Decades of Financial Deregulation & Racist Housing Policy Brought Us 2007 Meltdown, with More to Come (Pt 1/3)
Carter, Reagan, Clinton, the Bushes, Obama, and now Trump deregulated Wall Street and did nothing to help Black and Brown homeowners in America. White collar criminologist Bill Black discusses the social structure of mortgage discrimination. Part 1: The History
MARC STEINER: Welcome to The Real News Network. I’m Marc Steiner, great to have you all with us.
We’re all too well aware of the 2007 economic meltdown, the horrendous role that bundling mortgages played in that crisis that came out of the subprime mortgage market to a full-blown international banking crisis. It was then we learned how banks and other lenders targeted Black and Latino communities, whose loans they bundled, that we just talked about. Black and Latino homeowners were the largest group of victims, losing homes being forced to default on their mortgages. Now, ten plus years later, a group of economists have published an important study called The Social Structure of Mortgage Discrimination. It outlines how that industry targeted Black and brown communities and the history of discrimination in our banking world.
So today, we’ll examine not only how they did their study and what they found, but as importantly, what could come next, because the congressional fix was never very strong, and the reality that the predation of our banking industry is still not regulated enough to prevent another disaster like 2007 or something similar from striking our country again. And joining us once again from Minnesota, he was here from Kansas City Missouri, is Bill Black. Bill’s an Associate Professor of Economics and Law at University of Missouri, Kansas City. He’s a white collar criminologist and former financial regulator, author of the book–and I love this title–The Best Way to Rob a Bank Is to Own One. Of course, he’s a regular contributor here to The Real News. And Bill, welcome back. Good to have you with us.
BILL BLACK: Thank you.
MARC STEINER: So Bill, let’s start with this study, and it was really fascinating. You sent this to us and I was going through it all day here, and I’m just very curious. Why is it important ten years later, or twelve years later, looking at what they did?
BILL BLACK: OK. So first, the critical phase of the 2008 financial crisis, as opposed to 2007 when the meltdown occurred, obscured the predation and indeed turned the victims into the supposed villains. And this was through the famous Santelli rant, which is bizarre. It was a bunch of finance guys screaming that the problem was poor, and to use their word, “losers,” who were often the victim of predatory and fraudulent lending. And that led to the creation of the Tea Party and eventually to Donald Trump. And so, the whole story of predation got lost and perverted in this bizarre fiction, nasty fiction that was created.
It goes back, actually, all the way to Carter. Interest rates reached all-time peaks in a sharp rise that began in 1979 under Jimmy Carter. And the response was to pass a law that allowed the removal of interest rate controls on banks and other financial institutions. In the old days, it had been in the ballpark of eighteen percent. Nowadays, as many of your viewers will know, it can be over five hundred percent interest rate on payday loans. And this deregulation of interest rates did two critical things. One, it allowed financial institutions to grow at extraordinary levels, hundreds sometimes thousands of percent a year, because in the old days you couldn’t get cash to be able to grow that quickly. But now, you could offer to pay on deposits an extra one tenth of one percent, that’s ten basis points, and the next day you would literally have, if you wanted it, two billion dollars to be able to grow.
Well, by removing interest rate caps, you allowed that massive growth, but you also allowed predation against the most vulnerable folks. The savings and loan crisis, this was made infamous by the most notorious fraud, Charles Keating, where they deliberately predated against widows, consciously targeted retirement communities, and had internal memos that said, and I quote, “Remember, the weak, the meek, and the ignorant are natural targets for all of this.” Thereafter, it got worse, because we drove these predatory lenders, who in the early days, right near the end of the savings and loan crisis, clustered where all good financial frauds in America begin, in Orange County California. And we had jurisdiction over them, and we forced them out of the insured industry.
