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Resurrection of the American Dream
The American Dream is a concept that has been a part of American culture for many decades. The American Dream is a deeply held conviction that an individual can reach his or her fullest potential if they apply themselves appropriately. This concept is built on the idea that there are no limiting conditions that can keep someone from fulfilling their potential such as age, race, sex, disabilities, or other factors that are beyond an individual's control. The idea is centered on the concept that there exists the opportunity for social mobility that can be achieved through the application of one's efforts.
Through hard work and determination an American has the potential to improve their circumstances at all times. However, the vitality of the American Dream has been compromised in recent decades with many macroeconomic developments that have negatively impacted the economic opportunities for Americans. Furthermore, there are other threats to the American Dream as well. For example, the health of the population is declining with the instances of cancer and obesity reaching epidemic levels. However, homeownership stands as one of the cornerstones of the concept of the American Dream as well. This analysis will consider some of the factors that are detracting from the achievement of the American Dream as well as offer suggestions to how this dream can be resurrected.
American Dream Background
James Truslow Adams was among the first to explicitly refer to the American Dream in his book The Epic of America, which was written in 1931. The author stated that the American dream is:
"that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement. It is a difficult dream for the European upper classes to interpret adequately, and too many of us ourselves have grown weary and mistrustful of it. It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position. (Adams)"
The original ideas relating to the American Dream were not born in a merely materialistic pursuit. Rather, the American Dream was defined in terms of potential and the achievement of that potential regardless of the "circumstances of birth."
Despite the origins of the concept of the American Dream, it has steadily evolved over the years and has different meanings to different groups. The American Dream has been associated with home ownership since the post-World War II period. It has also been associated with different ideas regarding consumerism and the ability to purchase material items. However, in the modern globalized environment that constitutes that background for our current way of life there are many various material items and services that are necessary for individuals to have the opportunity to reach their full potential. For example, without access to health care an individual may not have the opportunity to live full and rewarding lives. The same arguments can be made about other services; especially education. Without access to education, an individual will not have a significantly diminished ability to better themselves in a modern world. Therefore, regardless of the material ambitions of various individuals, factors such as health, education, and access to the basic humanly needs are vital to maintaining the concept of the American Dream. However, since homeownership has manifested within the last couple of decades in regards to its association with the American Dream, this factor will be examined to determine the current state the concept.
The broadest first cause of the housing crisis in the United States is usually attributed to deregulation of the financial markets. The deregulation trend began in 1990s, which was led by many people who upheld a strong "free market" ideology. By deregulating financial institutions it gave them more freedom to design their own operations and internal policies by reducing the compliance and oversight limitations. Furthermore, investment banks and deposit institutions were allowed to merge their services whereas once they were separated by law. The deregulation of the banking gained the most traction under President Clinton who enacted regulations that virtually revolutionized the way banks do business (Lal).
The deregulated environment set the stage for what is known as the sub-prime real estate market. Banks were eager to carve out new market segments in which they could craft financial products for because the industry was fueled by competition. The industry forced banks to become more innovative so that they could simply remain competitive (Asensio and Lang). The sub-prime mortgage was developed and was designed that more Americans could experience the American Dream and banks could provide services to a broader customer base. A sub-prime mortgage was targeted towards customers whose could not qualify for a traditional mortgage for a variety of reasons. However, the most common type of sub-prime borrower often had a limited ability to repay their home loans and therefore this class of lending was coined as "sub-prime."
Because the market had become so deregulated, banks now had the ability to reinvent the mortgage process. It was formerly a requirement that borrowers would have to put down a down payment in order to qualify for a mortgage. However, this requirement was lifted for the sub-prime borrowers primarily because this group did not have the resources to make a significant down payment as traditionally required. Therefore banks created a new set creative loan terms in which potential homeowners could borrow with no money down. This opened the possibility of home ownership and the American Dream to a wide variety of consumers who had never been in the position before. Millions of first time borrowers took advantage of the new mortgage terms and purchased their first house; many times with only their mediocre credit score and their signature.
Since there was a lot of risk in this category of borrowers, banks needed a way to effectively manage their risky sub-prime loans. As a consequence of managing these risks, banks created a complex set of financial instruments known as financial derivatives. With the creation of derivatives and the derivative markets, lenders could package loans a group of loans for resale to various real estate funds. These packages work to effectively securitize the mortgage. So when a loan officer sold a new mortgage, they may have only been responsible for the mortgage for a second before sending it off to an investor or an investment fund. On one hand these were a reasonable approach to dealing with the risk in the sub-prime market. Historically, there had been a natural default rate that generally remains fairly consistent. Therefore, by diversifying the risks in these packages this worked to leverage the amount of risk exposure that any individual would face on their own (Focardi and Fabozzi).
As a result of deregulation and the innovative new loans that emerged, the real estate market exploded. Millions of Americans were eager to participate in the American Dream that they had been familiar with for most of their lives. This drove up demand for properties and as a consequence real estate prices catapulted because of the sub-prime eager to make purchases. The pursuit of the American Dream led to what was later called the "housing bubble" which was defined by the fact that real estate prices had grown to a level in which the actual asset price exceeded that would have been otherwise deemed as normal due to inflated demand. The demand was also fueled by the fact that buyers could purchase a mortgage with no initial investment on their behalf (Zhang, 2008).
However, the bubble ultimately burst and millions of new homeowners found that their housing values were now worth less than their sub-prime mortgages that they borrowed. Since many of the homeowners did not actually put down any of their own money to purchase these houses, this made it easy for this group to simply "walk away" from the properties. Others found themselves unable to make payments that grew larger under the terms of their adjustable rate mortgages and eventually fell into foreclosure. In total, it is estimated that roughly four million families have lost their homes and their piece of the American dream between 2007 and early 2012 (Wilson).
Although the intentions may have been pure to bring the American Dream to more and more families, this experiment ended horribly for many Americans and eventually sparked a global financial crisis. Yet it is difficult to believe that the intentions were actually pure given the numerous fraud and abuse charges that plagued all the major banks. In 2012 for example, the largest five banks agreed to a billions in settlements to avoid further legal actions which stemmed from misconduct. Various government efforts were proposed, however they were never enacted and as a result millions…[continue]
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