Justice for Some
Published in Romania Libera
(Romania) on 7 January 2011
by Joseph Stiglitz (link to original)
(Romania) on 7 January 2011
by Joseph Stiglitz (link to original)
Translated from
by Teodora Pogonat.
Edited by Gillian Palmer.
The mortgage disaster in the United Stated has raised serious questions about the “state law,” the universally accepted sign of an advanced and civilized society. State law needs to protect the weak from the strong and to assure that all people are treated equally. In America, since the subprime mortgage credit crisis, the state has failed to fulfill any of its roles. A part of state law is the security of property rights — if you owe money for your home, for example, the bank cannot take it from you, pure and simple, without due legal process. But in the recent weeks and months, Americans have seen cases in which many people have had their homes repossessed, even when they did not have debt. For some banks, these cases represent collateral damage: Millions of additional Americans, in comparison to the approximately 4 million in 2008 and 2009, still need to be thrown out of their houses. In reality, the rate of foreclosures would have increased if the government had not intervened. The fast track procedures, incomplete documentation and excessive fraud that accompanied the rush of banks to generate millions of bad loans during the housing bubble, however, have complicated the cleanup process of the mess the banks have left behind.
For many bankers, these are just details that can be overlooked. Most people evicted from their homes have not paid their mortgages and, in most cases, those that have thrown them on the street had the right to do this. But Americans should not believe in a justice that functions in general. We do not say that most of the people jailed for life have committed a crime that deserves such a punishment. The justice system in the U.S. demands more and there exists procedural safeguards that meet these requirements.
Banks want to evade these procedural safeguards. But they should not be allowed to do such a thing.
For some, all this is reminiscent of events in Russia, where the state law — in specific legislation for bankruptcy — was used as a legal mechanism to replace a group of owners with others. Courts were bought, documents were falsified, and the process went very smoothly.
In America, corruption is at a more advanced level. Not only can certain judges be purchased, but also laws through campaign contributions and lobbying, in what has come to be known as “corruption American style.”
It was widely known that banks and mortgage companies engaged in aggressive lending practices, profiting from the least educated and from those less informed from the financial point of view, determined to make loans with high fees and which would assume high risks for borrowers. (To be fair, banks tried to profit from even those more sophisticated from the financial point of view, as in the case of securities created by Goldman Sachs, that were designed to fail.) But banks used all their political ties to stop states from adopting laws that would limit predatory lending.
When it became clear that people could no longer pay what they owed, the rules of the game changed. Bankruptcy laws were modified so as to introduce a system of “partial contractual obligations.” An individual who, let’s say, has a debt equal to 100 percent of his income could be obligated to pay the bank 25 percent of his gross income before taxes for the rest of his life, because the bank could add, let’s say, 30 percent interest a year to the amount owed by that person. In the end, a person that has a mortgage would owe much more than the bank would ever receive, even if the debtor worked a quarter of his time for the bank.
So then when this bankruptcy law was adopted, no one cried that they were in opposition to the contractual sanctity. But the moment when borrowers started to suffer because of their debts, a more humane bankcruptcy law — from the economic and rational point of view — would have given them a chance for a new beginning in case the task of repayment became too burdensome. This knowledge should have prompted creditors to grant loans only to those that could repay. But creditors probably knew that if Republicans regained control of the government, they could make bad loans and in turn change the laws to ensure that the poor would pay.
With one in four mortgages in the U.S. under water — that is, people that owe more than what the house is worth — there is a rising consensus that there is only one way to resolve this mess, by recording the amount of the principal debtor (that which he owes). America has a special procedure for corporate bankruptcy, called Chapter 11, that permits a rapid restructuring through recording debt and transforming a part of this into liquid capital. It is important that the business continues to function as an economic conglomerate to assure jobs and economic growth. But it is equally important that families and communities to remain intact. So then Americans have a need for “a homeowners’ chapter 11.”
