Subprime Contagion

Subprime Contagion

Is America finally learning that extreme inequality isn’t just bad for those at the bottom—it’s ruinous for those on top, too?


I moved to Washington in July 2007, at a time when what was then quaintly referred to as the “subprime crisis” was starting to cause some consternation on Wall Street and Capitol Hill. With housing prices falling, banks found themselves holding on to packages of subprime loans that were hemorrhaging value. Every day, it seemed, another bank announced it was writing down a bunch of these loans, which were just starting to be called toxic assets, and the total of such write-downs was, by July, already tens of billions of dollars.

One of the first stories I wrote for The Nation from DC was a dispatch from a Joint Economic Committee hearing, at which Federal Reserve chair Ben Bernanke sought to calm the nerves of lawmakers made anxious by the cascade of worrying headlines. Bernanke acknowledged that some of the trends in the subprime market were worrying, but he said that the problems were, at least for the moment, contained. There was, he told the committee, “scant evidence of spillovers from housing to other components of final demand.” In other words: yes, there are some clouds on the horizon, but no, the sky isn’t falling.

But Maryland Representative Elijah Cummings, whose Baltimore district was facing as many as 12,000 foreclosures a month, found Bernanke’s tone just a bit too calm for his liking: “As I sat here and I listened to you, it seems like you have painted a very rosy picture…but if you came and walked through my district, Mr. Chairman, I think people would be surprised that you seem so calm.”

Bernanke was defensive: “Congressman, first, I don’t know how you got the impression that I was unconcerned about foreclosures.”

“I didn’t say you were not concerned,” Cummings shot back. “I just said you seem to be pretty calm about it.”

We now know Cummings was right: Bernanke and everyone else at the helm in Washington and Wall Street should have been a lot more panicked. But our governing and financial elites’ removal from the on-the-ground ravages of the subprime market meant they were very slow to recognize the magnitude of the unfolding disaster. The ship sprang a leak in the lower decks, flooding the servants’ quarters, and no one up top much cared. The cocktails continued to flow, the band continued to play and the party rollicked on Wall Street throughout the housing bubble, even as working-class homeowners in Baltimore drowned, as their lives and wealth and equities and homes were destroyed. But the water kept coming in, rising deck by deck, until eventually the music stopped, the party ended and, even if only briefly in retrospect, it looked like the entire thing might go down.

Given what a close call it was for those on that top deck, you would think the most important lesson they would take away from the near miss is this: you ignore the fate of those on the bottom deck at your peril. An economy divided into “subprime” and “prime” is dangerously precarious. The predations tolerated in the former will, sooner or later, come to wreak havoc on those who inhabit the latter.

And yet, astonishingly, four years later this lesson has gone almost entirely unheeded. Our governing institutions responded with nearly unprecedented swiftness and force to save, and then revive, the pillars of the prime economy—the banks and corporate America. Yet they are leaving the subprime economy to fend for itself, to suffer through the worst privation in seventy years. “If your personal wealth is predominantly in capital markets,” says Damon Silvers, a lawyer at the AFL-CIO who served on the TARP Congressional Oversight Panel, “well, then, you had a hell of a scare, but you’re 70 percent of the way back to where you were in 2007. If your personal wealth is predominantly in your home, you’re fucked. And approximately 80 percent of people in the US, their only asset is in their home.”

The bet that those who run the prime economy are making is the same one they made during the years that preceded the crash: that they can continue to profit enormously even as the broader economy fails to deliver for the majority of its participants. The last time around, this produced a housing and credit bubble that ended in ruin and almost took the financial elite with it. It’s very difficult to imagine this latest iteration producing a better result.

In fact, it was precisely this ominous thought that largely drove the panicked August selling on Wall Street. Even financial markets and the investor class are waking up to the fact that there’s only so much that corporate profits can grow if American consumers don’t have jobs or assets and are still neck deep in debt. Much as they may wish to finally and definitively detach the prime economy from the subprime one, the two remain stubbornly tethered.

The market panic was the first inkling of what, for our elites, is a long-overdue realization, one they’ve done everything in their considerable power to avoid in the postcrisis age: that extreme inequality isn’t just bad for those on the bottom; in the long run, it’s ruinous for those on the top as well.

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