In fact, the worst of them, Long Beach savings, voluntarily gave up federal deposit insurance and its charters of savings and loan for the sole purpose of escaping our jurisdiction. So it went out and it became the vector, in the sense that like an anopholese mosquito is the vector that spreads malaria, that spread this toxic loan and predation through the industry. And then, it morphed as a bunch of folks like Household Financial, who specialize–they were sort of the payday lenders of the early 1990s, 1980s, not as virulent, but really nasty–they started hiring people out of Household Finance when it went out of business into places like Long Beach Savings, which changed its name to Ameriquest. And literally, as the Attorney General of Illinois, Lisa Madigan, has said, became the model for what became known as the shadow financial sector, which was the primary specialist in making these fraudulent and predatory loans, but with the financial backing of Wall Street, mostly the investment banks.
So it really wasn’t Garn-St. Germain or the 1982 legislation on savings and loans, nor was it Gramm-Leach Bliley, which mostly got rid of Glass-Steagall, that was critical in this regard. It was this unholy marriage of two forms of predators, Wall Street predators and these really sleazy payday lender types, SNL fraud emigres, that got together and said, “Hey, Keating was right. All we have to do is pay loan brokers more money to induce people to overpay in interest rates. How should we go about doing that?” So the first answer was pay. But the second answer is what this new research is about, which by the way, is not primarily by economists, but by folks who really understand culture and demographics and such. And they said, “Let’s go look at the whistleblowers, the people who actually worked for these banks,” in the epicenters for where this predation occurred, which is places like Baltimore, Prince George’s County in Maryland, Cleveland, Ohio, Atlanta, Detroit where I was born.
MARC STEINER: So let me ask you something. I want to play two clips since we’re talking a bit about history, to see how they are relevant or not relevant. And then, we’ll take a short break, do a second segment. I want to hone in on just what folks found in this cultural look at how this happened and what it has to do with the city we’re broadcasting from and others around the country. But let me play these two quick clips for you and just get your thoughts and see if this is the blending you were talking about, the marriage that created some of this, the beginning. This is the first one, when Bill Clinton decided Glass-Steagall it was no longer important.
BILL CLINTON: It is true that the Glass-Steagall law is no longer appropriate to the economy in which we live. It worked pretty well for the industrial economy, which was highly organized, much more centralized, and much more nationalized than the one in which we operate today. But the world is very different. Now we have to figure out, well, what are still the individual and family and business equities that are still involved that need some protections?
MARC STEINER: Glass-Steagall not being completely relevant to this, but let me play this and juxtapose it to what Ronald Reagan said when he started beginning the process of deregulation here.
RONALD REAGAN: This bill is the most important legislation for financial institutions in the last 50 years. It provides a long-term solution for troubled thrift institutions, it’s pro-consumer, granting small savers greater access to loans, a higher return on their savings. And when combined with recent sharp declines in interest rates, it means help for housing, more jobs and new growth for the economy. All in all, I think we hit the jackpot. Now, this bill also represents the first step in our administration’s comprehensive program of financial deregulation.
MARC STEINER: The question is, have we really hit the jackpot here? Are there connections between these two and what we just saw in 2007 and what this report is talking about, or are they disconnected?
BILL BLACK: Well, the broader connection is in some ways the obvious one. First, as I said, it begins with the President Carter, goes through President Reagan. His vice president is the chairman of the deregulatory task force was talking about, that they were just at the start of efforts of getting things wrong with the Garn-St. Germain Act which kicked off the savings and loan debacle’s second phase, the vastly more expensive, fraudulent phase, and then was continued under Bill Clinton, who had the same fundamental policy. And then, the second George Bush continued it. And so, you had twenty plus years of essentially an assault on regulation.
And secondly, of course, what did they have in common? Well, President Trump isn’t the only president that lied, because virtually every statement that you just presented was a lie.
MARC STEINER: From both presidents, the Republican and the Democrat one, from both presidents.
BILL BLACK: From both presidents.
MARC STEINER: So we’re going to end this conversation here, just for this part of it right now. We’re talking with Bill Black, who of course you know is a regular contributor here at The Real News. In our second segment, we’re going to talk a bit more about what he just said, what was this dishonesty about, and then really delve into this report and what this report shows that we didn’t already know. And then, later we’ll talk a bit about where this might take us all in the future. So check the next segment out.
I’m Marc Steiner here for The Real News with Bill Black.