Extreme economic inequality is among the most destructive forces in a society. As inequality grows, it undermines the effective functioning of the economy, the basic tenets of capitalism, and the foundations of democracy.
Unfortunately, the housing crisis and now the housing settlement increasingly look like an example of how this mechanism works.
One of the central characteristics of highly unequal societies is that two sets of laws develop: One set for the rich and powerful and one set for everyone else. The more unequal societies become, the more easily they accept the unacceptable, and with each unrebuked violation, the powerful actors at the top of the society gain an ever greater sense of entitlement and an ever greater sense that the laws that govern everyone else don't apply to them. As a result, their behavior becomes increasingly egregious.
In contrast, sustainable capitalism requires that all participants in a contract or bargain believe their interests will be enforced equally by the courts: Capitalism requires that Lady Justice wear a blindfold. When powerful players are permitted to alter established rules at will, capitalism ultimately collapses. Contracts and the idea of a fair bargain become meaningless as less powerful parties to an agreement know their rights will not be enforced. Over time, citizens lose faith in government and their own ability to thrive in what becomes a corrupt economy. This uncertainty leads the small businesses, which are so often cited as important to our economy, to shy away from new activities that might put them at the risk of unequal treatment.
I would suggest that the robo-mortgage scandal is a strong indicator that this type of unequal justice is now becoming ever more commonplace in America. Past bank abuses are typically discussed without a sense of outrage. They have, in effect, become a recognized practice of deception with no consequences. Here are three prominent examples from the past few years:
First, the robo-mortgage scandal was discovered. As powerful members of society, the banks effectively decided what laws they wanted to follow and disregarded others. The banks claimed that their violations were technical and harmed no one. Nonetheless, the activities of the banks constituted massive fraud, perjury, and conspiracy. Bank officials have testified in court that they filed as many as 10,000 false affidavits a month. These are effectively undeniable admissions of law-breaking on a massive scale.
It's a federal crime, punishable by up of five years of imprisonment, to knowingly file a false affidavit with the court. From the perspective of the law, you are guilty of the same perjury, when you falsely testify in court or when you submit a false affidavit. In most states, filing false affidavits with the court similarly constitutes a felony offense of perjury.
If an individual citizen perpetrated this kind of massive perjury, he or she would be prosecuted. For illegal activities to take place on this type of massive scale, other serious crimes, such as conspiracy, are almost certainly committed as well.
Last week an audit of San Francisco mortgage practices, the first systematic audit in the nation, revealed that an astounding 82 percent of the cases analyzed involved suspicious activity by the foreclosing institution and concluded that a large portion of these activities probably involved felony violations of California perjury laws.
Second, when Martha Coakley, the attorney general of Massachusetts filed a civil suit related to the robo-mortgage scandal against several financial institutions, she was demonized by the financial services industry and appropriately recognized for her bravery by housing advocates seeking to end abusive bank practices.
What is noteworthy, however, is that Coakley filed a civil suit. This was a lenient effort as she undoubtedly had the ability to build a compelling criminal case against the banks (as institutions) and the bank officers who knowingly created the robo-mortgage scheme.
Third, the national housing settlement, involving the federal and state governments, was announced almost two weeks ago. A central concern associated with the settlement is how it will be enforced. The banks have a long and well-documented history, of agreeing to settlements that will change their behavior and then failing to live up to these binding agreements. Moreover, penalties for failure to comply with these settlements are rarely, if ever, assessed.
In her New York Times feature story, The Deal is Done, but Hold the Applause, Gretchen Morgenson wrote about this behavior, and how it relates to the current settlement:
But perhaps the largest question looming over this settlement is how it will be policed. Recent history is littered with agreements that required banks to take specific steps to make amends. All too often, the banks have skated away from their promises.
Morgenson then recounts a series of instances where the banks failed to comply with past settlements, including this quote from a former judge involved in these processes and her conclusion:
It's astounding that in such a huge percentage of cases the lenders are not complying,” said Philip A. Olsen, a former Nevada Supreme Court settlement conference judge. “The banks have learned that they can thumb their noses at the program and it won’t cost them anything.”So you have to wonder whether banks will thumb their noses at last week’s settlement, too. That makes policing compliance crucial.
The full details of the settlement have not been released, but unfortunately, the most recent disclosures suggest that this enforcement power and large penalties per violation are wishful thinking. An executive summary of the provisions of the settlement can be found here. It states, among other things: "If banks fail to remedy violations, they are subject to civil penalties of up to $5 million from the court."(emphasis added)
While the full details may indicate otherwise, the process as described here seems to be a far cry from substantial penalties of $1 million to $5 million for each failure of compliance that some media reports appeared to suggest.
