One reads and hears about how under-capitalized borrowers are the cause of our current financial woes. While it's true that loans were made outside normal lending practices, "the poor" were not the cause of this change. The housing bubble and credit crisis are resulting in a greatly increased foreclosure rate nationwide. Foreclosures are at all-time highs in some of the most affluent states and exclusive neighborhoods.

An economic bubble, according to Investopedia.com, is "an economic cycle characterized by rapid expansion followed by a contraction." These bubbles occur because of a change in the way members of that segment of the economy conduct their business and result in the transfer of capital to the bubble of rapid growth. When the bubble bursts, capital is moved out causing rapidly deflating prices.

The Investopedia.com dictionary describes a run-up in housing prices fueled by demand and speculation in the belief that recent history is an infallible forecast of the future as a housing bubble. "The poor" do not make lending decisions, assess the credit worthiness of the borrower, and do not speculate in an attempt to make a profit.

What is the evidence that "the poor" are not the cause of the current financial crisis? First, let's define "poor". The 2008 Health and Human Services Poverty Guidelines establish a family of four as being in poverty with an income of less than $21,200. An examination of economic statistics showing the percent below poverty level by state has Mississippi at #1, Louisiana #2 followed by New Mexico, District of Columbia, and Arkansas. The map at StateMaster.com is a colored, graphic display showing that the states with the least percentage below poverty level concentrated in the Northeast, Midwest, and West. It is fair to say that the states with the preponderance of families below the poverty level are in the South-Central and Appalachian regions of the United States.

If the "poor" were the cause of the housing bubble and credit crisis, then the states with the highest percentage of poverty level residents should have the highest foreclosure rates. Is this true? The blog, bigpicture.typepad.com, published a map of the United States showing in graphic form foreclosure actions as of April 2008. The comparison of that map to the poverty level map is striking.

Those states found to have the lowest percentage below poverty level had the highest foreclosure rates. As an example, Mississippi is #1 in percentage of the poverty level but close to #50 in percentage of foreclosures. The StateMaster.com map lists Michigan #26 in the poverty level but is close to #1 in foreclosures. Other states that fall into this category are Florida, Illinois, Indiana, Ohio, Virginia, Massachusetts, and the state tied for the lowest percent below the poverty level, Connecticut, was in the top one third of states in foreclosure rates.

Using "the poor" as a scapegoat for the current financial crisis merely passes the buck and deflects attention from the true causes. Easy credit based on loose fiscal policy by the Fed, creation of Government Sponsored Enterprise (GSE) like Fannie Mae and Freddie Mac, poor oversight by Congress of the GSE's, and pressure placed on lenders to loosen their lending standards by both governmental and nonprofit organizations are some of the more accurate causes.

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