The U.S. home foreclosure crisis is a social disaster, a moral blight on our nation, and is at the heart of our economic crisis. William Greider, writing in
The Nation, begins his article by
making those points in one short paragraph:
The rebellious citizens occupying Wall Street shock some people and inspire others with their denunciations of bankers, but everyone seems to know what they are talking about: it is the barbaric and suffocating behavior of the nation’s largest banks (yes, the same ones the government rescued with public money). Right now, these trillion-dollar institutions are methodically harvesting the last possible pound of flesh from millions of homeowners before kicking these failing debtors out of their homes (the story known as the “foreclosure crisis”). This is a tragedy, of course, for the people who are dispossessed. For the country, it is a generational calamity.
Consequences – The death spiralLater in the article, Greider describes the consequences of this crisis in greater detail:
The housing picture is ugly. Among the 55 million families with mortgages, one in five is underwater – they owe more on their mortgage than their house is worth – or already delinquent. That’s 10.4 million families who are sliding toward failure and foreclosure… As a result, the housing market will remain depressed for years…
Economic recovery may have to wait until that (housing) surplus is gone, because the housing sector has always led the way out of recession. The more housing supply exceeds demand, the more prices fall. The more prices fall, the more families get sucked into the deep muddy. The vicious cycle is known in the industry as the death spiral. So far, there’s no end in sight.
A SOLUTION: DEBT FORGIVENESS – CRITICISMS AND RATIONALE Greider proposes the core of a solution:
There is a solution, and it will appeal to the rebellious spirits occupying Wall Street because it combines a sense of social justice with old-fashioned common sense. It is Forgiveness – forgive the debtors. Write down the principal they owe on their mortgage to match the current market value of their home, so they will no longer be underwater. Refinance the loan with a reduced interest rate, so the monthly payment is at a level that the struggling homeowner can handle. This keeps families in their homes, with a renewed stake in the future. It gives homeowners incentive to keep up their payments, because once again they have some equity and the opportunity to accumulate much more.
Before providing the moral rationale for that solution, Greider notes the opinions of its detractors:
Some people are morally offended by the idea, and not just bankers… Letting failed borrowers off the hook encourages bad habits, they say, the so-called “moral hazard” of inviting others to skip their debt payments too. Forgiveness does require a measure of sympathy – a sentiment in scarce supply among governing elites. Policy wonks and politicians have been taught by a generation of hard-boiled titans and their business-school apologists to brush aside fellow feeling and focus only on the bottom line. The common good, conservatives claim, is best served by adhering to the unsentimental economics of “me first, never mind the losers.” That pernicious doctrine still reigns in the political culture…
Then Greider goes on to describe why some form of debt forgiveness is the right thing to, morally and economically:
Forgiving the debtors is the right thing to do, because the bankers have already been forgiven. The largest banks were in effect relieved of any guilt – for their crimes of systemic fraud or for causing the financial breakdown – when the government bailed them out, no questions asked. The Obama administration followed up with a very forgiving regulatory policy that basically looked the other way and ignored the fictional claims on bank balance sheets. Instead of forcing honest accounting and rigorous reform, the administration adopted a strategy of soft-hearted regulation…
The government’s rationale for rescuing bankers first was that the economy cannot recover until the financial system is healed. The premise did not prove out – banks revived, at least partially, but not the economy.
The same rationale applies, more logically, to failing homeowners. A heavy blanket of bad debt is smothering economic activity. Until the debt is lifted from the housing market… the economy is unlikely to regain its normal energies. So debt forgiveness is not just a moral imperative; it’s also an economic necessity.
THE ROLE OF INEQUALITY AND HISTORICAL PARALLELS
The role of inequalityGreider discusses the role of inequality in producing our current crisis:
Modern economists and their supposed “science” generally ignore the ancient wisdom… Gross concentrations of money at the top help explain why the system eventually stalls out. This is a basic insight that ought to inform the agenda for recovery. Inequality matters.
