Excellent book by Joseph E. Stiglitz, available here.
Winner of the 2001 Nobel Memorial Prize for Economics, Joseph E. Stiglitz is the author of Making Globalization Work; Globalization and Its Discontents; and, with Linda Bilmes, The Three Trillion Dollar War. He was chairman of President Clinton’s Council of Economic Advisers and served as senior vice president and chief economist at the World Bank. He teaches at Columbia University and lives in New York City. P
Joseph E. Stiglitz, The Price of Inequality (W.W. Norton & Co. 2012).
Some of the best parts regarding the foreclosure crisis that I’ve been battling, and even more upsetting, the erosion of the rule of law in our country, as I perceive it:
“Of all the costs imposed on our society by the top 1 percent, perhaps the greatest is this: the erosion of our sense of identity in which fair play, equality of opportunity, and a sense of community are so important. America has long prided itself on being a fair society, where everyone has an equal chance of getting ahead, but the statistics today, as we’ve seen, suggest otherwise: the chances that a poor or even a middle-class American will make it to the top in America are smaller than in many countries of Europe. And as inequality itself creates a weaker economy, the chance can only grow slimmer.”
Ch. Four, Why It Matters, p. 117.
It was rightly perceived to be grossly unfair that many in the financial sector walked off with outsize bonuses, while those who suffered from the crisis brought on by these bankers went without a job; or that government bailed out the banks, but was reluctant to even extend unemployment insurance for those who, through no fault of their own, could not get employment after searching for months and months; or that government failed to provide anything except token help to millions who were losing their homes.
What happened in the crisis made clear that it was not contribution to society that determined relative pay, but something else: bankers received large rewards, though their contribution to society–and even to their firms—had been negative. The wealth given to the elites and to the bankers seemed to arise out of their ability and willingness to take advantage of others.
Preface, p. xv
If President Obama and our court system had found those who brought the economy to the brink of ruin “guilty” of some malfeasance, then perhaps it would have been possible to say that the system was functioning. There was at least some sense of accountability. In fact, however, those who should have been so convicted were often not charged.
Before the debacle is over, millions of Americans will lose their homes, and millions more will face a lifetime of financial struggle.
Overleveraged households and excess real estate have already weighed down the economy for years and are likely to do so for more years, contributing to unemployment and a massive waste of resources. At least the tech bubble left something useful in its wake—fiber optics networks and new technology that would provide sources of strength for the economy. The housing bubble left shoddily built houses, located in the wrong places and inappropriate to the needs of a country where most people’s economic position was in decline.
In a democracy where there are high levels of inequality, politics can be unbalanced, too, and the combination of an unbalanced politics managing an unbalanced economy can be lethal.
Given the success of the financial sector and corporations more generally in stripping away the regulations that protect ordinary citizens, the legal system is often the only source of protection that poor and middle-class Americans have. But instead of a system with high social cohesion, high levels of social responsibility and good regulations protecting our environment, workers and consumers, we maintain a very expensive system of ex post accountability, which to too large an extent relies on penalties for those who do injury (say, to the environment) after the fact rather than restricting action before the damage is done.
As one banker friend put it to me, anyone, even his twelve-year-old son could have made a fortune if the govt. had been willing to lend money to him at those terms. But the bankers treated the resulting profits as if they were a result of their genius, fully deserving of the same compensation to which they had become accustomed.
But the markets are a fickle disciplinarian, giving an A rating one moment and turning around with an F rating the next. Even worse, the financial markets’ interests frequently do not coincide with those of the country. The markets are shortsighted and have a political and economic agenda that seeks the advancement of the well-being of financiers rather than that of the country as a whole.
Chapter 7, Justice for All? How Inequality is Eroding the Rule of Law
While a good “rule of law” is supposed to protect the weak against the powerful, we’ll see how these legal frameworks have sometimes done just the opposite, and the effect has been a large transfer of wealth from the bottom and middle to the top.
Early on in the housing bubble, it became clear that the banks were engaged not only in reckless lending—so reckless that it would endanger the entire economic system—but also in predatory lending, taking advantage of the least educated and financially unsophisticated in our society by selling them costly mortgages and hiding details of the fees in fine print incomprehensible to most people.
That’s why “power”—political power—matters so much. If economic power in a country becomes too unevenly distributed, political consequences will follow. While we typically think of the rule of law as being designed to protect the weak against the strong, and ordinary citizens against the privileged, those with wealth will use their political power to shape the rule of law to provide a framework within which they can exploit others. They will use their political power, too, to ensure the preservation of inequalities rather than the attainment of a more egalitarian and more just economy and society.
The immensity of the task led the banks to invent “robo-signing.” Instead of hiring people to examine records, to verify that the individual did owe the amount claimed, signing an affidavit at the end that they had done so, many banks arranged for a single person to sign hundreds of these affidavits without even looking at the records. Checking records to comply with legal procedure would hurt the bank’s bottom line. The banks adopted a policy of lying to the court. Bank officers knew this—the system was set up in a way that made it impossible for them to examine the records, as they claimed to have done.
