Neo-Feudalism and the Housing Crisis

A number of people have linked to the part of this Joseph Stiglitz interview where he says we won’t fix the economy without some good old fashioned prosecutions. But I wanted to highlight where he describes the way our system of debt imposes a kind of indentured servitude on the debtors.

Can we draw a direct line from the outsize influence of the executives and the bankers — because these skewed incentives and penalties out of whack didn’t just arise out of a vacuum. How did we get to where we are?

It’s clearly the influence of campaign contributions and lobbyists. Let me give you another example of where the legal system has gotten very much out of whack, and which contributed to the financial crisis.

In 2005, we passed a bankruptcy reform. It was a reform pushed by the banks. It was designed to allow them to make bad loans to people to who didn’t understand what was going on, and then basically choke them. Squeeze them dry. And we should have called it, “the new indentured servitude law.” Because that’s what it did.

Let me just tell you how bad it is. I don’t think Americans understand how bad it is. It becomes really very difficult for individuals to discharge their debt. The basic principle in the past in America was people should have the right for a fresh start. People make mistakes. Especially when they’re preyed upon. And so you should be able to start afresh again. Get a clean slate. Pay what you can and start again. Now if you do it over and over again that’s a different thing. But at least when there are these lenders preying on you should be able to get a fresh start.

But they [the banks] said, “No, no, you can’t discharge your debt,” or you can’t discharge it very easily. They have a right, now, to take 25% of your before-tax income. Now imagine what that means. Let’s assume that you wound up, as it’s not that hard to do, with a debt equal to 100% of your income. You’re making $40,000, and your debt is $40,000. You have to turn over to the credit card company, to the bank, $10,000 of your before-tax income every year. But, the banks can now charge you 30% interest.

So what does that mean? At the end of the year, you’ve paid the bank $10,000, a quarter of your income. But what you owe the bank has gone from $40,000 to an even larger number because they’re charging you 30%. So you’re debt is larger. So the next year you have to give a quarter of your income again to the bank. And the year after. Until you die.

This is indentured servitude. And we criticize other countries for having indentured servitude of this kind, bonded labor. But in America we instituted this in 2005 with almost no discussion of the consequences. But what it did was encourage the banks to engage in even worse lending practices.

We’ve made it so difficult for individuals to discharge their debt and have this fresh start, and yet it is just taken for granted that a corporation or a company can blow up and then they can file for bankruptcy and then they can start over.

We give rights to corporations that we don’t give to ordinary Americans. One of my proposals in my book Freefall — one of the ways to deal with this foreclosure problem, the fact that one out of four Americans who have a mortgage are underwater: They owe more money on their home than the value of their home. Their home used to be what they used as the reserve for paying their kids college education, for their retirement. Now it’s a liability, not an asset.

So what I’ve argued is, we have these laws called Chapter 11 to give a fresh start to corporations. We say it’s very important to be able to do this quickly, we want to keep jobs, we want to keep the corporation going as an ongoing enterprise.

Families are as important as corporations. Keeping kids in school, not forcing them out of their home, keeping the community together, is certainly as important as keeping a corporation alive.

He calls this indentured servitude, but I call it (because I’m also factoring things in like the privatization of security and decline of the nation-state) neo-feudalism. In either case it’s an observation that people who used to be citizens have been turned into profit centers for the very powerful. Through a variety of means, these very powerful entities have secured the ability to oblige those profit center people to turn over large chunks of their  worldly gain for the foreseeable future, and even though those powerful entities offer little in return, the people bound to them have little hope of escape. Hell, in many states, mortgages serve as a similar kind of legal bind to a piece of territory, one ultimately owned (if they can prove they have the note) by these powerful entities.

And as Stiglitz notes, a key to pulling this shift off is to write the law to favor the powerful entities and disempower the weak. And (as he points out elsewhere in this interview) to make sure that only those powerful entities have access to justice.

Yet, as a recent study made clear, the access to justice for the poor in this country rivals that of Mexico and Croatia.