Creditors cry that this type of law would take their right to the property. But almost all changes to laws and regulations favor some over others. When the bankruptcy laws of 2005 were adopted, creditors benefited; they did not worry about how the law would affect the rights of debtors.
Rising inequality, combined with a defected campaign financing system, is risking transforming the American legal system into a parody of justice. Some could continue to name it a “state law,” but it would not be a state that protects the weak against the strong. Rather, it would allow the strong to exploit the weak.
In the America of today, the proud claim of “justice for all” is replaced with the more modest claim “justice for those who can afford it.” The number of people who can afford it is declining rapidly.
For many bankers, these are just details that can be overlooked. Most people evicted from their homes have not paid their mortgages and, in most cases, those that have thrown them on the street had the right to do this. But Americans should not believe in a justice that functions in general. We do not say that most of the people jailed for life have committed a crime that deserves such a punishment. The justice system in the U.S. demands more and there exists procedural safeguards that meet these requirements.
Banks want to evade these procedural safeguards. But they should not be allowed to do such a thing.
For some, all this is reminiscent of events in Russia, where the state law — in specific legislation for bankruptcy — was used as a legal mechanism to replace a group of owners with others. Courts were bought, documents were falsified, and the process went very smoothly.
In America, corruption is at a more advanced level. Not only can certain judges be purchased, but also laws through campaign contributions and lobbying, in what has come to be known as “corruption American style.”
It was widely known that banks and mortgage companies engaged in aggressive lending practices, profiting from the least educated and from those less informed from the financial point of view, determined to make loans with high fees and which would assume high risks for borrowers. (To be fair, banks tried to profit from even those more sophisticated from the financial point of view, as in the case of securities created by Goldman Sachs, that were designed to fail.) But banks used all their political ties to stop states from adopting laws that would limit predatory lending.
When it became clear that people could no longer pay what they owed, the rules of the game changed. Bankruptcy laws were modified so as to introduce a system of “partial contractual obligations.” An individual who, let’s say, has a debt equal to 100 percent of his income could be obligated to pay the bank 25 percent of his gross income before taxes for the rest of his life, because the bank could add, let’s say, 30 percent interest a year to the amount owed by that person. In the end, a person that has a mortgage would owe much more than the bank would ever receive, even if the debtor worked a quarter of his time for the bank.
So then when this bankruptcy law was adopted, no one cried that they were in opposition to the contractual sanctity. But the moment when borrowers started to suffer because of their debts, a more humane bankcruptcy law — from the economic and rational point of view — would have given them a chance for a new beginning in case the task of repayment became too burdensome. This knowledge should have prompted creditors to grant loans only to those that could repay. But creditors probably knew that if Republicans regained control of the government, they could make bad loans and in turn change the laws to ensure that the poor would pay.
With one in four mortgages in the U.S. under water — that is, people that owe more than what the house is worth — there is a rising consensus that there is only one way to resolve this mess, by recording the amount of the principal debtor (that which he owes). America has a special procedure for corporate bankruptcy, called Chapter 11, that permits a rapid restructuring through recording debt and transforming a part of this into liquid capital. It is important that the business continues to function as an economic conglomerate to assure jobs and economic growth. But it is equally important that families and communities to remain intact. So then Americans have a need for “a homeowners’ chapter 11.”
Creditors cry that this type of law would take their right to the property. But almost all changes to laws and regulations favor some over others. When the bankruptcy laws of 2005 were adopted, creditors benefited; they did not worry about how the law would affect the rights of debtors.
Rising inequality, combined with a defected campaign financing system, is risking transforming the American legal system into a parody of justice. Some could continue to name it a “state law,” but it would not be a state that protects the weak against the strong. Rather, it would allow the strong to exploit the weak.
In the America of today, the proud claim of “justice for all” is replaced with the more modest claim “justice for those who can afford it.” The number of people who can afford it is declining rapidly.