The following is an excellent excerpt from the book “TWILIGHT OF THE ELITES: America After Meritocracy” by Christopher Hayes from Chapter 6: “OUT OF TOUCH” on page 206 and I quote: “THE FINANCIAL CRISIS – Michael Lewis’s masterful chronicle of the crisis, The Big Short, contains a remarkable, though largely unremarked upon, anecdote that gives a glimpse of just how social distance facilitated the greatest financial disaster of our age. One of Lewis’s protagonists, a hedge fund manager, had an epiphany in a chance conversation with a domestic worker he employed to provide child care. An immigrant from the Carribean, she mentioned to him that she and a sister owned six townhomes in Queens. At first it seemed to make no sense; he knew exactly how much she made and it was hardly enough to afford so much property. Eventually he unraveled the mystery: It turned out that mortgage brokers had been targeting immigrants for large mortgages on purpose. Since immigrants often didn’t have much of a credit history, brokers could exploit a loophole in how creditworthiness was analyzed and more or less invent a credit score for them. This, in turn, made them look like much better credit risks than they actually were and facilitated feeding the mortgages into the securitization machine that would then produce mortgage-backed securities that conferred a wellspring of money on everyone involved in the process.
Within the immigrant communities in New York, the ready availability of massive mortgages was common knowledge, but those same communities were entirely removed from the inner circles of Wall Street where these mortgages were transubstantiated into the asset-backed securities that generated trillions of dollars of revenue for it. So it took a chance encounter between a multimillionaire hedge fund manager and his baby nurse to connect the dots.
Like a disease at first confined to paupers, the plague of bad lending practices and fraud spread among working-class “subprime” borrowers, while the economic mainstream largely ignored their plight and forged ahead, either in ignorance or with unearned confidence that the disease couldn’t ever reach them. Community groups working with subprime borrowers saw this story play out in grim slow motion. They recognized, probably before anyone else, that the entire mortgage industry had taken a very dark turn, and they sounded early and consistent warnings that went unheeded.
One of the most vocal of these groups was the Center for Responsible Lending (CRL) in Durham, North Carolina. CRL’s parent organization is Self-Help, a nonprofit lender that runs a credit union and makes loans for small businesses and local development projects. Its relationship to its customers is the kind of face-to-face connection of the bygone It’s a Wonderful Life era. It’s this social proximity that allowed Self-help to build a business targeted at low-income, “subprime” borrowers that did not implode when the crisis hit. “When we talk about Self-Help’s success,” says Mary Moore, who works as senior communications associate at CRL, “part of it is spending time with the borrowers. It’s what we call ‘high touch.'” The opposite, in other words, of out of touch.
It was this social proximity that first alerted Self-Help’s CEO Martin Eakes to the changes in the mortgage market that would spell doom, first for borrowers, then for the entire global economy. Moore recounts the story of a Self-Help customer who came into their offices one day in 1998 absolutely distraught. The man’s lender, Associates, had put through a familiar cycle of predatory loans. First they pushed him into a refinance with a teaser rate, promising to lower his monthly payment. After a short while, when the rate exploded, they came back again with another refinance offer. Each time they refinanced, the lender took a fee, stripping out equity until there was none left. The borrower appeared in person in Self-Help’s offices with a look of desperation in his eyes: he’d run out of room to refinance, had fallen behind on his payments, and was now going to lose his home. “He went to talk to Martin about it and basically broke down and said he couldn’t lose that home,” recalls Mary Moore. “He was a single father with a little girl and that home was the last tie to his child’s mother and he wasn’t going to lose it.”
So Martin Eakes called up the lender, Associates, himself and asked how much the gentleman owed on his loan. “They wouldn’t tell him,” says Moore. “They wouldn’t tell the borrower either. Basically they were determined just to let the guy fail; they had made their money on him.” The experience precipitated an epiphany for Eakes, who now realized just how abusive lender practices had become.
