who saw the writing on the wall. Indeed, looking at the foreclosure crisis and the credit crisis—and the resulting bankruptcy crisis—it’s hard to avoid the conclusion that, in many ways, things are working out exactly as planned.
In hindsight, it’s as if a giant bear trap had been set for the middle class—a bear trap that was sprung by the economic crash.
Let’s start with the bursting of the housing bubble and the foreclosure crisis that followed. For a century, from the mid-1890s151 to the mid-1990s, home prices rose at the same pace as the overall rate of inflation. The bubble started to inflate in 1996 and within a decade home prices had jumped 70 percent—an $8 trillion bubble.
That bubble was no accident. We’ve just seen the way middle-class incomes had fallen behind expenses over the past three decades. How is it that more and more Americans were able to buy more and more houses—even as incomes stagnated? By taking on more debt, of course, provided by an underregulated army of lenders pitching seductive new mortgage vehicles. By 2005, subprime mortgages had skyrocketed152 to 20 percent of the market.
Fueling the boom was the development153 of securitized mortgages—including collateralized debt obligations (CDOs)—in which mortgages of varying degrees of risk were bundled together in “tranches” and sold to investors. Since lenders were selling off the risk to someone else, they felt much freer to make loans to borrowers who never would have been able to qualify for a prime mortgage.
The Fed did its part, too, contributing extremely low interest rates and lax oversight to the increasingly toxic housing mix. In the words of economist Dean Baker, “The Federal Reserve Board completely failed154 to do its job.”
And both sides of the political aisle aided and abetted the bubble. Even after a spate of accounting scandals155, many Democrats continued to support Fannie Mae and Freddie Mac, seeing them as valuable facilitators of affordable housing. Between 2004 and 2007, Fannie and Freddie156 became the top buyers of subprime mortgages—exceeding $1 trillion in loans. George W. Bush and the GOP also helped157 inflate the bubble by pushing to dismantle some of the barriers to homeownership—part of Bush’s vision of “an ownership society” that sought to, as he put it in his second inaugural address, “give every American a stake in the promise and future of our country.” The road to hell continues to be paved with good intentions.
Refinancing homes and offering home equity lines of credit—the better to be able to buy all those things you see on TV but really can’t afford—became a fee-generating bonanza for financial institutions. Protected and encouraged by their political cronies in Washington, banks were given free rein to push ticking time bomb mortgages on the middle class—mortgages they could then slice and dice and sell as swaps, derivatives, and all sorts of complex financial products to investors around the world.
So banks, confident in the securitization of their loans, began selling mortgages to anyone who had a pulse, and they often neglected to confirm that borrowers could afford the mortgages they were selling them. By 2006, 62 percent of all new mortgages158 were so-called liars’ loans—loans that required little or no documentation.
We got a glimpse into the back rooms of the mortgage industry in April 2010 when a Senate panel investigated the collapse of mortgage giant Washington Mutual. Among the findings159, as reported by Sewell Chan of the New York Times, was that the bank offered its loan officers pay incentives to originate riskier loans. Loan officers and salespeople “were paid even more if they overcharged borrowers through points or higher interest rates, or included stiff prepayment penalties in the loans they issued.”
The behavior of the WaMu bankers, and the many others just like them, was no different than the behavior of corner drug dealers—and while they weren’t peddling crack or meth, they were selling something every bit as addictive: a no-money-down, no-proof-of-income-needed, interest-only, teaser-rate ticket to the good life. The bankers, with a green light from Congress, were determined to turn everyone into irresponsible consumers.
THE MORALLY BANKRUPT BANKRUPTCY BILL
Of course, the bankers knew that the housing bubble, like all bubbles before it, had to eventually burst. And when it did, massive foreclosures and bankruptcies would result. So they needed to set up their self-protecting bear traps.
Enter the bankruptcy bill160 that banking lobbyists pushed through Congress and President Bush signed into law in 2005. It was a bill so hostile to American families that it could have come about only in a place as corrupt, cynical, and unmoored from reality as Washington.
Instead of cracking down on predatory lending practices, closing loopholes that favor the wealthy, and strengthening the safety net for working people, single mothers, and elderly Americans struggling to recover from a financial setback, the Senate put together a nasty little bill that:
• made it harder for average people to file for bankruptcy protection;
• made it easier for landlords to evict a bankrupt tenant;
• made it more difficult for small businesses to reorganize, while opening new loopholes for the Enrons of the world;
• allowed creditors to provide misleading information; and
• did nothing to rein in lending abuses that all too frequently turned manageable debt into unmanageable crises.
Even in failure, ordinary Americans could not get a level playing field.
And make no mistake, the inequitable nature of the bill—bending over backward to help the credit industry while sticking it to working people who fall on hard times—was not the result of chance. Time and again, the Senate shot down amendments that would have made the bill less mean-spirited. Senators denied proposals that would have made it easier for military veterans, the sick, and the elderly to qualify for bankruptcy protection. They even rejected an amendment161 that would have put a 30 percent ceiling on the interest rates credit card companies can charge. Thirty percent—that’s more than your neighborhood loan shark charges.
According to the Institute for Financial Literacy162, in 2009, 9.1 percent of the people who filed for bankruptcy earned $60,000 a year or more, up from 4.7 percent in 2005. And among those who declared bankruptcy in 2009, 57.7 percent had attended college, an increase of 3.9 percent.
The institute’s executive director, Leslie Linfield163, also points out that there is an alarming bell curve for bankruptcy filings in the thirty-five to fifty-four age group. “Fifty-six percent of bankruptcy filers,” she says, “are in this age group. This is concerning because you are looking at a group of people who are middle-aged and very unprepared for retirement. As a society we can’t help but ask the question what will happen in twenty years when this group does in fact retire?”
Our elected leaders utterly ignored the fact that the vast majority of people who file for bankruptcy are
