A New Type Of Poverty Is Crushing The Middle Class

As if the current global monetary system didn’t put the middle-class at a structural disadvantage versus the wealthy, by taxing them disproportionately with inflation, encouraging dissaving and taxing labor (ordinary income) much higher than capital (long-term gains), we now find out that the middle class has a new reason they're being pushed into poverty: banks are willingly trying to put them there.

In a report by the Sydney Morning Herald, the newspaper notes that more middle-class Australians are being pushed into poverty. The simple explanation why this is happening: Australian banks are trying to figure out exactly how much they can charge customers before pushing them into poverty; to do this they are using a formula which incorporates a poverty index to calculate the last marginal dollar of disposable income that the middle class has for fees and charges.

Here's more:

The banking and finance royal commission has cast light on a new type of poverty to emerge in our society: middle class poverty.

To understand it, we have to go back to an earlier government inquiry: the 1972 Commission of Inquiry into Poverty, conducted by Professor Ronald Henderson. That commission had no real policy impact, but its cultural impact was profound. It gave prominence to the Henderson Poverty Index: a measure of consumption described by Henderson as so austere that it was unchallengeable. Updated versions of this index remain a standard benchmark of poverty.

But more than 45 years on, the royal commission into finance is revealing that poverty is no longer just about low income. The commission has heard that Australian banks have adopted actual lending practices (as distinct from their official lending policies) that claim so much household income for contract payments that borrowers are left without enough money to fund basic consumption levels: they are living in poverty.

This isn’t an accident: it is a strategic policy by banks. How much do banks think households need for daily living? According to the Australian Prudential Regulation Authority's submission to the royal commission, banks “typically use the Household Expenditure Measure [a relative poverty measure] or the Henderson Poverty Index in loan calculators to estimate a borrower’s living expenses”.

And regulators in Australia aren't doing much to help - in fact, they've simply made a blanket "don't worry about it" type statement while conducting a "targeted review":

So measures designed to capture the impacts of low incomes are now targeting financially-enmeshed middle-income households, and not as a statement of social shame, but as strategic objects of bank policy.

This has caused embarrassment to APRA, the regulator charged with overseeing those bank practices. In response, it was permitted to make a supplementary submission to the royal commission in March.

APRA now distances itself from use of these lowly measures, claiming them to be an "under-estimation" of household expenses. It reports that in 2017 it conducted a targeted review of a sample of loan files, using external audit firms to ensure independent integrity.

Following the review, one "groundbreaking" conclusion emerged:

The review contended that lending on the basis of either poverty index is not consistent with sound risk management. It assures that its discussions with banks are leading to improvements.

But it doesn't stop there, as regulators had already identified the problem more than 10 years ago and did nothing to act on it: 

The urgency of this attention is disingenuous. In 2007, then APRA chairman John Laker revealed that a survey by APRA showed that "most [banks] use either the Henderson Poverty Index or (the higher) Household Expenditure Survey data from the Australian Bureau of Statistics as the basis for their living expense calculations ... Our review indicated that many lenders were, at the time, using estimates of living expenses below the HPI or were not regularly updating their estimates".

So a decade ago, APRA had already publicly named the problem, in the exact same terms as it names it now. It has simply watched as the practice of using a poverty index to measure a customer's ability to repay a loan has become normalised as a culture.

A consequence of APRA neglect is that "poverty" now goes significantly up the income scale, well into what we generally call the middle class.

As the report further elaborates, the middle class is far more susceptible to slip into poverty as a result of their financial profiles versus either the upper or lower classes:

Middle income people are the cohort in greatest financial risk. They are highly leveraged: they spend more of their income on loan repayments than do people with higher incomes.

Second, their assets are undiversified: they own labour market skills, some home equity and some superannuation.

Third, these assets are illiquid (not easily sold): you can’t transfer your skills to another, houses are costly to sell and superannuation is generally inaccessible. By contrast, people at the top of the income distribution also hold more debt, but their assets are more diversified and liquid, and many generate income streams. Conversely, low income people hold proportionately less debt and are more diversified than the middle: they don’t have their (more meagre) assets tied up in housing.

Fourth, middle income people are under-insured or, in financial terms, unhedged. Their insurance isn’t keeping up with their borrowing. Low income people are relatively well insured. They face compulsory insurance, such as for cars and health. High income people have also not increased their insurance, but their need is less because they are more diversified and have more discretionary funds.

In a commercial setting, financial units that are highly leveraged, undiversified, illiquid and unhedged are considered to be high risk.