In January 2008, well before the financial crisis became an emergency, I asked Chuck Schumer why Democrats didn’t repeal the 2005 Bankruptcy Bill Stiglitz addresses above. I pointed out that repealing it might mitigate the problem of foreclosures and with it, stave off a larger crisis.

Schumer responded by saying we did not yet have the votes to make the kind of substantive overhaul that was necessary. We had to wait, he said in January 2008, eight months before foreclosures contributed to the the collapse of financial system, until 2009, when we had a larger majority.

We just lost the majority that Schumer claimed we would use to repeal the bankruptcy bill. During the entire time the Democrats had the majority, families were losing their homes in ever increasing numbers.

And yet Democrats never used their vaunted majority to stem the advance of neo-feudalism in this country.

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  1. phred says:

    Lord Schumer is well served by neo-feudalism as are King Obama and the Dukes of Goldman and Sachs.

    These people aren’t idiots nor are they negligent, they are doing precisely what they intended.

    I don’t see how the Democratic Party survives if the current leadership remains in place.

  2. rkilowatt says:

    re Foreclosure and demands to “show me the note”.

    IANAL—blogs have stated that Bank of America el al have responded to forms requesting “show me the note” [where only the legal holder of the note {IOU}has right to bring foreclosure] by replying that BOA has no legal obligation to show the note.

    That reply may literally be true, as there is law that foreclosing party must be the legal assignee of the note.

    So the correct approach is to request proof that the bank [or forecloser]is the legal holder or assignee. Namely, produce the document that assigned them the note and made them the legal assignee. [E.g. they did not steal the note or are making it all up.]

    Of course, check with a real lawyer.

  3. JamesJoyce says:

    “…a kind of indentured servitude on the debtors.”

    What is it, 3/4 servitude or 1/4 servitude? Servitude is servitude. It is not Liberty or freedom. It is a “life lived” for the benefit other. We have taken for granted our true liberties. Instead we construe “servitude” as freedom? Ask the Marlboro Man!

    • emptywheel says:

      Well, it’s 30% for consumer debt servicing, 40% for the house, and 10% for the car. We just add 20% for health care for those who don’t get it.

      Let’s see, that leaves …

      Hmm. I think I just discovered why so many people are relying on food stamps.

      • JamesJoyce says:

        Today it is reported, gas prices are going up. Great news first thing in the morning. More “servitude” of the American people to energy corporations, while we get to waste economic value as we have for generations and starve. The bottom line is America is being “used” for the benefit of who?

  4. thatvisionthing says:

    Serfs up!

    In the Middle Ages, tenant farmers worked three months of the year for the lord of the estate. In return, they got land, house, and the advantages of the communal defense system. Three months. And we call these people serfs. In grade school, we thought of serfdom as only slightly removed from slavery. Yet in my home state of New York, “Tax Freedom Day” is in late May. We work the first 140-odd days of the year just to pay local, state and federal taxes…and we still haven’t done anything about the shelter itself. With roughly a third of the average after-tax middle-class income going toward housing, we can conservatively add another 90 days to reach “Shelter Freedom Day” sometime in late August. So now we’re committed to eight months labor to achieve what the peasants of the Middle Ages accomplished by their three-month contract with their lords. If these poor wretches were serfs, what word can we find to describe ourselves?

    ~ Rob Roy, Mortgage-FREE! p. x, 1998

    • thatvisionthing says:

      That’s the book, btw, where I learned that “mortgage,” or “mort gage,” is old French for “death pledge.”

        • phred says:

          My all-time favorite concert t-shirt was from a Billy Bragg tour two decades ago that had “serfs up” on the back. I wore it out ; )

          We still have a long way to go…

          • thatvisionthing says:

            No way! I thought I made that up!

            Long way to go? According to @11, we’re actually overdue — and joke’s on Sarah! I mean, I can hardly wait:

            But it’s his bleak forecast for the U.S. that is music to the ears of the Kremlin…

            A polite and cheerful man with a buzz cut, Mr. Panarin insists he does not dislike Americans. But he warns that the outlook for them is dire….