Economists Michael Kumhof and Romain Rancière wrote
a breakthrough paper for the IMF that made the connection between inequality and financial crisis. “The crisis,” they wrote, “is the ultimate result, after a period of decades, of a shock to… two groups of households, investors who account for 5% of the population… and workers who account for 95% of the population.” The 5 percent, broadly speaking, lend to the 95 percent, and in so doing gain still greater wealth and power. The shock comes when the creditor class suddenly realizes that the borrowers are drowning in debt and cannot possibly absorb any more…
In the early 1980s the 95 percent had debts equal to about 65 percent of their income. By 2006 that figure had risen to 140 percent. They were devoting so much of their paychecks to making payments on old debt – credit cards, equity lines and mortgages – there was nothing left to make the payments on new debt. Defaults and bankruptcies were already swelling….
Greider provides some very interesting parallels to ancient civilizations:
The American financial system seems ultramodern in its complexity, but it is actually ancient in the brutal ways wealth asserts power over others. The earliest societies were torn by conflicts between lenders and borrowers, the rich versus the poor. They were compelled to fashion hard rules and put restraints on lending to curb the cruelties and promote a moral minimum for social justice. Nearly every country and culture embedded these values in religious tenets that governments enforced…
The arguments typically began when kings or landowners lent some of their surplus wealth to peasant farmers, then took away the debtors’ property if they failed to repay the loans. In olden days, the creditor would seize the debtor’s livestock and vineyard, perhaps even his children to be enslaved as household servants, until the debts were repaid. If the failure of borrowers persisted, the wealthy lenders would wind up owning all the property, with the peasants reduced to tenant farmers on the land they had once owned. The negative cycle stopped when the peasants could no longer borrow because they had nothing left for lenders to claim in default.
Economic life at that point was frozen or depressed, no longer functioning. In a rough sense, this resembles what happened to our economy in the financial crisis. Debtors were tapped out, up to their eyes in debt, and creditors recognized that they could not lend to them anymore without losing their money. In modern economies, no one takes away their children, but they do seize homes and cars and other assets…
Here is what Americans can learn from the ancients: severe inequality of wealth and income is not just a question of morality. Inequality is the fundamental source of the disorder that leads to financial crisis and chokes off the economy. Ancient religious
principles like the limits on interest rates were a practical way of maintaining balance in economic life. Taking away those rules – as US politicians did when they repealed prudent regulations of banking and finance – in effect authorized the growing
inequality that eventually leads to chaos.
Parallels to the greatest economic crisis in U.S. historyGreider describes similar parallels with the Great Depression of the 1930s:
The same ominous combination – a run-up of debt accompanied by gaping inequality – preceded the crash of 1929… But why did ordinary debtors fall into this trap? The standard line is that they were… eager for consumer pleasures they couldn’t afford. This is true for some, but the explanation libels most working people. Wage stagnation started in the 1970s and spread widely in the Reagan era. Typically, as incomes faltered, families faced two bad choices – either go deeper into debt or surrender their middle-class standard of living. Naturally, most people tried to hang on to what they had.
The responses to this crisis are well-known. People worked more – women and teenagers entered the workforce, family members took two or three jobs. And they borrowed more, paying the bills with credit cards. In these terms, average families were making heroic efforts to maintain their standard of living… At some point the merry-go-round would have to stop. The retreat is now in full flight… Wages are stagnant or falling. Foreclosures are tearing through communities, and falling home prices are destroying family equity. Americans … are experiencing the reverse New Deal.
GOVERNMENT FAILURE TO ACTGiven that home foreclosures were at the heart of our economic crisis, one would hope that government interventions would be targeted towards helping homeowners rather than relying on a trickle down sort of solution in which primarily banks were targeted for relief. But it didn’t work out like that. William Kuttner in his book, “
A Presidency in Peril – The Inside Story of Obama’s Promise, Wall Street’s Power, and the Struggle to Control our Economic Future”, describes how this crisis was handled by both the Bush and Obama administrations:
The Bush administration made the fateful decision to give primary relief to banks, not to homeowners. Obama continued the basic policy… The collapse in housing prices had wiped out at least $7 trillion of net worth of American families…
Obama’s solution was a program called “
Making Home Affordable”. Kuttner explains that this program had several fatal flaws. Perhaps the most fundamental flaw was that it was
voluntary for the banks. Instead of mandating actions on the part of banks, they were given various “incentives”. But the incentives weren’t enough to make it worth the bank’s while to provide much help to homeowners. In fact, in many cases they had an incentive to foreclose rather than help the homeowner stay in the home. Consequently, the banks offered very little help for most homeowners.