Why does the monitor need to provide the banks with a chance to remedy violations of the settlement? The banks certainly know what they are supposed to be doing. It's one indication that the banks will be able to pursue the changes requires by the without a sense of urgency.
With no set penalty formula the same banks which have argued that over 10,000 knowing violations of the law harmed no one, will undoubtedly argue--perhaps for years--that any violations of the settlement are inevitable consequences of glitches in operating a new system, have no practical impact, don't merit fines of any kind.
In addition, have the banks agreed that they will not contest the monitor's request of penalties to the court? If not, then, as I have previously noted a court fight over each penalty can—and most probably will—ensue, with the possibility that the entire monitoring process is a charade.
I hope that I am wrong, but the above analysis certainly suggests that, in Morgenson's words, banks will have the opportunity to "thumb their noses at [the] settlement" without incurring serious penalties.
If the enforcement provisions of the settlement prove to be meaningless, Americans will rightfully believe they have been misled by public officials to believe the settlement included stiff penalties to ensure violations did not occur.
The stakes here are enormous. They extend beyond the housing market to the nature of American society itself. The banks' blatant malfeasance with regard to the robo-mortgage scandal and other foreclosure-related activities have been a clear example of unequal enforcement of the laws. Now, the settlement may serve as another example that equal justice through equal enforcement of the laws, which is necessary for sustainable capitalism, no longer prevails in America.
Yale's Robert Dahl, one of the preeminent political scientists of our era, wrote in 2006 in On Political Equality (Yale University Press) of the risks of rising economic inequality, which is inevitably accompanied by political power which also concentrates at the top of the society:The unequal accumulation of political resources points to an ominous possibility: political inequalities may be ratcheted up, so to speak, to a level from which they cannot be ratcheted down. The cumulative advantages in power, influence, and authority of the more privileged strata may become so great that .. a majority of ordinary citizens...are simply unable...to overcome the forces of inequality arrayed against them.
I fervently hope we are not living out the ominous possibility Professor Dahl raises.
President Obama has declared income inequality to be "the defining issue of our time." I agree, but I am terrified that the most recent news related to the housing settlement is not the definition the president intends.
An earlier version of this article appeared in the Restoring Capitalism series of the New Deal 2.0 blog, a project of the Roosevelt Institute.
Follow Bruce Judson on Twitter: www.twitter.com/BruceJudson
"Spare the rod, and spoil the......society!
A recent action by Congress emphasizes the hold which the wealthiest of the Country have on our lawmakers. They recently passed a measure which would raise the size of a loan which can be guaranteed by the FHA to $729,750. It had been at $625,500. Couple that with the fact that FHA’s annual actuarial report, which said the agency has a 50 percent chance of needing to seek TAXPAYER AID to bolster its “insurance†fund. Actually a guarantee fund. Once these mansions have been purchased, the new owner will begin to salivate over the income tax deduction in respect to the home loan interest cost.
Also the fact that this was a bi-partisan action emphasizes the influence, among other powers of the National Association of Realtors. The National welfare has succumbed again to influence peddlers.
A recent Congressional Budget Office report has shown that the higher loan limits would benefit the top 5 percent of US households.
The FHA itself was against this measure taking into account, its precarious fiscal position. Since 2008, its contingent liabilities have grown by 1 trillion dollars and its expectation that it will soon have to seek another bailout.
A few points:
a) The evidence that inequality is growing in any significant sense is mixed with most of the robust research showing that what aggregate inequality observed is due to changes in demographics not a reduction in individual well-being for some groups
b) Where some inequality has been observed, it has mostly been confined to the 0.01%. So what? What they make does not come at the expense of what other people make and for the 99.9% of the population they are still better off than they were decades previously.
c) Even if inequality were growing, so what…another word for it is meritocratic reward. It should be celebrated.
d) But you make a good point. The problem with America is not inequality, per se, but the lack of sound, unbiased government and legal institutions. This is due to the fact that our governemnt has moved away from being a limited and unbiased protector of property rights, liberty, equality and fair process based on regulations that apply to all equally or to no one at all and instead has become a biased distributor of ‘fair outcome’ for some at the expense of others.
The real problem is that the US government should not be in the welfare and insurance businesses since these are easily captured by special interests, such as the green energy, unions, the poor, the elderly, auto companies, people that live in hurricane zones, and even bankers.
Kai
Thanks for the response:
You ask/state, ‘I do not know where you got your figures.’
