I’d like to apologize for stepping into this conversation sporadically, and that too with such lengthy contributions. But since it was my piece that set this off, I feel that I should offer a response to some of the critiques.
A good place to start might be the question that km asked: Just how is sub-prime lending a problem? If we understand subprime lending to be a process where a high-risk borrower receives money at a higher-interest rate, then there should probably be some provision for that in an organized financial system. But many of the subprime loans in this crisis were given to people who should never have qualified for them in the first place, and whose only chance of being able to make good on their payment was contingent on the value of properties continuing to increase. The lending agencies did not bother to check the accuracy of the information that was filled out on the forms, and even encouraged borrowers to lie about their income and credit histories. Informally, these loans were referred to within the industry as “liar loans”.
But why would lenders do that? Why loan money to someone who you know will probably be unable to repay? It is crucial to understand this in order to make sense of the mess. The loans that were given were mostly by mortgage companies that weren’t even banks. Their intention was to make loans only to sell them off to Wall Street, where these loans were turned into securities which passed along from hand to hand, getting transformed into more and more esoteric instruments along the way. As long as the bubble could be kept going, all parties in the transaction made large sums of money (where do you think the $700 billion that is being asked for disappeared?). The racket was too tempting. The runners of the scheme knew it was going to fail; Warren Buffet had called derivatives “weapons of mass financial destruction” way back in 2003. But they also knew that when the house of cards came tumbling down, it would be no skin off their nose. Someone else would be left holding the bag.
There was no regulatory framework to prevent the repeated cutting and repackaging of securities, rendering the system so opaque that no one knows which domino can fall next. There were two other major regulatory “lapses”. One, investment banks were so highly leveraged (for instance, Morgan Stanley has $30 of assets for every $1 of capital), that any gain or loss was highly magnified. These corporations were boldly going where none had gone before, laying down huge bets with borrowed money. Two, the government chose to look the other way on several issues of conflict of interest. Remember Enron? It had hired Arthur Anderson to audit its books, even while it retained the same company for huge consulting projects. The Sarbanes-Oxley Act fixed that but only after a major debacle, which claimed several prominent organizations. In the case of the current crisis, the securites that were created out of the mortgages became desirable only because credit rating agencies like Moody’s and Standard & Poor’s gave them AAA ratings. Why did they do that? Well, financial institutions that want to sell their securites hire the rating agencies for a large fee to help them convert their mortgages into securities that can be sold in the market. Shouldn’t the rating agency have been an independent organization that didn’t have a dog in the fight?
But why was there no adequate regulatory framework in place? Because it had been systematically hollowed out over the years by lawmakers eager to do the bidding of those with deep pockets. It wasn’t for nothing that Freddie and Fannie spent over $174 million in lobbying Congress over the last 10 years. The justification for reducing regulatory oversight was cloaked in ideological terms. The “free market” should be allowed to do what it deems best. What’s good for Wall Street is good for
Keep in mind the following. Fannie Mae was a publicly owned enterprise till 1969 and served its purpose very well. It bought up mortgages from banks, freeing them to loan more money to newer homeowners. By 1970, around 63% of American families owned their own home, up from 43.6% in 1940. Everyone made money, though no one made exorbitant profits. But once private enterprise started competing with Fannie and making more money because they were free to take greater risks, Fannie was spun off as a private concern too in an increasingly deregulated environment; a process that pre-figured the current scam.
So, on to the other major question I wanted to address: Is it fair to blame Wall Street (alone) for this mess? The answer – of course – is no. Wall Street stands in – as its alpha male – for a system that is designed to screw over the disadvantaged. While this has always been the name of the game, its nature has been significantly altered in recent times. To take just one indicator, the Wall Street Journal reports that now the top .01% (14,000) families own 22.2% of the nation’s wealth, while the bottom 90% (around 133 million) families, a mere 4%; numbers not seen in nearly a century. A system of crony capitalism is firmly in place, that has been responsible for the redistribution of wealth from the poor to the rich (check out the Gini coeffiecients over the recent past).
The so-called “greed” of those who were seduced, cajoled, and deceived into taking on the subprime loans is “understandable” because we can all put ourselves in their position and justify their actions. They wanted to move into a decent neighborhood and/or make some money. They assumed that this would happen because they were being told over and over again that the prices of property was rising and would continue to rise, that they’d be foolish to pass this opportunity by, and that the only thing that was holding them back was an inability to get a loan – a hurdle that the salesperson claimed could be easily surmounted by signing on the dotted line. The “greed” of the Wall Streeters however came out of a desire to make vulgar amounts of money from a process that they very well knew was a scam, one that would eventually and inevitably extract a price from the general public in the shape of a taxpayer bailout, but also from poor and vulnerable communities. I suggest that many among us would not find this quite so “understandable”.
So this is what the story boils down to. A powerful coterie of investment banks and hedge funds used hundreds of millions of dollars lobbying a compliant administration and Congress to rewrite the rules of the game in their favor. The administration, charged with being watchdogs, was staffed with people from the very industry it was supposed to police, and often chose to look the other way even as the debacle was unfolding and even as conflict of interest ran rampant. As a consequence, thousands of people lost their lives savings, and millions more will be affected by increased commodity prices, growing unemployment, and an impoverished exchequer that will have to cut back on services to the poor. When it comes to making hard decisions of cutting expenses in the budget next year, whose interests do you think it will be easier to deprioritize; those of the potential contributors to election funds, or those who have nothing to give? And as I witness this sordid drama unfold, do I have to really justify my moral outrage? The demand to blame an abstract “society” is, in effect, the demand to blame no one, to allow the perpetrators a free ride, to encourage them to do it again, and therefore to be complicit in the next scam.
“If these people are too stupid to understand what they're signing, they should stay out of the market,” say some. Great. So we are playing the blame game then. Only, we are going to blame the “stupid”. Who also happen to be the poor. It is their stupdity to blame. Case closed, let’s carry on with life.
Among other things, I do some work with an organization called the Coalition of Immokalee Workers. I visited the town of
I will write my manifesto on “The Right to Outrage” sometime soon, but let me end by making a final point. Historians, writing about inequality in the
*What? You didn't really think I was going to resist temptation, did you?