Bankers Versus Capitalism
When it comes to defending private enterprise, Wall Street is its own worst enemy.
Jan 16, 2012, Vol. 17, No. 17 • By IRWIN M. STELZER
Enough whining. As Lenin asked, “What is to be done?” Voter action at the polls is clearly indicated, although the appalling lack of choice—a Democrat wedded to the economics of the past, and either a clearly nutty or a cautious, establishment Republican technocrat—suggests that the radical change the moment calls for will not come from the political class, at least until the young Turks in the Republican party mature while, we hope, remaining, well, young Turks. So what is to be done is what can be done—remove some of the most glaring defects in the capitalist system, starting with the financial sector. That will take conservative support for change—support not only from the conservative punditry, but from the business community.
Recall: The titans of finance are not well positioned to display a lack of sympathy for those suffering from the consequences of their errors. They still hold their jobs only because the taxpayers bailed them out, with the Fed providing $1.2 trillion of public money on top of other bailout funds, the alternative—watching the financial system melt down—being too gruesome to contemplate. No good saying that without Wall Street there would be no Main Street. The facts are that Main Street is littered with shuttered shops, while appallingly managed banks have survived, and that the foreclosure rate in Greenwich, Connecticut, the preferred home of hedge fund managers and those financial executives who prefer sweeping lawns to the sweeping penthouse views favored by some of their colleagues, is far below the national average.
Yet, pick up your daily paper for the sort of anecdotes that sometimes trump data. Bank of America hires a debt collection agency that a Florida judge finds illegally harasses widows to pay the credit-card debts of their deceased husbands. Here is part of the report in the Wall Street Journal:
One anecdote should not be the basis of policy. But such an anecdote backed by numerous tales of homeowners who failed in their attempts to negotiate easier terms so as to avoid foreclosure tells something about the insensitivity of leading bankers to the threat posed to the capitalist system by the difficulties faced by millions of Americans. These bankers might do well to cast an eye over the magazine rack of their local newsstand, where Consumer Reports’s cover blares, “Fight Back Against Your Bank.” We’re not talking the Nation or the New Republic here, but the stuff which middle-class America reads.
Sure, it is easy to say people should never have bought homes they cannot afford. But many of these people could indeed afford those homes in the opinion of the banks that lent them the money, before securitizing their mortgages into bundles that the rating agencies saw as virtually riskless—triple-A rated—and passing them off to investors. Many were simply the victims of a financial calamity they did not produce, others of globalization and inept trade policy that allowed China’s currency manipulators to destroy their jobs, still others of government programs that lured them into buying homes that would prove beyond their means, especially when the low, starter-interest rates willingly offered by the banks ratcheted up.
The odd part of the banks’ preference for foreclosure over mortgage restructuring is that they end up with houses they cannot manage and lawns they cannot mow, properties that become rundown with dire consequences for entire blocks and neighborhoods, and that end up being sold for a fraction of their value. True, foreclosure does avoid moral hazard, an advantage not to be ignored. But that advantage has to be weighed against the costs of a wave of foreclosures. I wonder if those bankers, with the wisdom of hindsight, would have preferred a bit of moral hazard to the failure of Lehman Brothers. Most important is the failure of the bankers to ask themselves what sort of policy towards foreclosures is consistent with the long-term acceptability and survival of American capitalism. And the failure of Republican politicians to ask themselves just why they support banks’ opposition to allowing bankruptcy judges to include mortgage obligations when they restructure the debts of those seeking bankruptcy protection, as many Democrats propose. Executives of American Airlines are applauded by the financial community for their shrewd use of the bankruptcy laws to get out from under their contractual obligations. Homeowners who do the same thing are considered immoral.
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