So who is advocating for the interests of this cohort? Not the regulators. Their mandate is to ensure that households don’t default at unexpected rates and create problems for financial institution solvency (APRA's concern) or for wider financial stability (The RBA's concern). The fact that people are living on the Henderson poverty line is not a concern in itself to the regulators; it only matters if they stop paying their bills.

The article's author, an emeritus professor of political economy at the University of Sydney, concludes that the regulatory system is rigged set up in such a way so that banks can continue to rip off the middle class, as opposed to making sure that the consumer is actually protected:

So Australia’s regulatory framework is vigilant in ensuring that households don’t create stability problems for the financial system, but no regulator has a mandate to ensure that the financial system doesn’t create stability problems for households. Someone or something has to assume this mantle, for mounting poverty and default risk is surely going to play out as a social crisis, not just a financial one.

This leaves the obvious question: if taxpayers are blanketed with regulation that benefits banks at the expense of the middle class, just why did taxpayers (i.e. the middle class) bail out the world's banks ten years ago?

Comments

Offthebeach GoFuqYourself Mon, 04/30/2018 - 04:39 Permalink

This leaves the obvious question: if taxpayers are blanketed with regulation that benefits banks at the expense of the middle class, just why did taxpayers (i.e. the middle class) bail out the world's banks ten years ago?

 

Something about tanks in the streets.

Which will be next time with the dictatorship.

In reply to by GoFuqYourself

Leakanthrophy 1 Alabama Mon, 04/30/2018 - 06:53 Permalink

It all comes down to GREED:

muh SUV

muh country club membership

muh medical marijuana

muh golf clubs

muh small boat

muh second car

muh 100" TV

muh latest gadgets

muh branded clothing

muh dumb wife's vices

muh stupid kids private schools/ useless colleges 

-------------------------

= TRYING TO IMPRESS MUH CUL-DE-SAC neighbors.

 

Middle class is greedier than poor class, but stupider than the rich class...therefore prone to make financial errors -> slip into poverty.

 

In reply to by 1 Alabama

Theosebes Goodfellow Stuck on Zero Mon, 04/30/2018 - 10:49 Permalink

~"Conversely, low income people hold proportionately less debt and are more diversified than the middle: they don’t have their (more meagre) assets tied up in housing."~

Let this be a lesson to you bourgeoisie! Learn to live, (and love), the life of a peasant! /S

The same people who impoverish us are the ones selling us the false dreams which we keep sucking up. Which dreams you ask? The ones fed to you via your television. TV is more poisonous than drugs. If you doubt this set up a cam of yourself watching your television. Then play it back, the whole thing, and time yourself. The first thing you will notice is how passive you are whilst doing it. You become quite bovine really.

If you are not being productive with the time you have apart from your work to invest in yourself, you will never gain anything. Invest that time with your kids. Teach them not to be cows either. By your measure so shall ye be rewarded. There is no life in front of your TV.

 

 

In reply to by Stuck on Zero

looseal WallHoo Mon, 04/30/2018 - 10:13 Permalink

It is that simple.  It's as simple as telling yourself NO, when your eyes are bigger than your wallet.  

I'm 65 years old, no loans, bought two homes with cash, cars with cash.  Can't remember the last time I took out a loan.  I simply wait until I have the money when making big purchases.  

No, I don't have designer clothes or fancy jewelry.  But I'm enjoying life without financial worries.  

In reply to by WallHoo

Blankone looseal Mon, 04/30/2018 - 11:02 Permalink

Seen it myself of course. When 2600 SF is not enough for a couple to raise 2 kids. Have to buy the 4600 sf house. And the husband got laid off in the last down turn, so what if there is another?

In this case it was all due to a need to keep up with others in a women's club.
Not the banks fault.

Grandparents raised two boys in a two bedroom, one bathroom, no basement house. And that was a lower middle class neighborhood (not a slum) with no crime (white people).

In reply to by looseal

MopWater Blankone Mon, 04/30/2018 - 11:21 Permalink

Im having to do this with my own wife.

 

No, were not buying a new house.

Yes, you are going to get rid of the newer car and get something cheaper.

No, we're not going to keep up with the Jones

Yes, we are going to start doing something to add income in.

 

Somethings gotta give and it's not gonna be me.

In reply to by Blankone

WallHoo looseal Mon, 04/30/2018 - 11:24 Permalink

I dont mind if you have lost faith with people,its not that hard,people are stupid...But in the grand sceme of things people will behave with what they have...If debt is the name of the game,debt it is...

 

In a debt based system NOONE can escape debts.It is calculated that even people without debts pay 40-50% of theire income to debt repayments one way or another.

