One of the objections/arguments I keep seeing in news post threads about debt forgiveness is "People should have been more responsible." The ones who annoy me are the ones who are referring to borrowers when they tout personal responsibility as the cause of the housing market crash in 2008 and the resulting disasters since then.
A typical comment goes something like this (quoted directly from a comment thread on a Mother Jones article about the Occupy movement):
It used to be (I know, silly me...) that you bought a house and paid it off after 30 years so you had a place to live when you retired. Somewhere along the line that concept vanished. Every buyer expected 20% gains after 5 years so they took out equity with every refi. I don't care if they used the money to put their kids though college or paid medical bills, they took out a loan against paper profits and got stuck when the market turned. Like a speculator buying stocks on margin, they lost their bet. In the process they made housing unaffordable for first time buyers and ruined the economy for millions. I don't feel sorry for them. They mismanaged their finances and showed themselves to be colossally ignorant and dangerously naive. They are not our future. They are anchors holding the rest of us back. Help them survive, but lets not pretend helping them is anything other than charity.
We live in a time when job security is non-existant. Yet millions decided to go deep into debt while counting on future income and unlimited credit to roll over the debt.
My response is over the jump, expanded from my response on that site. Come on over.
There are several misconceptions in this kind of response to the push for loan forgiveness and debt restructuring. The first is who started the whole mess - it wasn't the borrowers. The second is why they started the mess - it was for greater profits. The third is the confluence of legal and political factors that allowed them to start and continue the mess that has been the housing lending industry for the last twenty or so years.
It wasn't the buyers who expected the gains. It was the sellers. Most people don't even realize what banks and mortgage brokers began to do with mortgages in the late 1990s. They commoditized them. Yes, home-equity lending also went through the roof during this time period, but that's not as major a factor as banks getting people into homes who were not qualified for the loans they were given. Attempting to divert this from "unqualified borrowers who got lied to" to "greedy people who have to have the new granite countertop in their kitchen" is disingenuous at best, and dishonest at worst. Let's stick with the topic of people who took out loans in good faith because they were led to believe that they could, and the reasons why they were led to believe it.
The author of the comment I quoted says, "It used to be that you bought a house and paid it off after 30 years." Yes, that's how it used to be. This gave bankers an incentive to find only borrowers who could be reasonably expected to pay back the loan over thirty years' time. It meant that bankers were cautious about who qualified for a home loan. It meant that they were going to go over your credit history, your income history, your job history, and if you weren't showing that you were a responsible borrower and debtor, then you didn't qualify because the risk to the banker was too great. That's the situation as it stood for over fifty years; most people didn't default on their home loans because they only got one if they were a qualified buyer/borrower.
The reason it's no longer like that is because the banks were no longer willing to hold on to a loan for the thirty years it would take the borrower to pay it off, so they packaged up a bunch of 'em and sold them as commodities. Once banks and brokers turned a mortgage into a financial commodity instead of a held asset (the two are not the same), the push was on to generate as many loans as possible so they could be commoditized. Pair that with the deregulation of the banking industry, and especially the repeal of Glass-Steagall (which separated depositor banks from investment/speculation banks so that people's deposit money could not be used for "leverage" on investment bets) with Gramm-Leach-Bliley (which gutted Glass-Steagall in its entirety), and you get the situation we got: bad loans being created solely so that they could be commoditized as triple-A securities.
In this situation, it's no skin off the banker's nose if the borrower defaults, because the banker got his money out of the loan three to four months after the loan was generated by selling it as a commodity to someone else. Bankers no longer had to care if a buyer/borrower could pay over thirty years. As long as they could pay for three or four months, the loan was commoditizable, and then it wasn't the banker's problem any more because they'd sold it off to someone else. It's no skin off the nose of the people who bought the loan as a commodity, because it was not just rated triple-A but insured heavily, so they were covered, regardless. The only people really at risk here were the original buyers of the home and, possibly, the insurance companies who trusted the ratings agencies to tell the truth about the quality of those packaged, commoditized loans.
It's disgusting, because the home mortgage industry had collusion from people in the securities ratings industries, which is how they got that toxic paper rated triple-A. That, by itself, went a long way towards creating the situation we had. If the rating agencies had looked at the instruments and seen that they were based on what we now call 'subprime' lenders, who often had very poor income and credit histories, and if they had actually labeled them as what they were - junk - the insurers would not have gotten into the massive financial pickle they got into because none of them would have agreed to insure those instruments. There would have been no incentive for the banks to continue generating bad loans, and this crisis could have been averted.
While the author of the comment is correct in saying people were financially naive, I don't see how that's really their fault. When you don't know about something, you go to the experts. They went to the experts - bankers, who are supposed to know this stuff and tell you at the time of application whether or not you'll qualify for a loan. People were told they could buy a house, that they qualified - many of them people who could not be reasonably expected to know the ins and outs of finance. And of course they wanted a house. It's part of the American Dream.
Bankers are supposed to be the authority on whether you qualify or not. How were these borrowers supposed to know they didn't qualify? The so-called experts were telling them they did! And the only reason those "experts" were telling unqualified buyers that they were qualified is because their aim was not having that buyer as a debtor for the next thirty years; their aim was generating a loan that they could sell as a financial commodity, and the borrowers did not know that. While I am all for personal responsibility, there's a problem when the experts lie to you to get you to sign on the dotted line, and that's exactly what happened here. Personal responsibility and informed consent go hand in hand. The borrowers were lied to, repeatedly and often, so that banks and brokers could USE THEM as commodities. Therefore, they did not have informed consent. What happened was unethical, and should be illegal. We can't hold borrowers completely accountable for that. (And if you do, you have no empathy.)
So what do we do about this?
Well, first, we should forgive or massively restructure any loan that was issued during this fraudulent time, so that the only money owed is the actual value of the house that the loan was generated for, and so that borrowers can expect a thirty-year loan that ends in true home ownership. Of course, finding proof of that is going to be pretty tough for a lot of people, since the banks have done so well at hiding and losing paperwork, but my recommendation is that we err on the side of the borrower, not the lender. The lenders have a trillion bucks or more of our money that they aren't letting go of, that they got in the bailouts. Let them use that to cover the losses that they created for themselves by generating bad loans.
Second, we must repeal Gramm-Leach-Bliley and reinstate Glass-Steagall immediately. Banks must never again be allowed to speculate with depositors' money. You can either be an investment/betting bank, or you can be a depositor bank. You cannot be both. This one law, this one regulation, prevented market crashes for fifty years between 1932 and 1982. Then we began to deregulate and we started having panics and crashes again. Here's a four-minute video that explains why it's so important to put Glass-Steagall back in place:
Third, we must create criminal penalties for doing what the banks did (fraudulent lending) and for what the credit rating agencies did (fraudulent high rating of junk instruments). Bankers, brokers and raters should be paying enormous fines and spending time in jail for the damage they've done to our economy with this little gavotte. Fraud should be heavily penalized, instead of bringing a slap on the wrist - and I think a good additional penalty should be that if you participated in fraudulent activity, you should be barred from working in finance for life, in any capacity. Go get a job working in sanitation or flipping burgers, but you should never be let near a bank in any capacity other than a depositor again for the rest of your life.
Finally, we must join the Occupy Wall Street protests. Whether that's virtually, on Twitter and other social media sites, or in person, going to the actual sites, we must make it known that we insist on transparency in our government and transparency in our banking system, and that we will not settle for anything less. This must be one of the major demands of OWS - accountability and transparency. The smoke and mirrors is what got us into this situation; it's time to clear the air.