This brought a new twist to the old doctrine of too-big-to-fail. The big banks knew that they were so big that if they lost on their gambles of risky lending they would have to be bailed out. They also knew that they were so big that if they got caught lying, they were too big and powerful to be held accountable. What was the government to do? Reverse the millions of foreclosures that had already occurred? Fine the banks billions of dollars—as the authorities should have done? But this would have put the banks again in a precarious position, requiring another government bailout, for which it had neither the money nor the political will. Lying to a court is normally a very serious matter. Lying to the court routinely, hundreds of times, should have been an even greater offense. There was a pattern of crime. If corporations had been people in a state that enforced a “three strikes” rule these repeat offenders would have been sentenced to multiple life sentences without parole. In fact, no bank officer has gone to jail for these offenses. Indeed, as this bank goes to press, neither Attorney General Eric Holder nor any of the other U.S. district attorneys have brought suits for foreclosure fraud. By contrast, following the savings and loan crisis, by 1990, the Department of Justice had been sent 7,000 criminal referrals, resulting in 1,100 charges by 1992, and 839 convictions (of which around 650 led to a prison sentence). Today the banks are simply negotiating what their fines should be—and in some cases the fines may be less than the profits that they have garnered from their illicit activity.
What the banks did was not just a matter of failing to comply with a few technicalities. This was not a victimless crime. To many bankers, the perjury committed as they signed affidavits to rush the foreclosures was just a detail that could be overlooked. But a basic principle of the rule of law and property rights is that you shouldn’t throw someone out of his home when you can’t prove he owes you money. But so assiduously did the banks pursue their foreclosures that some people were thrown out of their homes who did not owe any money. To some lenders this is just collateral damage as the banks tell millions of Americans they must give up their homes—some eight million since the crisis began, and an estimated three to four million still to go. The pace of foreclosures would have been even higher had it not been for government intervention to stop the robo-signing.
The banks’ defense—that most of the people thrown out of their homes did owe money—was evidence that America had strayed from the rule of law and from a basic understanding of it. One is supposed to be innocent until proven guilty. But in the banks’ logic, the homeowner had to prove he was not guilty, that he didn’t owe money. In our system of justice it is unconscionable to convict an innocent person, and it should be equally unconscionable to evict anyone who doesn’t owe money on her home. We are supposed to have a system that protects the innocent. The U.S. justice system requires a burden of proof and establishes procedural safeguards to help meet that requirement. But the banks short-circuited these safeguards.
In fact, the system we had in place made it easy for them to get away with these shortcuts—at least until there was a popular uproar. In most states, homeowners could be thrown out of their homes without a court hearing. Without a hearing, an individual cannot easily (or at all) forestall an unjust foreclosure. To some observers, this situation resembles what happened in Russia in the days of the “Wild East” after the collapse of communism, where the rule of law—bankruptcy legislation in particular—was used as a legal mechanism to replace one group of owners with another. Courts were bought, documents forged, and the process went smoothly. In America, the venality operates at a higher level. It is not particular judges who are bought but the laws themselves, through campaign contributions and lobbying, in what has come to be called “corruption, American-style.” In some states judges are elected, and in those states there’s an even closer connection between money and “justice.” Monied interests use campaign contributions to get judges who are sympathetic to their causes.
The administration’s response to the massive violations of the rule of law by the banks reflects our new style of corruption: the Obama administration actually fought against attempts by states to hold the banks accountable. Indeed, one of the federal-government controlled banks, threatened to cease doing business in Massachusetts when that state’s attorney general brought suit against the banks.
Massachusetts attorney general Martha Coakley had tried to reach a settlement with the banks for over a year, but they had proved intransigent and uncooperative. To them the crimes they had committed were just a matter for negotiation. The banks (she charged) had acted both deceptively and fraudulently; they had not only improperly foreclosed on troubled borrowers (citing fourteen instances), relying to do so on fraudulent legal documentation, but they had also, in many cases, promised to modify loans for homeowners and then reneged on the promise. The problems were not accidental but systematic, with the MERS recording system corrupting the framework put into place by the state for recording ownership. The Massachusetts attorney general was explicit in rejecting the “too big to be accountable” argument. “The banks may think that they are too big to fail or too big to care about the impact of their actions, but we believe they are not too big to have to obey the law.”
The discussion of this chapter along with that of chapter 5, has shown how the financial sector made sure that the “rule of law” works in its favor almost always, and against ordinary Americans.
But in lending and in foreclosures they targeted the weak, the poorly educated, the poor. Moral scruples were set aside in the grand quest to move money from the bottom to the top.
In chapter 5 we explained how the foreclosure crisis could itself have been largely avoided, if we had only not let the banks have so much influence, by allowing an orderly restructuring of debt, just as we do for large corporations. At each step of the way there were alternatives . . . but with a political system where money matters, these alternatives had no chance. p.202