            Mr. Panarin posits, in brief, that mass immigration, economic decline, and moral degradation will trigger a civil war next fall and the collapse of the dollar. Around the end of June 2010, or early July, he says, the U.S. will break into six pieces — with Alaska reverting to Russian control.

            • phred says:

              Really??? Aw geez, now I’m sorry I spoiled it for you. Go ahead, and take credit, you made it up, you just had some company : )

              What made the shirt so great was “Serfs Up” was in Cyrillic and it had a picture of Lenin in shorts and sandals holding a surf board under which it said, in English, “Even Socialists Surf”. I tried to google a picture for you, but no luck.

              • thatvisionthing says:

                No, no, happy to know I’m devolving from something :-)

                It’s not socialists serfing, but how about these? link

          • thatvisionthing says:

            The T-shirt I’m always sorry I didn’t buy — and I didn’t buy it because the words were on the back and not the front — was the one that said in huge block letters:

            EXXON DON’T SURF

            I promise you, if I’d bought it, it would be worn to shreds by now.

  5. Mary says:

    Not only did they not do anything about the legislation, they never even made a serious effort to frame the issues or generate talking points on them. This is one of the many reasons I’m not wearing a black armband over the Dems losses in Congress.

    It wouldn’t hurt if they would fix the Article 9 UCC changes from 2000 that also made all the damn securitization so much “easier” and which have led to so many of the title and foreclosure rights issues to date.

  6. captjjyossarian says:

    Neofeudalism indeed. Michael Hudson writes a lot about the same process going on in Europe.

    The 2005 bankruptcy “reform” seems especially toxic since we eliminated our usury laws under Carter back in 1980 with the Depository Institutions Deregulation and Monetary Control Act.

    Our economy is looking more and more like a death trap.

    “And what do you think of usury?” — “What do you think of murder?”

    – Cato the Elder

  7. bobschacht says:

    I hate to say that a Democratic Representative from Hawaii, Ed Case, was one of those proudly backing the 2005 bankruptcy reform law. I have not trusted anything he has said since then. Fortunately, he lost his bid to become Hawaii’s Senator.

    Bob in AZ
    (formerly from HI)

  8. thatvisionthing says:

    A little more re 2005 Bankruptcy Act, a couple comments I left in the HAMP Parasites diary:

    – Elizabeth Warren’s comment at Netroots Nation that the bankruptcy act set up Lehman’s bankruptcy to be a run on the bank by those holding toxic assets like CDSs and derivatives and repo agreements, at your expense, instead of an orderly process overseen by a judge in court.

    – Similar to HAMP “extend and pretend” — Ronald Mann’s “Sweat Box” argument that it lengthened time before consumer could actually file for bankruptcy and get into court, thus giving banks time to lard on crazy fees and interest hikes.

    So that seems to be a common feature — MOTU banks get protected from court oversight, and you get fleeced, courtesy of Congress.

    If the Republicans are in for a civil war between Rs and Tea Party, I sure hope this is a battleground. Expecting Obama to be useless here; wondering what Warren can do.

  9. PJEvans says:

    Schumer responded by saying we did not yet have the votes to make the kind of substantive overhaul that was necessary. We had to wait, he said in January 2008, eight months before foreclosures contributed to the the collapse of financial system, until 2009, when we had a larger majority.

    We just lost the majority that Schumer claimed we would use to repeal the bankruptcy bill. During the entire time the Democrats had the majority, families were losing their homes in ever increasing numbers.

    And yet Democrats never used their vaunted majority to stem the advance of neo-feudalism in this country.

    They had to keep that powder dry, after all.
    Idjits. And beckwits.

    I suspect that if they’d moved farther to the left, so average voters could tell them from Rs without needing programs, they’d have come out with even larger majorities, instead of losing them.

  10. Batocchio says:

    Good analysis. I’ve been using the term “neo-feudalism” myself throughout the year, mostly in relation to increasing wealth inequity and plutocracy. But it’s extremely appropriate for all the housing scandals.

