These borrowers had -- knowingly or not -- been gambling on a real estate market they did not understand. Understanding the complexities of the real estate market and fiscal policy is complicated -- those who have grown up without access to the best education and who do not have experienced friends and family to help advise them in this process were the most vulnerable.
Squires, Hyra and Renner showed that subprime lenders were able to segment their market by geography. Combined with the ethnic segregation that exists in most American cities, the outcome was simple -- minorities were targeted for subprime loans. The poor and working class were targeted by predatory lenders. When the crisis hit, it was these groups that suffered the most and foreclosure rates in these communities spiked.
Interest Rates & Bank Deregulation
To spur economic growth during the slowdown in 2000-02, the Federal Reserve lowered interest rates and implemented other measures to inject capital into the economy. This is the money that flowed into the real estate market, initiating the bubble. Banks could not find enough prime borrowers, and so increased their rate of subprime lending. They did this because deregulation of the industry had allowed them to increase their risk. The result was that banks reaped short-term rewards, but at the expense of increased risk levels. In countries that did not experience this deregulation, such as Canada and Australia, the banking system remained robust throughout the crisis and its impacts on workers were not felt as strongly. Bankers made less money, but the economy was insulated from the worst of the impacts.
When U.S. banks began to fail under the weight of mounting foreclosures, the government stepped in to bail them out, first the Bush administration and then the Obama administration after that. The banks expected this -- George Bush, Sr. had bailed out the industry in the wake of the savings and loan crisis so bankers knew the government would step in to protect them. Wealthy bankers gamed the system -- they gambled with money that they knew was guaranteed by the American taxpayer. In the good times, they took home tens of millions of dollars in bonuses. In the bad times, the taxpayers covered the losses. Even the bonuses, which the Obama administration initially railed against, have now become acceptable. The public, meanwhile, has seen its taxes increase and programs cut in order to help pay for these bailouts and bonuses.
The financial crisis exemplifies the argument that Scott and Leonhardt make about the ways in which the wealthy classes continue to find ways to press their advantage at the expense of lower social classes. Bankers well versed in economics and armed with government policies favorable to their interests flourished in an environment that promoted risk-taking. They reaped the rewards knowing that the taxpayers would pay the cost of their failure, a lesson they learned during Bush, Sr.'s pro-upper class administration.
The banking industry is back to business as usual, racking up profits and bonuses along the way. For them, the financial crisis is essentially over. For millions of Americans that suffered foreclosure, the crisis is ongoing. While many pundits place the blame on a lack of financial savvy, they fail to ask how this lack of savvy came about. The ghettoization of poor Americans -- usually ethnic minorities -- results in poor educational opportunities and poor job prospects. This creates a class of American ill-prepared to gamble on real estate markets, or to weather a financial crisis. The class that influences the laws and has access to the education and experience that allows them to understand housing bubbles, interest rate policy and other factors influencing this crisis has emerged from the crisis quickly and easily. The other class -- without the benefits that come with wealth and privilege -- is left with high rates of unemployment, tax increases they cannot afford, and cutbacks to the few social services they receive. There can be little doubt that this situation will only drive the wealth and class divide in this country further apart, setting the stage for future exploitative crises.
Squires, G.; Hyra, D.; Renner, R. (2009). Segregation and the subprime lending crisis. EPI Briefing Paper. Retrieved February 15, 2010 from http://epi.3cdn.net/d1219ac2d8a407a2f5_b3m6b5bkb.pdf
Scott, J. & Leonhardt, D. (no date). Shadowy lines that divide.