Foreclosures: A Double Standard
By Carmine Gorga, Peter J. Bearse, and David S. Wise
Home ownership is an essential part of the American dream.
For this purpose, having a modest interest mortgage is essential.
Decades before the economic collapse in 2007, loose money policy pursued by the Fed contributed to the allure of accelerating growth in the value of financial assets.
Big banks grew increasingly more adept at recklessly playing double-edged winning games at the expense of their clients and inducing people of modest means to buy mortgages. Abusing the newly gained “freedom” from the Glass-Steagall Act, banks became too big—too big to fail.
That growth was unsustainable. The collapse came and the American economy plummeted into the Great Recession, an event reminiscent of the Great Depression.
Real estate values declined precipitously. Without jobs and other sources of income, hapless home owners were overwhelmed with bank foreclosure demands.
Millions of embattled Americans lost their homes, forcibly sold at prices that were lower than the mortgages themselves. A great many of these were scarfed up by wealthy investors, further aggravating inequality.
Government help was too little to bail out the foreclosed home owners. Homelessness and poverty surged.
Wall Street also went into turmoil: Lehman Brothers collapsed; Bear Stearns was bought by JP Morgan Chase. Big banks grew bigger. The stability of JP Morgan Chase, Bank of America; Citybank, and many other national and international financial institutions was in jeopardy.
The American economy could not be allowed to fail. The Bush and then the Obama Administration immediately came to the rescue.
The Treasury Department, operating in concert with the Fed, loaned at low interest billions of dollars to the Wall Street banks that were judged to be too big to fail, while, in reality, they were too big to succeed—except by short term and highly risky trading that was oblivious to the fate of others.
The Wall Street banks were not foreclosed as a direct result of their reckless financial behavior, especially while selling worthless derivative mortgages and taking short positions against their own customers—making tons of money playing both ends against the middle!
Is it not fair to ask why average Americans can suffer foreclosure of their major asset, their house, while big banks are not similarly foreclosed when not managed efficiently? Where is the equity; where is the fairness in this discrepancy?
The unjust disparity between the two social and economic sectors—banks and ordinary citizens—is shocking!
The Official Reason
The reason for the sharply discriminatory treatment of the same economic situation lies in the fact that the banks were assumed to be too big to fail. The imagined danger was that, if they had been allowed to fail, they would have brought the entire financial market down with them.
The past is done and cannot be undone. We are concerned about the future. When the next debacle comes, as it surely will, because nothing has changed in the conditions that created the last crash, will we have the same excuse for the destruction of the middle class? Ought we not to have a sturdier monetary system in place?
The Reform of the Fed
We must start by reforming the key operations of the Federal Reserve System. Three changes will suffice:
The Fed has to issue loans—not grants—ONLY for the creation of new real wealth (neither for the purchase of consumer goods, nor for the purchase of financial assets);
Loans have to be issued at cost of administration (not at variable interest rates);
Loans have to be issued for the benefit of all the people in our country; hence, loans have to be issued not to financiers, but to individual entrepreneurs, governmental entities, cooperatives, and corporate enterprises that have Employee Stock Ownership Plans (ESOPs) in their constitution.
The reader is urged to notice that, had this policy been in place in the past, the fuel of new money poured onto the fire of inflating values of financial assets would have not been allowed to be pumped out.
The reader is also urged to notice that if this policy will ever be in effect, no corporation will be considered too big to fail. Policy makers need no longer be frightened. No matter how large individual trees are, a well-functioning global market will not hear the sound of their falling in the forest.
If the Fed did not exist, we would need to create it. The Fed does much good. What better way to celebrate its 100th anniversary than to ensure an avoidance of the mistakes of the past?
Carmine Gorga is president of The Somist Institute; Peter J. Bearse is an international economics consultant; David S. Wise is a public citizen, Rockport, MA.