Here's Why We Still Need to Finger Culprits in the Financial Crisis
Are we so obsessed with fingering the "bad actors" who caused the financial crisis that we're unable to see the larger social forces behind the meltdown? George Washington University sociologist Gregory Squires thinks so:
Among the identified culprits are greedy homeowners, lazy underwriters, asleep-at-the-wheel regulators, irresponsible investors, fraudulent appraisers and credit rating agencies, misguided housing policy agencies of government and a range of other individuals and organizations. Missing from virtually all discussions is the crucial role that several broader, and more fundamental, contextual factors played in nurturing the crisis events, factors that promise to create future bubbles and crises if attention is not paid.Arguably the most important such factor is the role that racism played in mortgage lending and the ensuing foreclosure epidemic, Squires says. Other causes include soaring economic inequality in the U.S., which makes people vulnerable to predatory lenders; dubious ideas about the infallibility of markets; and Wall Street's vast political clout. Given these deep roots to the crisis, scouring the world of credit default swaps and vaporizing "too big to fail" banks alone won't restore the American economy, he says.
Lots of talk, little action
All true. Where Squires goes too far is in arguing that "social forces" are more to blame for the financial crisis than bad actors. First, it's a false dichotomy, or at least splitting hairs. Flogging bankers -- or admonishing clueless borrowers, for that matter -- doesn't interfere with understanding financial crises as multifaceted socioeconomic events. At least no more than locking up thieves obstructs recognizing that theft, too, is a sociologically complex act.
Second, there's been copious public discussion of all the factors he identifies as driving the crisis (although it never hurts to have more). State legal officials and journalists have zeroed in on reverse-redlining and the class dimensions of predatory lending. Distinguished economists have warned about the danger of rising inequality. Numerous books have focused on the financial industry's destructive degree of political influence. Think-tanks across the political spectrum have devoted megawatts of brain-power to tracking the housing crash back to its ideological lair. In Washington, scores of congressional hearings have provided important context for understanding what occurred. And this exegesis is on top of everything we already know about previous financial bubbles.
So the problem isn't inadequate consideration of the social backdrop for the crisis -- it's that such talk hasn't cohered into a broader discourse that political elites, and much of the American public, are willing to hear (although the Tea Party and elements of the left are listening). It's that some things can't be said, at least not without people looking at you weird. As a result, the connections between, say, declining social mobility in this country and corporate power are not widely understood, let alone factored into public policy.
Meet Wall Street -- change agent
Third, dividing participants in the financial system from the social currents that sweep them along ignores that such actors are themselves expressions of ideas, beliefs and values. They're also agents of change.
For instance, Squires notes that the state-owned Bank of North Dakota could teach us a thing or two about how to restructure the financial system in more productive ways. No doubt. But the only reason that institution exists is because it was created in the early 20th century by the socialist Nonpartisan League, which after sweeping state elections in 1916 went on to create the bank to make loans to farmers and low-income borrowers. To this day, the Bank of North Dakota embodies the agrarian political ideals that led to the company's birth. It is both an actor -- a rather good one, I might add -- and a vehicle for social policy.
Or take Squires's point about how racial segregation made U.S. minorities particularly vulnerable to the housing bust. Correct. And why? Yes, because of our sorry history of racism. But also because, as he concedes, large banks and other mortgage lenders targeted minorities, going so far as to enlist religious leaders to sell their parishioners on the saintly virtues of subprime loans. These firms also sought to change attitudes about lending by transforming a long-held cultural aversion to "debt" into a credulous belief in the miracles of "credit."
Who is more to blame, at least in the ethical sense, in this scenario -- racial segregation or the company that exploits it? The former is a historical condition, the latter a profiteer. As Squires says, enforcing fair housing laws can help counter such discrimination, and in so doing promote financial reform. But that requires, well, enforcement, and as a deterrent the rule of law is a beautiful thing.
Although Squires is right in saying that social forces such as racism, inequality and an unquestioning belief in the efficiency of markets contributed to the crisis, it's a major leap to suggest that no crisis would've occurred -- or will again -- if those forces had been absent. Racism wasn't a trigger for the Great Depression, for instance. Yet here we are again.
And how to explain that many similar, if smaller, financial calamities have occurred in countries with starkly different social conditions? Take Sweden. In the early 1990s, several of the country's big banks had to be rescued (and nationalized) after a housing bubble caused in large part by deregulation. And yet income is distributed much more evenly in Sweden than in the U.S., while residential segregation was a non-issue.
Similarly, the latest financial crisis laid waste to most developed economies, including nations that are socially very different than the U.S. France has never suffered from excessive faith in American-style capitalism, for instance. Yet its banks also choked on derivatives.
Capitalism: Not losing our religion
Another area where I differ with Squires is his contention that "we are experiencing a crisis of capitalism, not a crisis of regulation." He writes:
The unsustainable demand for permanent private returns on capital made mortgage-backed securities an attractive outlet for surplus capital, at least until the bubble burst. But failure to rein in global capital invites more frequent, and more severe, booms and busts.I'm sympathetic to the idea that capitalism can be its own worst enemy. Everyone knows the profit motive is an important economic lubricant; what we've forgotten is that it's not all-important. These minor epiphanies aside, I see no evidence at all that capitalism is fundamentally in "crisis." And certainly not in Washington, as Republicans crusade for deregulation and President Obama nuzzles Corporate America.
After a brief shudder, investors again are investing. Entrepreneurs are risking. Corporate earnings surge. Employees place their retirement dreams in the hands of money managers most will never speak to even once. If there's a crisis, perhaps it's not one of having too little faith, but too much.
No, for better or for worse -- probably both -- capitalism remains the national religion. And what's religion without a little damnation?
Image from Wikimedia Commons, CC 2.5
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