There was one provision of Obama’s bill that had some teeth. That was the proposed authority of bankruptcy judges to
compel banks to modify loans to prevent foreclosures. This provision was fiercely resisted by the financial industry, and therefore given very little support by the Obama administration. Kuttner explains:
In this key battle, the White House did not lift a finger to urge wavering legislators to support their president… Word was quickly passed on Capitol Hill that this was not a provision that mattered to the White House.
The only provision of the bill that was opposed by the financial industry therefore died in the Senate.
Ignored alternativesAs the Obama administration was attempting to come up with a plan to address the home foreclosure crisis, and it looked as if their primary intervention would be a bailout of banks, my daughter posed an idea to me: Why not give or loan the money directly from the government to the homeowners? Why go through the banks? How do we know that they will put the money to any useful purpose? I responded something like, “Well, that makes sense to me, and I’d like to see it happen. But I don’t hear anyone talking about it. I don’t know why not. Maybe it’s because the corporatocracy feels that if you give money to banks, that’s capitalism, and therefore good, but if you give money people who are in the bottom 99% on the wealth scale, that’s socialism, and therefore bad.”
I later learned that Kuttner (as well as former U.S. President Franklin Roosevelt) was thinking along very similar lines:
There is a straightforward alternative to the administration’s approach to foreclosure prevention, but it would require much more direct government involvement. And it would take a nervy battle rather than a friendly collusion with Wall Street. In the case of unaffordable mortgage loans still held by banks, a “public option” of direct government financing could reduce borrower costs without relying on largely futile incentive payments to bankers…
The comparison with the New Deal is instructive – and depressing, when one contrasts the boldness of Roosevelt with the timidity of Obama. Faced with an epidemic of mortgage foreclosures, the New Deal created four new institutions…
Maybe that’s why FDR’s first and third presidential terms demonstrated the two
largest average annual increases in job growth of all presidential terms from 1921 (when records are first available) to the present.
The Obama administration’s ‘trickle down’ approachKuttner comments on the difference in government solicitude for banks, compared with the rest of us – the bottom 99%:
The contrast was all too vivid – several trillions in loans and loan guarantees for the banks, and a grudging $3 billion for the homeowners who had been the banks’ victims. As a consequence of the administration’s half measures and failure to move boldly, the mortgage foreclosure crisis is continuing to drive millions of Americans from their homes, depress housing prices… and retard the recovery… Refinancing underwater retail mortgages is comparatively easy. It just requires political will.
Greider also comments on the failure of the Obama administration to address the needs of ordinary people, while favoring powerful financial institutions:
The largest and most powerful banks are standing in the way of this solution. The Obama administration is standing with them, because bankers and other creditors would have to take a big hit if they were forced to write down the debt owed by borrowers… That risk presumably explains why the Treasury Department and various housing agencies try to dodge the growing demands for debt forgiveness. Fannie Mae and Freddie Mac, which guarantee roughly 70 percent of all mortgages and are now virtually owned by the government, have flatly rejected the idea, and so have the Federal Housing Administration and the Veterans Administration… President Obama seems to be playing a sly double game – protecting banks from sharing the pain while proclaiming sympathy for embattled homeowners…
Laurie Goodman, a housing-finance expert, made a similar point in testimony before the Senate Banking Committee, telling them that the government is making it more difficult for homeowners to get new mortgages, stating: “The Treasury has not let it happen… Almost every single proposed government action has been aimed at further tightening credit availability”.
Greider makes a parallel between the failed Obama administration’s ‘trickle down’ approach and Japan’s handling of a similar problem in the 1990s:
The president is losing the policy bet he made at the outset of his administration. Government regulators, he decided, would give leading banks a pass on stern cleanup and rigorous reforms. With blanket forbearance… the assumption was that the largest financial institutions could earn their way back to solvency, gradually shedding all those “toxic assets” left over from the collapse of the housing bubble. Recovery of the broad economy was supposed to follow.
