Third World America - Arianna Huffington [24]
This response ignores the ugly truth of what brought about this crisis. It wasn’t a sudden spike in irresponsibility on the part of middle-class Americans. It was the inevitable by-product of tricks and traps deliberately put in place to maximize profits for a few while creating conditions that would soon maximize misery for millions. The devastation was predictable—and, in fact, had been predicted by any number of Jeremiahs 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-1890s to the mid-1990s, home prices rose at the same pace as the overall rate of inflation.62 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 skyrocketed to 20 percent of the market.63
Fueling the boom was the development 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.64 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 failed to do its job.”65
And both sides of the political aisle aided and abetted the bubble. Even after a spate of accounting scandals, many Democrats continued to support Fannie Mae and Freddie Mac, seeing them as valuable facilitators of affordable housing.66 Between 2004 and 2007, Fannie and Freddie became the top buyers of subprime mortgages—exceeding $1 trillion in loans.67 George W. Bush and the GOP also helped 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.”68 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