Self-Help spun off the Center for Responsible Lending to focus on research and policy advocacy, and they became among the closest observers and critics of the burgeoning market in subprime closest observers and critics of the burgeoning market in subprime finance, from payday lending to shady mortgages with bait-and-switch terms. As the housing bubble expanded, securitization accelerated, and underwriting standards eroded, CRL’s research staff started sounding the alarms. “We published a paper in 2006,” says CRL analyst Wei Lee, that concluded “for the next 5 years we will see 2.2 million foreclosures a year in the subprime market. At that time when we released the report people just laughed at us.”
That report now seems clairvoyant. Between 2006 and 2010, there were, in fact, more than 10 million subprime foreclosures. Wei and his colleagues also predicted in 2006 that a shockingly high percentage of subprime loans–one out of five–would lead to foreclosure in the next two years. They ticked through the worrying trends in the industry that were leading toward a disaster: “lose underwriting,” “predatory lending,” “third party originators/lack of accountability,” and “inadequate oversight.” “From 2003 to 2006, the market was just crazy,” says Wei, “and nobody cared!”
During the same time that CRL was predicting a coming catastrophe in housing, Ben Bernanke, than a Federal Reserve governor nominated to become chair, was assuring anyone who would listen that the housing market was fine. In July 2005, he said that the “fundamentals” of the housing market were “very strong.” In February 2006: “We expect the housing market to cool, but not to change very sharply . . . The weakness in housing market activity and the slower appreciation of house prices do not seem to have spilled over to any significant extent to other sectors of the economy.” And he was doing this despite the fact that representatives from CRL and other similarly situated groups were actually meeting with members of the Fed to warn them of what was coming. “I don’t think people realize how much information the regulators had,” says CRL chief operating officer Debbie Golstein. “They had plenty of complaints, they had plenty of research. They had standards they could have put in place. It took them a very long time to put in standards. The Fed was slow, it was really slow.”
Goldstein says CRL found state governments far more responsive than the federal government to their concerns because, crucially, there was less social distance between the victims of predatory lending and their state representatives. “I think legislators had constituents who were getting bad loans and they heard about them,” says Goldstein. “At the state level you had more legislators who were in the business, were Realtors or they’d been screwed by somebody. They understood much more personally what these products meant.”
The Fed, however, the one entity with the most authority and power to crack down on the abuses, looked the other way, while the Office of Comptroller of the Currency set about gutting tougher state-based regulations by preempting state regulations. “It wasn’t until it started happening on blocks where people didn’t expect it to happen,” one CRL staffer told me, “that it became a national problem.”
In Inside Job, director Charles Ferguson confronts former Federal Reserve governor Frederic Mishkin, who served on the Fed committee charged with oversight of consumer abuses. Speaking of Robert Gnaizda of the Greenlining Institute, an ally of CRL and someone who met several times with the Fed, Ferguson says:
CHARLES FERGUSON: [Gnaizda] warned, in an extremely explicit manner, about what was going on, and he came to the Federal Reserve Board with loan documentation of the kind of loans that were frequently being made. And he was listened to politely, and nothing was done.
FREDERIC MISHKIN: Yeah, So, uh, again, I, I don’t know the details, in terms of, of, uh, of, um–uh, in fact, I, I just don’t–I, I–eh, uh–it’s, it’s actually, to be honest with you, I can’t remember the, the, this kind of discussion. But certainly, uh, there, there were issues that were, uh, uh, coming up.”
Part of the issue was that the institutional setup of the Federal Reserve is designed to produce a very narrow kind of feedback. Wary of too much concentration of geographical powers, the Federal Reserve Act created twelve different banks spread throughout the country, with the idea that they would be responsive to different local concerns. But the profiles of the local bank boards are all bankers, and they’re the only people who get a vote when selecting those who will serve on the Federal Reserve Board. What this means is that the people running the single most powerful economic institution in the country are mostly chosen by bankers. And as we’ve learned the hard way over this past decade, bankers’ information about the economy isn’t necessarily the only information there is, and their interests don’t necessarily align with those of the public’s at large.