Obama’s bet looked very much like the one Japan made in the 1990s, after its spectacular housing bubble burst. Obama’s failed just as Japan’s did, and for some of the same reasons. Neither nation wished to take on the biggest banks or do something about the mountain of bad debts suppressing new economic activity… Obama hasn’t changed his failed strategy or relieved the advisers who sold it to him. But the original plan has come back to haunt him…
CAUSES
The corrupting influence of money in politicsThe most obvious explanation for why the financial industry is so well treated by our government, compared to their treatment of ordinary people, is the corrupting influence of money in politics. This problem is so well known, and I’ve written about it so much that I won’t spend the time that it deserves here. Ari Berman describes the problem succinctly in an article titled “
Occupy Wall Street Hits K Street”:
If you want to understand how the top 1 percent have accumulated such power in American politics, look no further than Washington’s K Street lobbying corridor. Wall Street has long been the dominant player in the capital. “The banks,” Senator Dick Durbin said in 2009, “are still the most powerful lobby on Capitol Hill. And they frankly own the place.” The
financial sector has spent more money on campaign contributions and lobbying than any other sector of the economy – $4.6 billion on lobbying since 1998, according to Open Secrets. This year,
commercial banks and
securities and investment firms have spent over $82 million on lobbying, employing over 1,000 lobbyists.
for president perhaps provide an explanation for his favored treatment of the financial industry, with over $3 million received from Goldman Sachs, JP Morgan Chase, Citigroup, and Morgan Stanley combined.
Misplaced respect for and confidence in our financial elites Another factor that enables the financial elites to grab so much power is that they are surrounded by a – vastly misplaced – mystique, awe and respect. No matter how many mistakes they make, or how much money the American taxpayers have to put out to bail them out of the trouble that they created, that mystique, awe and respect still remain, at least to some extent.
For example, it should have been obvious by the time that Barack Obama took office that Robert Rubin and Larry Summers – both who served as Treasury Secretary under Bill Clinton – played a major role in the financial disaster that then confronted our country. Rubin was a major advocate of financial sector deregulation, and he was the prime architect of the repeal of Glass-Steagall. Following his tenure as Treasury Secretary, his irresponsible risk taking at Citigroup drove it into the ground. Robert Kuttner comments on the absurdity of Obama’s reliance on Rubin’s financial advice:
Given the abject failure of the financial deregulation that Rubin championed as Clinton’s top economic adviser, followed by the collapse of the business model that he promoted as senior executive at Citigroup, it is remarkable that a consummate outsider like Barack Obama did not view Rubin (or his protégé Summers) as fatally damaged goods. On the contrary, Obama felt he needed men like Rubin and Summers for tutelage, access, and validation. That itself speaks volumes about where power reposes in America…
As a member of Ronald Reagan’s Council of Economic Advisors and as successor to Robert Rubin as Bill Clinton’s Treasury Secretary, Larry Summers was a big proponent of the kind of financial deregulation that led to our current crisis. He was
ousted as president of Harvard University in 2006 for pursuing reckless financial policies. Yet Obama appointed him as his top economic advisor. Kuttner comments on that:
Summers’s checkered past was more than sufficient to persuade {Obama’s} political team and the official vetters that he was not an acceptable risk for Senate confirmation (for Treasury Secretary). But evidently it did not give much pause to the premise that Obama should put Summers in charge of America’s economic policy.
Obama’s re-appointment of Ben Bernanke as Chairman of the Federal Reserve and Rahm Emanuel as White House Chief of staff were also symptomatic of his misplaced respect for Wall Street insiders. Bernanke was so against transparency in government that
he agreed to provide the Inspector General of the TARP program with certain information only on condition that it not be shared with Congress. His actions were characterized by an extreme anti-regulatory philosophy. In Emanuel’s three terms in the U.S. House of Representatives, he was the largest recipient of funds from the financial industry.
