Professor Joseph E. Stiglitz should be ashamed of himself for arguing racial profiling was a major cause of the 2007/08 subprime mortgage crisis
Nobel Prize winner Joseph E. Stiglitz, in “When Shall We Overcome?” Project Syndicate, March 12, 2018 writes: “America’s financial sector targeted African-Americans for exploitation, especially in the years before the financial crisis, selling them volatile products with high fees that could, and did, explode.” Thousands lost their homes, and in the end, the disparity in wealth, already large, increased even more. One leading bank, Wells Fargo, paid huge fines for charging higher interest rates to African-American and Latino borrowers”
No! America’s financial sector did not target any special community”. It targeted extraordinary returns on equity made possible by the process of securitization teaming up with extremely lousy bank regulations.
1. A part of the financial sector targeted originating and packaging very lousy high interest rate mortgages into AAA rated securities, because that is how you make real big money in the process of securitizing. Packaging an AA rated mortgage into an AAA rated security is not even worth the effort. Packaging a $300.000, 30 year, 11% fixed rate mortgage, and getting an AAA rating on the resulting security, that would allow you to perhaps sell the mortgage as if 6% was a reasonable rate, something which would allow the team to pocket $210.000 in immediate profits.
2. In 2004, bank regulators approved that if those securities had an AAA rating, or if an AAA rated corporation (AIG) had sold a default guarantee on such securities even if it had worse credit ratings, then banks needed to hold only 1.6% in capital, meaning they could leverage 62.5 times with it. If banks thought they could only make 1% in net margin on those securities, then they could expect 62.5% yearly return on equity… and frankly who could resist such a temptation.
Put those two things together and you have 99% of the explanation you need without having to enter into any sort of racial profiling arguments.
Professor Stiglitz having served in 2009 as the chairman of the U.N. Commission on Reforms of the International Monetary and Financial System, where he oversaw suggested proposals and commissioned a report on reforming the international monetary and financial system, should know all that very well, and so he should be ashamed of himself for doing so.
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