But imagine for a moment if the board were constituted so that it had to include consumer advocates or even bank customers themselves. Or imagine if Ben Bernanke and Frederic Mishkin lived in the neighborhoods in which foreclosures had become a widespread scourge. Now imagine if they had to walk past the foreclosure signs or counsel distraught neighbors through the trauma of being expelled from their homes. Think of the difference between the mnemonic salience of a meeting in an airless boardroom, with a bunch of anonymous do-gooders waving charts in your face, and just one conversation with a terrified and desperate single father who’s about to have his home taken right out from under him.
Here’s where the distinction between information presented through official channels and the subconscious experiential force of your daily observations matters: the difference between being in the freezing building and simply seeing a temperature display in your warm office fifteen miles away. It’s the same difference we saw in New Orleans, the difference between looking at the census data about poverty and disability and having people in your social circle carless, poor, and housebound. The difference between headlines about war in Iraq and your own kin sustaining a brain injury from an IED.
The increasing complexity of financial markets and the massive explosion in securitization created a way to link together the fates of an impossibly attenuated chain of players bound to one another inextricably but invisibly. The financial distance between a working-class grandmother in South Carolina with an adjusted rate mortgage and a Norwegian pensioner whose fund had purchased a slice of her loan was radically shrunk, while the immense social distance remained. And since there was no other institution or mechanism for mediating that distance, genuine disaster could bloom in the vast dark spaces in between.
Such is the core lesson of the financial crisis: the increasing inequality, compartmentalization, and stratification of America in the post-meritocratic age served to seduce those at the top into an extremely dangerous, even pathological, kind of complacency. The ship sprung a leak down in the lower decks, flooding the servants’ quarters, and no one up on top realized that it would bring down the whole thing. The cocktails continued to flow, the band continued to play, and the party rollicked on Wall Street throughout the housing bubble, even as subprime borrowers drowned, as their lives and wealth and homes were destroyed. But the water kept coming in, and it climbed deck by deck until, eventually, the music stopped and the party ended, and it looked like the entire thing might go down.
Given what a close call it was for those on the top deck, for the Jamie Dimons and the bankers and titans of industry and all the members of the 1 percent, you would think that the single most important lesson they would take away from the near miss would be this: You ignore the fate of those on the bottom deck at your peril. An economy divided into “subprime” and “prime” is dangerously precarious; the predations tolerated in the former will, sooner or later, come to feast on those who make up the latter.
And yet, astonishingly, this lesson has gone almost entirely unheeded. We once again have a bifurcated economy, a prime economy and a subprime economy. Our governing institutions responded with nearly unprecedented swiftness and force to save, and then revive, the prime economy. Yet they are letting the subprime economy fend for itself, to suffer through a period of drought and privation as bad as anything in eighty years. “If you’re personal wealth is predominantly in your home, you’re fucked. And approximately 80 percent of people in the U.S., their only asset is in their home.”
Despite anemic growth in the post-crisis years, stocks are performing at historically high levels and inflation-adjusted corporate profits are at near record highs; the stock market has regained its losses from the crashes and the Dow is back above 13,000. Unemployment for the 30 percent of the adult population with a four-year college degree is a bit above 4.5 percent, which is back to its pre-crisis levels and constitutes full employment for that portion of our society. Large corporate law firms that dramatically cut their signing bonuses for well-credentialed new associates in the wake of the crisis have reinstituted them at levels even higher than before the crisis. Bonuses on Wall Street are once again breaking records.
Meanwhile the “real economy,” or “Main Street” as politicians call it, is mired in its worst extended contraction in eighty years. Middle-class professionals find credit constricted in a way that recalls the experience of marginalized inner-city communities in the days before the Community Reinvestment Act outlawed redlining. Personal bankruptcies have been climbing and are near an all-time high, and forty months after the financial crisis, the unemployment rate remains above 8 percent. Broader measures of unemployment, which include those who’ve given up looking for work, are above 16 percent. Millions of Americans are mired in a long-term unemployment epidemic unprecedented in American history.
Polls consistently rate the economy and jobs as voters’ prime concerns. Yet the political system seems more or less completely deaf to any cries for more stimulus and direct job creation. As soon as stocks had recovered and a modicum of growth was restored, the dominant conversation in Washington among both Republicans and Democrats was about how and how much to cut the deficit. The White House spoke of its “pivot” to deficit concerns, while Wall Street, conservative think tanks, and the Republican Party all devoted themselves to sounding increasingly dire alarms about the size of the U.S. government’s debt and advocating a radical deconstruction of the country’s basic framework for providing social insurance.