Mostly from research:
Misperceptions About the Magnitude and Timing of Changes in American Income Inequality
http://www.nber.org/papers/w15351
‘This paper shows that a conceptually consistent measure of this growth gap over 1979 to 2007 is only one-tenth of the conventional measure. Further, the timing of the rise of inequality is often misunderstood. By some measures inequality stopped growing after 2000 and by others inequality has not grown since 1993. This cessation of inequality’s secular rise in 2000 is evident from the growth of Census mean vs. median income, and in the income share of the top one percent of the income distribution. The income share of the 91st to 95th percentile has not increased since 1983, and the income ratio of the 90th to 10th percentile has barely increased since 1986. Further, despite a transient decline in labor’s income share in 2000-06, by mid-2009 labor’s share had returned virtually to the same value as in 1983, 1991, and 2001.’
EARNINGS INEQUALITY AND MOBILITY IN THE UNITED STATES: EVIDENCE FROM SOCIAL SECURITY DATA SINCE 1937
http://www.econ.berkeley.edu/~saez/kopczuk-saez-songQJE09SSA.pdf
(link may break, search fro title and narrow for pdf)
Mobility at the top of the earnings distribution is stable and has not mitigated the dramatic increase in annual earnings concentration since the 1970s.
U.S. Income Inequality: It’s Not So Bad
http://www.stlouisfed.org/publications/itv/articles/?id=1920
You go on to bemoan the reduced that the middle class has been losing ground:
A "Second Opinion" on the Economic Health of the American Middle Class
http://papers.nber.org/papers/w17164
‘When using the most restrictive income definition – pre-tax, pre-transfer tax unit cash (market) income—the resources available to the middle class have stagnated over the past three business cycles. In contrast, once broadening the income definition to post-tax, post-transfer size-adjusted household cash income, middle class Americans are found to have made substantial gains, and these increases are even larger when including non-cash income such as the ex-ante value of health insurance.’
Middle American incomes rise substantially even while inequality increases
http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4049
‘Average household size declined substantially during the past 30 years, so household income is being spread across fewer people. The mix of household types—married versus single, young versus old—also changed considerably, so the “median household†in 2006 looks quite different from the “median household†in 1976. ‘
Reply: Ya, I guess you mean that, as the size of the population grows, the inequality grows proportionately.
QUOTE: and for the 99.9% of the population they are still better off than they were decades previouslyÂ."
Reply: So the the 99 percent is twice as "well off" compared to 40 years ago and the 1 percetn is 10 times as well off.
QUOTE: "c) Even if inequality were growing, so what…anothÂer word for it is meritocratÂic reward. It should be celebratedÂ."
Reply: And if you have assets of a million or so probaably inherited, retire at 25 years lay back and live devinely on the proceeds, interest, tax loopholes, etc. etc.
Quote: "and instead has become a biased distributoÂr of ‘fair outcome’ for some at the expense of others."
Reply: Example N. Gingrich made a million or so per year as "Historian" for Freddie Mac.
The average K St. lobbiest makes 10 times the average national income by reason of having served in Congress or having been - - -
Qote: "are easily captured by special interests,"
Reply: Ya, the "poor", the "unions" the payroll tax paying (now "elderly") are entirely to blame for "inequality" AIG and G-Sachs, Enron, BP Oil nothing to do with it??
You state, ‘Ya, I guess you mean that, as the size of the population grows, the inequality grows proportionately.’
Changes in demographics not changes in the quantity of our population is responsible for much of the change in inequality. As a percentage of the population, we have more minorities, more single-person households, more retirees, more felons, more high-school drop outs, more women workers, more immigrants, more single parents, etc. This results in a skewing of the data to previous periods, say 1950, 1660, 1970, 1980, etc. Add in changes in the way compensation is provided and it skews the way the data look.
You go on, ‘So the 99 percent is twice as "well off" compared to 40 years ago and the 1 percent is 10 times as well off.’
Correct! Thanks for admitting that 99% is better off. Oh wait…are you one of those people that it is not enough that you are better off but that other people cannot be MORE better off than you. Typical crass greed by progressives. If you are better off, what does it matter if Warren Buffet made more than you….he has not hindered you from getting a better life (since you are twice as better) and he does not stop you now from going out and doing what he does…invest money (so you can make 10 times if you want)...
You continue, ‘And if you have assets of a million or so probably inherited, retire at 25 years lay back and live divinely on the proceeds, interest, tax loopholes, etc. etc.’
a) 80% of millionaires are self made. Only 10% received an inheritance of significant worth. The average millionaire is 57 years old, meaning that his fortune has accrued over his lifetime and not at birth. 66% own a business (in other words they are entrepreneurs and job creators), 20% are retired, and 14% work for others. Etc.
http://s.fatwallet.com/static/attachments/455_The_Millionaire_Next_Door.pdf
Sorry of the facts do not align with your specious world view.
b) So what if they did. It means their parents made it for them. What is wrong with families taking care of each other and working hard to ensure that future generations do better, not worse than them. It is what America was supposed to represent, not the government-enforced serfdom you yearn for.
Looks like the Republicans are winning.