One of the perplexing realities surrounding the recession that rocked the nation beginning in 2008 was the way that public outrage became diffuse and unfocused, never concentrating its force on the actual culprits who caused so much havoc for so many people.
One of the reasons was the myth that everyone, more or less, shared the blame. Lenders made bad loans, but home buyers eager to buy into a hot market took out bad loans. The over-ambitious home buyer in Phoenix was as much to blame as the mortgage broker who loaned him money or the Wall Street investment banker who financed the whole shaky scheme.
A new article in The New Republic magazine explodes this myth. The article goes a long way toward clarifying perceptions of what went wrong and laying the foundation for the kind of political action that might set it right.
What went wrong, for the most part, was not fraud by borrowers. Dean Starkman, author of the article, notes that cases where a borrower misrepresented himself were a tiny percentage. FBI figures showed that the total of fraudulent mortgages at the peak of the boom in 2006 amounted to $25 billion, a small share of the total of the write-downs of that year of $2.7 trillion, and not nearly enough to rattle the real estate market.
Instead, what went on was a vast, systemic fraud perpetrated by the real estate and mortgage industry with the financial backing of Wall Street. Lenders misrepresented the value of the houses they were financing. They forged borrowers’ signatures and altered documents. Citigroup alone was responsible for 2 million cases of deceiving customers. One of the most egregious abuses was the practice by banks of steering clients who qualified for regular mortgages to subprime mortgages, for which they would have to pay high, and often unaffordable, interest. It is predatory lending of an extreme sort, and in 2006 more than half of the mortgages issued fell into that category.
Why would banks purposely make bad loans when they were in a position to make good ones? Because they could quickly sell them to Wall Street banks, which packaged them into mortgage-backed securities, which they would sell for a profit. Then they could sell insurance on those securities. Everyone was profiting from the original fraud. It also happened that racial disparities meant that blacks and Latinos fell victim to predatory lending at a higher rate than for whites.
It is possible to blame the victim for being swindled, but that isn’t the best way to guard against fraud. We guard against fraud by prosecuting the criminals who are responsible — we prosecute Bernie Madoff, not his victims. And yet it has been noteworthy that after the recession, none of the high-level Wall Street tycoons, who made tens of millions of dollars from the fraud they committed, has been prosecuted. Some companies flamed out in dramatic fashion, but many have been absorbed by the big banks. As a result, the too-big-to-fail banks that have survived are bigger than ever, even though they were participants in one of the greatest crimes in American history.
Still, many Americans blame the little guy, weakening the effort to crack down on the banks. Many Americans also blame the government, which they view as too cozy with the banks. Thus, the tea party elements of the Republican Party criticized the government for trying to promote mortgage relief for deadbeats who took out bad loans, as well as for bailing out the banks.
No wonder inequality is growing. Whole neighborhoods were decimated and a huge amount of wealth vanished, especially hurting the economic standing of minorities, while the big banks specifically and the stock market more generally have prospered in the wake of the catastrophe.
If we saw the recession for what it was — the product of a vast orgy of greed by predatory lenders and their Wall Street backers — we might be more willing to take the kind of actions that would bring greater justice to our world. Until then Wall Street will be chortling all the way to the bank as all the little people continue to expend their energy blaming each other.
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