It’s not just Obama. Robert Scheer, in his book “
The Great American Stickup”, commented upon the fact that our government is filled with public officials who rely on advice from the financial elites and their lobbyists for just about everything:
I found that congressional representatives or their staffers would often respond to my questions by helpfully referring me to lobbyists who they conceded knew a great deal more about the subject than those actually paid by taxpayers to represent the public interest. That these staffers could do so without embarrassment speaks enormously to the incestuous arrangements of our political process. Not only are these lobbyists seen as “experts” on Capitol Hill, rather than simply corporate mercenaries using cash to buy laws and access, but they are treated with a palpable respect, as are the corporate executives who often accompany them… They are received as admired insiders, a resource to be milked for knowledge and campaign contributions. Their presence unchallenged and unquestioned, they tromp up and down the halls of power, writing laws, killing bills, and generally putting the lie to the fantasy of a government “of the people, by the people, for the people”.
Scheer also explains how this is translated into policy:
The word “dole” is usually applied pejoratively to welfare mothers sustained in their dire poverty by meager government handouts, not to top bankers ripping off the taxpayers. But as opposed to welfare mothers, who must survive stringent monitoring, the bankers would be largely self-monitoring. Under Obama as with Bush and Clinton before him, there was to be tough love for welfare mothers but never for bankers…
Matt Taibbi, in his book, “
Griftopia – Bubble Machines, Vampire Squids, and the Long Con that Is Breaking America”, explains how that awe and respect that are automatically afforded to our financial elite is furthered by our corporate media in the rules they apply to what can and cannot be said:
You can talk abstractly about class economics using clinical terms like “income disparity”. But in our media you’re not allowed to just kick the rich in the balls and use class-warfare language. The taboo isn’t so much the subject matter, the taboo is the tone… You can’t call them crooks and imply that they haven’t earned their money by being better or smarter than everyone else, at least not until they’ve been indicted or gone bankrupt…
When Taibbi wrote a
very critical article in
Mother Jones about the misdeeds of our financial elite, and suggested that our bailout of them was too generous, he was lambasted by the corporate media. However, they did not contest his facts. Rather, their main point was that no matter how bad the financial elite are, we need them and they must be saved. Here is a typical criticism on this issue
by David Brooks:
Political populists… can’t seem to grasp that a politics based on punishing the elites won’t produce a better-educated work force, more investment, more innovation or any of the other things required for progress and growth… The populists have an Us versus Them mentality. If they continue their random attacks on enterprise and capital, they will only increase the pervasive feeling of uncertainty, which is now the single biggest factor in holding back investment, job creation and growth.
What a bunch of baloney. Attacks on our financial elites are not usually “random”. There is no politics that is “based on punishing the elites” just for being elites. People like Matt Taibbi criticize them when they exert their considerable wealth and power to “influence” public officials to create laws or policies that allow them to rob the American people. Our financial elites and their backers in the corporate media try to sell us on the idea that we need their services so badly that we can’t afford to penalize them when they commit crimes against us. If our financial system is so fragile that we have to tolerate our money being stolen from us in order to prevent the system from collapsing, then it seems to me that the system needs a complete overhaul.
PROSPECTS Despite the massive corruption of our political system, and the massive amounts of money and power arrayed against ordinary people today, Greider sees some reason for optimism that our economic crisis will eventually be constructively dealt with – though it may get a lot worse before it gets better.
The issue of forgiveness has little traction in mainstream debate, but prospects for action are far more promising than cynics assume. I am convinced that the debt-forgiveness question will eventually move to center stage… If it is not dealt with, the problem will become larger and more destructive. The politics will change when the public realizes that the economy will remain stagnant until banks are forced to a reckoning and the huge overhang of bad debt is eliminated.
My evidence for optimism is a sampling of authorities from the financial system – banking and housing experts, financial economists, even a few investment bankers – who are already calling for debt reduction. Moral sentiment aside, people who know how the financial system works understand the ugly consequences of doing nothing. The industry advocates of dramatic write-downs are not radicals, but the logic of their position has so far been largely ignored by the major media.
Active citizens are spreading the word, however. While Lower Manhattan was being occupied, the New Bottom Line, a coalition of community groups, church folks and other networks, was staging daily clashes with big banks around the country. George Goehl of National People’s Action sees the level of direct action and nonviolent civil disobedience rising rapidly among frustrated people of conscience.
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