In reply to by looseal

inhibi Leakanthrophy Mon, 04/30/2018 - 14:49 Permalink

Lol, people like you are a massive part of the problem. Not only does your statement belie itself, it also falls flat at the most cursory of glances.

"Middle class is greedier than the poor class, but stupider than the rich" is utter bullshit. The rich are neither smarter nor dumber, they are just luckier. Luck is like 99% of why the rich are rich, and to think otherwise means you have poor understanding of the world.

So many examples almost uncountable of heroic, smart, intellectual individuals who were not wealthy, as wealth is:

1) a pursuit (meaning you need to target wealth specifically to become wealthy)

2) rewards the egotistical over the empathic (meaning you have to be okay with driving others, who may be more gifted/smart, to earn wealth for you, which is another way of saying you need to buy into the fraud that is being rich - making others do your work)

3) perpetuates itself (meaning those born into wealth have very high chance of being wealthy themselves, or those that have connections to wealth, or those that inherit wealth, win wealth, etc).

If your statement were true, we wouldn't have IDIOTS running corporations ALL OVER THE WORLD.

 

EDIT: My idea of 'rich' is someone who doesnt have to work for life, who gains by doing nothing, not a temporarily wealthy musician or athlete.

 

In reply to by Leakanthrophy

Promethus Rex Titter Mon, 04/30/2018 - 07:43 Permalink

After the 2005 Hurricane season USAA decided to get out of the Home owners insurance business in Florida. They grandfathered in their current customers and closed the market. My insurance went from $1k to $6k a year where I was paying more for my two bedroom townhouse than either of my siblings paid for their McMansions in Boca or Wellington. I've been with USAA since the 70s. So Yes, keep an eye on USAA too.

In reply to by Rex Titter

Rex Titter ZENDOG Mon, 04/30/2018 - 13:07 Permalink

No, I'm not retired brass sucking the lifeblood of the hapless taxpayers.  I have too much integrity for that.  Those ridiculous military pensions should only go to people that had to dodge bullets in a combat zone.  All others work till they're 65...  Downsize too what?  USAA is cheaper than anybody else I know of...  Lemmeno,,,  ;-D

In reply to by ZENDOG

GeezerGeek Promethus Mon, 04/30/2018 - 09:06 Permalink

Is your townhouse east of I-95? Anything to the east gets creamed for the windstorm insurance. Some of Boca is to the west, and Wellington definitely is west. To save in the long run, I wanted to pour concrete over my house (east of I-95), but code enforcement said it would be to much of an eyesore. So much for owning my own land.

My plan B is hoping TPTB won't sent any major hurricanes within 100 miles of where Debbie Wasserman-Schultz lives. Worked like a champ last summer, but if she and the Awan crew go down I may need a plan C.

In reply to by Promethus

toady bobdog54 Mon, 04/30/2018 - 10:44 Permalink

See, this is the type of comment I still can't figure out... you see it a lot on the boomer hate threads.

+90% of the general population in the U.S. has nothing to do with what the government does. Hell, even most of the drones that work in government only process paperwork.

Do you think a majority wants income inequality? Wants to bomb the middle East? Wants to bail out the rich?

No. The 90% want to be left to their own devices. They don't vote, invest, or shoot people. They leave that shit to the 10%. I wish them good luck, think the bulk of what they do is wrong, but realize there's nothing I can do about it.

In reply to by bobdog54

Dilluminati GoFuqYourself Mon, 04/30/2018 - 06:37 Permalink

Foolish people borrowing money.. what happened to saving and owning?  These people should be taught at grade school the dangers of borrowing.. the long-term consequences of immediate gratification by signing their names.

Foolish people doing stupid shit?

Hardly newsworthy

In reply to by GoFuqYourself

RedBaron616 Dilluminati Mon, 04/30/2018 - 06:43 Permalink

People have forgotten how to save. Everything is instant gratification or the government will bail me out. Can't drive a used car, have to have a new one and then not a car, but the biggest SUV/Truck I can afford payments for. My car is a 2005 Honda Accord EX with 155K on the odometer. It runs and looks good. Plan to keep it another 100K.

In reply to by Dilluminati

Ghost who Walks Dilluminati Mon, 04/30/2018 - 07:32 Permalink

The whole environment in Australia has been to push people into investing in "Property".

Endless TV shows on buying and refurbishing, ads, discussions at social functions, manipulation of taxation laws and endless marketing from Real Estate Agents.

If the school system had tried to push that training and knowledge as part of the agreed Education studies for young people it would have attracted adverse comments for the Public Servants from the usual suspects in the lobbies.

