Extreme economic inequality is among the most destructive forces in a society. As inequality grows, it undermines the effective functioning of the economy, the basic tenets of capitalism, and the foundations of democracy.
Unfortunately, the housing crisis and now the housing settlement increasingly look like an example of how this mechanism works.
One of the central characteristics of highly unequal societies is that two sets of laws develop: One set for the rich and powerful and one set for everyone else. The more unequal societies become, the more easily they accept the unacceptable, and with each unrebuked violation, the powerful actors at the top of the society gain an ever greater sense of entitlement and an ever greater sense that the laws that govern everyone else don't apply to them. As a result, their behavior becomes increasingly egregious.
In contrast, sustainable capitalism requires that all participants in a contract or bargain believe their interests will be enforced equally by the courts: Capitalism requires that Lady Justice wear a blindfold. When powerful players are permitted to alter established rules at will, capitalism ultimately collapses. Contracts and the idea of a fair bargain become meaningless as less powerful parties to an agreement know their rights will not be enforced. Over time, citizens lose faith in government and their own ability to thrive in what becomes a corrupt economy. This uncertainty leads the small businesses, which are so often cited as important to our economy, to shy away from new activities that might put them at the risk of unequal treatment.
I would suggest that the robo-mortgage scandal is a strong indicator that this type of unequal justice is now becoming ever more commonplace in America. Past bank abuses are typically discussed without a sense of outrage. They have, in effect, become a recognized practice of deception with no consequences. Here are three prominent examples from the past few years:
First, the robo-mortgage scandal was discovered. As powerful members of society, the banks effectively decided what laws they wanted to follow and disregarded others. The banks claimed that their violations were technical and harmed no one. Nonetheless, the activities of the banks constituted massive fraud, perjury, and conspiracy. Bank officials have testified in court that they filed as many as 10,000 false affidavits a month. These are effectively undeniable admissions of law-breaking on a massive scale.
It's a federal crime, punishable by up of five years of imprisonment, to knowingly file a false affidavit with the court. From the perspective of the law, you are guilty of the same perjury, when you falsely testify in court or when you submit a false affidavit. In most states, filing false affidavits with the court similarly constitutes a felony offense of perjury.
If an individual citizen perpetrated this kind of massive perjury, he or she would be prosecuted. For illegal activities to take place on this type of massive scale, other serious crimes, such as conspiracy, are almost certainly committed as well.
Last week an audit of San Francisco mortgage practices, the first systematic audit in the nation, revealed that an astounding 82 percent of the cases analyzed involved suspicious activity by the foreclosing institution and concluded that a large portion of these activities probably involved felony violations of California perjury laws.
Second, when Martha Coakley, the attorney general of Massachusetts filed a civil suit related to the robo-mortgage scandal against several financial institutions, she was demonized by the financial services industry and appropriately recognized for her bravery by housing advocates seeking to end abusive bank practices.
What is noteworthy, however, is that Coakley filed a civil suit. This was a lenient effort as she undoubtedly had the ability to build a compelling criminal case against the banks (as institutions) and the bank officers who knowingly created the robo-mortgage scheme.
Third, the national housing settlement, involving the federal and state governments, was announced almost two weeks ago. A central concern associated with the settlement is how it will be enforced. The banks have a long and well-documented history, of agreeing to settlements that will change their behavior and then failing to live up to these binding agreements. Moreover, penalties for failure to comply with these settlements are rarely, if ever, assessed.
In her New York Times feature story, The Deal is Done, but Hold the Applause, Gretchen Morgenson wrote about this behavior, and how it relates to the current settlement:
But perhaps the largest question looming over this settlement is how it will be policed. Recent history is littered with agreements that required banks to take specific steps to make amends. All too often, the banks have skated away from their promises.
Morgenson then recounts a series of instances where the banks failed to comply with past settlements, including this quote from a former judge involved in these processes and her conclusion:
It's astounding that in such a huge percentage of cases the lenders are not complying,” said Philip A. Olsen, a former Nevada Supreme Court settlement conference judge. “The banks have learned that they can thumb their noses at the program and it won’t cost them anything.”
So you have to wonder whether banks will thumb their noses at last week’s settlement, too. That makes policing compliance crucial.
The full details of the settlement have not been released, but unfortunately, the most recent disclosures suggest that this enforcement power and large penalties per violation are wishful thinking. An executive summary of the provisions of the settlement can be found here. It states, among other things: "If banks fail to remedy violations, they are subject to civil penalties of up to $5 million from the court."(emphasis added)
While the full details may indicate otherwise, the process as described here seems to be a far cry from substantial penalties of $1 million to $5 million for each failure of compliance that some media reports appeared to suggest.
Why does the monitor need to provide the banks with a chance to remedy violations of the settlement? The banks certainly know what they are supposed to be doing. It's one indication that the banks will be able to pursue the changes requires by the without a sense of urgency.
With no set penalty formula the same banks which have argued that over 10,000 knowing violations of the law harmed no one, will undoubtedly argue--perhaps for years--that any violations of the settlement are inevitable consequences of glitches in operating a new system, have no practical impact, don't merit fines of any kind.
In addition, have the banks agreed that they will not contest the monitor's request of penalties to the court? If not, then, as I have previously noted a court fight over each penalty can—and most probably will—ensue, with the possibility that the entire monitoring process is a charade.
I hope that I am wrong, but the above analysis certainly suggests that, in Morgenson's words, banks will have the opportunity to "thumb their noses at [the] settlement" without incurring serious penalties.
If the enforcement provisions of the settlement prove to be meaningless, Americans will rightfully believe they have been misled by public officials to believe the settlement included stiff penalties to ensure violations did not occur.
The stakes here are enormous. They extend beyond the housing market to the nature of American society itself. The banks' blatant malfeasance with regard to the robo-mortgage scandal and other foreclosure-related activities have been a clear example of unequal enforcement of the laws. Now, the settlement may serve as another example that equal justice through equal enforcement of the laws, which is necessary for sustainable capitalism, no longer prevails in America.
Yale's Robert Dahl, one of the preeminent political scientists of our era, wrote in 2006 in On Political Equality (Yale University Press) of the risks of rising economic inequality, which is inevitably accompanied by political power which also concentrates at the top of the society:
The unequal accumulation of political resources points to an ominous possibility: political inequalities may be ratcheted up, so to speak, to a level from which they cannot be ratcheted down. The cumulative advantages in power, influence, and authority of the more privileged strata may become so great that .. a majority of ordinary citizens...are simply unable...to overcome the forces of inequality arrayed against them.
I fervently hope we are not living out the ominous possibility Professor Dahl raises.
President Obama has declared income inequality to be "the defining issue of our time." I agree, but I am terrified that the most recent news related to the housing settlement is not the definition the president intends.