The bet that those who run the prime economy are making is the same bet they made during the years that preceded the crash: that they can continue to profit enormously even as the broader economy fails to deliver real and steady gains for the majority of its participants. The last time around this produced a housing and credit bubble that ended in ruin for most and almost took the financial elite with it. So one might think that rebooting this same program is a wildly irrational if not genuinely psychopathological proposition.
But the real lesson of the financial crisis and the bailouts that followed is that when the subprime economy threatens to bring down the prime economy, the government will step in with overwhelming force to make sure the prime economy is saved. If that’s the case, then there’s simply no real reason for Wall Street and the chamber of commerce and the rest of the elite superstructures of American capitalism to worry about a repeat of the boom-bust cycle that nearly did them in. Even if the ship sinks, they know they’ve reserved sufficient life rafts for themselves, so why fret about the icebergs?
Democracies will always struggle to protect the rights and interests of minorities from being swallowed up by majority rule. Along the way, democratic societies will engage in brutal and, in hindsight, indefensible ignorance of the plight of those who are in its darkest corners. So it was with gay men facing the AIDS crisis in the 1980s, the infirm and carless residents of New Orleans, and subprime borrowers.
But what we confront in the post-crisis era is far more grave. No longer is ours a ruling majority that has lost sight of the plight of a hated or invisible minority. The ratio has flipped. The majority of Americans now feel deeply as if they have been relegated to minority status. We are all subprime now.
We now see ourselves ruled by a remote class. They may not wear flowing robes, or carry miters, but they are marked in their own way as separate and distinct. The distance between those who will be bailed out and those who will not is the ultimate social distance, and it has grown so vast it now strains the bonds of representation that hold the republic and its people together.”
(THE FOLLOWING IS ABOUT THE AUTHOR AND PRAISE FOR THE BOOK AND I QUOTE:
CHRISTOPHER HAYES is editor at large of The Nation and host of Up w/ Chris Hayes on MSNBC. From 2010 to 2011, he was a fellow at Harvard University’s Edmond J. Safra Foundation Center for Ethics. His essays, articles, and reviews have appeared in the New York Times Magazine, Time, The American Prospect, The New Republic, Washington Monthly, and The Guardian. He lives in Brooklyn with his wife, Kate, and daughter, Ryan.”
“This is the Next Big Thing that we have been waiting for. Twilight of the Elites is the fully reported, detailed, true story of a twenty-first-century America beyond the reach of authority. It’s new, and true, and beautifully told–Hayes is the young left’s most erudite and urgent interpreter. Brilliant book.”
—RACHEL MADDOW, host of The Rachel Maddow Show and author of Drift
HERE ARE MY COMMENTS: THIS IS A GREAT EXCERPT IN CHAPTER 6 OF JUST HOW BUSH-CHENEY GOT OUR BIG INVESTMENT BANKS INTO TROUBLE WITH MORTGAGE LENDING WHEN THE CUSTOMER WAS TOLD TO LIE ABOUT THEIR INCOME, AS WELL AS OTHER LENDING COMPANIES LIKE PAYDAY LENDERS WHO ALSO EXPLOITED THEIR CUSTOMERS WITH EXORBITANT INTEREST RATES. CHAPTER 7 IS ALSO VERY INTERESTING TELLING ABOUT HOW THE MIDDLE CLASS GOT EXPLOITED BY OUR OWN GOVERNMENT BY LOWERING THE TOP FEDERAL INCOME TAX BRACKET AND PUTTING MORE BURDEN ON THE MIDDLE CLASS TO ATTEMPT TO PAY FOR THE GROWING DEBT. THAT TOO, FELL BEHIND. SO, IT’S CRUCIAL THAT WE KEEP INFORMED AND MSNBC HAS DONE A GREAT JOB.
LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen Member and USAF Veteran
isely 