In private schools I don't think the subject of finance and borrowing is covered either. My daughters attended both systems and never discussed it with me.

In reply to by Dilluminati

Tubs GoFuqYourself Mon, 04/30/2018 - 06:49 Permalink

The info coming out of the Royal Commission is insane ie: aprox 30% of mortgage applications were not assessed for income correctly. Interest rates will spike when we come out of the Royal Commission and one has to ask, if even 15% of the bank order book defaults where does that leave the banks?

Our holes and houses economy is going to come to an end soon and it gunna be a bloodbath.

In reply to by GoFuqYourself

HRClinton GoFuqYourself Mon, 04/30/2018 - 06:49 Permalink

Darwinism rules. If dumb cucks & fvcks get screwed by banks, they deserve it. Only the 'fittest' thrive.

Smart people have a Plan and take charge of their lives, by joining the Parallel Economy (PE) and staying there:

PE = DIY + Barter +PM + Cryptos + Collectibles & other Appreciating* Assets 

* RE, Art, Antiques that "appreciate" against CB fiat creation.

If you're going to live on the CB Debt Plantation, expect to be treated as its serf, vassal and slave. It's that simple.

In reply to by GoFuqYourself

ItsAllBollocks Mon, 04/30/2018 - 04:09 Permalink

Why Australia? Because the average Australian doesn't give a rats about politics. It's not really our fault, we're brought up this way. Football, meat pies, kangaroos and Holden cars. It's the reason most Australians still have no idea we have lost our country, let alone how or to whome. We even have a saying for it. 'She'll be right mate'.

Tarzan ItsAllBollocks Mon, 04/30/2018 - 04:40 Permalink

If a robber has a bill to pay before the end of the day, and robs me to pay it, have I "bailed him out", or been robbed?

We sure as shit didn't have a say in the matter.   We didn't bail them out, we were robbed, by force of the almighty tax man, and the threat of being thrown in jail, for tax evasion.

They say the middle class is in poverty, over run with debt, and we are, yet who is it with their hand out, who is it that can't pay their fucking bills without robbing the middle class?

When the shit hits the fan, and we deal with these spooks in the intelligence agencies and their coup, the Bankers must closely follow their demise!

In reply to by ItsAllBollocks

keep the basta… ItsAllBollocks Mon, 04/30/2018 - 05:45 Permalink

I am a local and I dont call it invasion day, tho I had to sell my lovely home to an indian for land value as I was the only white face for kilometres.

and everyone suffered here after the english arrived except for their own, the sqattocracy, the english church  and the english bloodlines in specific areas, the women sold for rum on disembarkation, the  convicts,  the indigenous, the free irish and still when I was  young at school.

The english cause pain and suffering everywhere they go, and if they are in their own country they  make those under the  elite suffer... 25% children in UK live in poverty. The disabled suiciding  after their pensions cut.

Its alright mate is just bullshit. It snot alright here at all. The asian immigrants are flooding in, cities are unbearable. Whole generation of australians  have not been able to have children because they cant afford homes and wont have kids in a room.

The govt will NOT pass the second tranche of the anti money laundering by Property bill. 

In reply to by ItsAllBollocks

ItsAllBollocks keep the basta… Mon, 04/30/2018 - 06:09 Permalink

I agree with you 100% though the term 'she'll be right mate' cannot be disputed. As I said, it's why we lost the country and as for invasion day I don't really care.

Something I do really care about though is the fact so few have any idea why our Goldman Sachs government really wants a republic and the only opposition to it is staying loyal to the english monarchy.

Australia has no foreign enemies except the ones we create by blindly following the US into it's perpetual wars of aggression and is in the unique position to form a multicultural and politically neutral republic with a new constitution and bill of rights the rest of the world would envy.

Unfortunately that's not the plan of our Goldman Sachs prime minister.

p.s. There is no such thing as ex-Goldman Sachs. Once a bankster, always a bankster.

In reply to by keep the basta…

keep the basta… Aussiekiwi Mon, 04/30/2018 - 06:35 Permalink

Terrible, the drought was awful the past summer, I lost a lot of kangaroos and wallabies son my property. It was heartbreaking to them lose weight. They are truly wild free animals. Then there are hares and big protective lizards, worried for them. And the birds.

With whats coming in climate NSW will be much colder, was -10.8 C in some places. Dry too, and the soil is poor and the oldest country on the earth. No glaciers to refresh the soil  and no volcanoes.

I fear much wildlife will die in the next years

In reply to by Aussiekiwi