Resurrection of the American Dream: Housing Crisis Analysis

Introduction

The American Dream is a concept that has been a part of American culture for many decades. It is a deeply held conviction that an individual can reach his or her fullest potential through appropriate application of effort. This concept is built on the idea that no limiting conditions — such as age, race, sex, disability, or other factors beyond an individual's control — can prevent someone from fulfilling their potential. The idea centers on the existence of social mobility that can be achieved through personal effort and determination.

Through hard work and determination, any American has the potential to improve their circumstances. However, the vitality of the American Dream has been compromised in recent decades by macroeconomic developments that have negatively affected economic opportunities for Americans. There are other threats as well: the health of the population is declining, with instances of cancer and obesity reaching epidemic levels. Homeownership, meanwhile, stands as one of the cornerstones of the American Dream. This analysis considers some of the factors detracting from the achievement of the American Dream and offers suggestions for how this dream can be resurrected.

Background of the American Dream

James Truslow Adams was among the first to explicitly refer to the American Dream in his book The Epic of America, written in 1931. Adams 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 of 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 these origins, the concept has steadily evolved over the years and carries different meanings to different groups. The American Dream has been associated with homeownership since the post-World War II period and with consumerism and the ability to purchase material goods. However, in the modern globalized environment, many material goods and services are necessary for individuals to have the opportunity to reach their full potential. Without access to health care, for example, an individual may not have the opportunity to live a full and rewarding life. The same argument applies to education: without access to it, an individual faces significantly diminished ability to better themselves in the modern world. Therefore, regardless of the material ambitions of various individuals, factors such as health, education, and access to basic human needs are vital to maintaining the concept of the American Dream. Because homeownership has become strongly associated with the American Dream in recent decades, this factor will be examined to determine the current state of the concept.

The Housing Crisis and Deregulation

The broadest first cause of the housing crisis in the United States is generally attributed to deregulation of the financial markets. The deregulation trend began in the 1990s, led by many who upheld a strong "free market" ideology. By deregulating financial institutions, policymakers gave those institutions more freedom to design their own operations and internal policies by reducing compliance and oversight requirements. Investment banks and deposit institutions were also permitted to merge their services, whereas they had previously been separated by law. Deregulation of the banking sector 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 became known as the subprime real estate market. Banks were eager to carve out new market segments in which they could craft financial products, driven by intense industry competition. That competition forced banks to become more innovative simply to remain competitive (Asensio and Lang). The subprime mortgage was developed with the stated goal of allowing more Americans to experience the American Dream while enabling banks to serve a broader customer base. A subprime mortgage targeted customers who could not qualify for a traditional mortgage for a variety of reasons, most commonly a limited ability to repay their home loans — hence the term "subprime."

Because the market had become so deregulated, banks acquired the ability to reinvent the mortgage process. It had formerly been required that borrowers make a down payment in order to qualify for a mortgage. This requirement was lifted for subprime borrowers, primarily because this group did not have the resources to make a significant down payment as traditionally required. Banks therefore created new, creative loan terms under which potential homeowners could borrow with no money down. This opened the possibility of homeownership — and the American Dream — to a wide variety of consumers who had never previously been in a position to purchase a home. Millions of first-time borrowers took advantage of the new mortgage terms and purchased their first house, often with nothing more than a mediocre credit score and a signature.

Since this category of borrowers carried considerable risk, banks needed a way to effectively manage their subprime loan exposure. As a consequence, banks created a complex set of financial instruments known as financial derivatives. With these derivatives and the markets built around them, lenders could package groups of loans for resale to various real estate funds. These packages effectively securitized the mortgage. When a loan officer sold a new mortgage, they might have held responsibility for it only briefly before passing it on to an investor or investment fund. On one hand, this was a reasonable approach to managing risk in the subprime market. Historically, mortgage default rates had remained fairly consistent, and diversifying risk across these packages helped limit the exposure any single investor would face (Focardi and Fabozzi).

Conclusion

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 five largest banks agreed to billions of dollars in settlements to avoid further legal action stemming from misconduct. Various government remedies were proposed, but they were never enacted, and as a result millions of Americans were forced out — literally, in some cases — of their piece of the American Dream.

It is likely that a functional government could have done more to mitigate the worst effects of the crisis for millions of families; however, the response was too little and too late for most. The bipartisanship found in the U.S. government has prohibited many innovative solutions that could provide effective leadership in such situations. This bipartisanship remains and had, at the time, recently resulted in a "sequester" cut of eighty-five billion dollars with the potential to become the next self-inflicted crisis (Mason and Spetalnick). It is clear from these examples that one necessary component in the resurrection of the American Dream is a functioning federal government capable of meeting the modern challenges it confronts — and that such a government had yet to emerge.

Works Cited

Adams, J. The Epic of America. Simon Publications, 1933. EBook.

Asensio, A. and D. Lang. "The Financial Crisis, Its Economic Consequences, and How to Get Out of It." International Journal of Political Economy (2010): 58–69. Web.

Focardi, S. and F. Fabozzi. "The Reasonable Effectiveness of Mathematics in Economics." American Economist (2010): 19–30.

Lal, D. "The Great Crash of 2008: Cause and Consequences." Cato Journal (2012): 265–277. Web.

Mason, J. and M. Spetalnick. "Spending cut debate casts pall over Obama's second-term agenda." 2 March 2013. Reuters. Web. 2 March 2013.

Wilson, J. "Foreclosures (2012 Robosigning and Mortgage Servicing Settlement)." 7 January 2013. The New York Times. Web. 2 February 2013.

Zhang, F. "Perspectives on the United States Subprime Mortgage Crisis." Macro China Network (2008): 115–121.