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Individual Responsibility, Subprime Mortgages and Race by Nicholas Austin

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The Subprime Mortgage Crisis: Individual Responsibility & Why Race Still Matters

By Nicholas Austin

Like it or not, race still permeates every crevice of American life. From drawing school district boundary lines, to healthcare, nothing escapes this basic conflict. The subprime mortgage crisis offers textbook examples of racial 'scapegoating' and factual distortions.. Injecting race into the crisis distorts the complex reality of America's financial picture and ignores the true culprits of this crisis, all of us.

For some financial experts, America's financial markets provided equal access to capital, credit and economic vitality. Adam Smith, the father of modern economics, argues in his classic treatise, An Inquiry into the Nature and Causes of the Wealth of Nations that "the greater good for all is achieved through a market of free exchange, guided by an invisible hand where a willing buyer and seller agree to a transaction at arms length."

Today, conservative economists cite Smith for their view that people entrapped by subprime mortgage debt were exclusively responsible for their own financial misery. Some pundits have even branded minorities and poor as the sole cause of the collapse of the global financial system. In these vignettes the villains are the unaffordable homes and unsustainable life-styles of the working poor.

This analysis failed, to see that predatory practices combined with misinformation, and lack of knowledge cluttered Smith's utopian vision of the bargaining table.
They failed to see that Smith's buyers and sellers' arms length transactions were not done in vacuums.

Gerhard Lenski's 1966 book Power and Privilege theorized that a "Class Perspective Theory of Economic Inequality" existed. He argued that a structured system of economic inequality was intrinsic to the economic realm and was not "fundamentally altered by economic mobility of individuals." He argued that modern economic relations perpetuated class differences that are transmitted from generation to generation. Lenski viewed race, gender and ethnicity as interacting with class to create mutually defining structures that shape both consciousness and success.

Lenski's theories fill in the gaps left by Smith. While the poor bargained with mortgage brokers in hopes of buying homes, they remained unaware of the economic and financial factors surrounding their transactions. They came to the table unaware of the full financial ramifications of their decisions.

Dr. Kathe Newman, a professor of urban planning and policy development at Rutgers University, also noted that the casual observer blamed "irresponsible borrowers" for the crisis while ignoring "the evolution of the mortgage banking industry and its role in creating the structural basis for the crisis."
Many actors, including individual homeowners, lenders, mortgage brokers, government sponsored enterprises, ratings companies, speculators, contributed to the current chaos in our economy.

Did homeowners (white, black, native American, Arabic, Asian, Hispanic, etc.) evaluate their personal finances and buy homes they could afford? Were the realtors selling homes for the commission, even while they knew their clients could not afford the house over the long run? Were the banks and mortgage lenders honest with their clients on the repayment terms surrounding variable rate mortgages and other risk- laden loan structures? Did they seek to ensure that their clients understood all the risks of their decisions? Did the agencies rating the loan bundles being sold to investors bybanks investigate them as thoroughly as they should have? Did the investment banks investigate the stability of the loan bundles they purchased from banks? Did the government officials do all they could to ensure this area of securities was being regulated effectively? Did the elected officials make any effort to correct the problems before they snowballed or work to fix legislative loopholes that contributed to the creation of the crisis?

If we answer these questions, instead of engaging in racial stereotyping, we will have learned enduring lessons from this crisis. Failure to pursue these questions will doom us all to repeat these mistakes in the future.

Nicholas Austin is a third-year law student at Georgetown University in Washington, DC

Disclaimer: The views expressed in the student blog entries do not represent my views, or those of Georgetown University. They are the individual expression of each student, who is solely responsible for the content of their message.