  11. orionATL says:

    well now,

    this gets to the heart of the mortgage mess.

    stiglitz calls the mortgage mess, backed up by the new bankruptcy law,

    what it resembles – indentured servitude.

    but stiglitz’s analogy is a little off.

    with indentured servitude a person served a certain amount of time at his benefactor’s behest, and then he was free.

    the example cited here allows for perpetual debt enslavement.

    this is, of corse, illegal and has been regarded as “inhuman” law since not long after the time of charles dickens and debtors’ prisons.

    our clever contemporary financial corporations have done away with the “prison” part (bad p.r.) in favor of legal/financial ankle bracelets – the individual or family is still imprisoned with debt, but the “optics” for the persecuting financial corporation are so much more “positive”, i. e., the coersion and injustice are hidden from public view.

    on a different tact,

    many of the home loans peddled/sold to individuals are identical psychologically to drug products sold to consumers, beginning with tobbaco and alchohol but not stopping there.

    i’m not going to take the time now to lime it out,

    but when you sell a highly psychologically desireable product, like a drug or a home mortgage, to folks who do not understand its full consequences,

    as completely as do you, the merchant,

    then you are taking advantage of and deceiving your customers in a way that opens your corporation to civil or criminal penalties and to regulation.

    cf, american tobbaco companies up to and then thru the 1990’s.

  12. JamesJoyce says:

    At what point do the American people say enough is enough? We have no say in the matter? Like gutted codfish…….

    • thatvisionthing says:

      At what point do the American people say enough is enough? We have no say in the matter?

      We don’t talk in cash, so we can scream away in 300 million part unison and never be heard.

      Ironic — citizens united…

  13. klynn says:

    We’ve made it so difficult for individuals to discharge their debt and have this fresh start, and yet it is just taken for granted that a corporation or a company can blow up and then they can file for bankruptcy and then they can start over.
    We give rights to corporations that we don’t give to ordinary Americans.

    If “corporations are individuals,” according to Citizens United decision, how come they have better financial protection in terms of the law than individuals? Does not the difference in bankruptcy laws for instance show corporations are not individuals and individuals are not corporations and that the law through time, has viewed them differently?

    Really now corporations, you cannot have it both ways. How come the SC did not look at all the laws that are unique to corporations that are not applied to the individual citizen to show the difference between corporations and individuals? Looks like there is a need to make federal laws consistent for all citizen individuals, whether a solo life with breath or a large business claiming the same rights as an alive human being in the US.

    • JamesJoyce says:

      “If “corporations are individuals,” according to Citizens United decision, how come they have better financial protection in terms of the law than individuals?”

      Slave-owners had fugitive slave laws to protect their property interests.
      Justice Taney provide legal cover for the institution of slavery in 1857 Scott vs Sanford, dismissing the case on procedural grounds while commenting on race. I think the 14th Amendment affords for due process rights, and equal protection of rights. IMHO Citizen United is as reprehensible as Scott vs Sanford. Scott was deemed to be inferior, therefore not entitled to constitutional protections afforded the slave-owner.

      Today corporate due process rights are disproportionately protected over the rights of individuals. This is achieved by giving a legal advantage to corporate by Robert’s Court “saying money is protected free speech,” just as Taney gave advantage to slave-owner by saying “… Negroes are inferior…” Both statements are bold faced lies to justify the obliteration of individual’s rights. By most accounts Dred Scott, was better educated than his white male counterpart, certainly not inferior. Most people know money has nothing to do with merit, when debating an issue. In America merit based discussion and the formulation of merit based policies which benefit the republic’s general welfare long term, are reflected in the positive financial outcomes, which allows progress. I guess we have done just wonderful over the period of 30 years????

      So now we the people pay a “premium on life,” because we have lives, under fear of tax penalty. Where before people could be owned, a way has been found to get around ownership of individuals, administratively! Now the mechanism of change, the rule of law can be bought by corporations to stymie change, because they have all the cash and the people stripped of cash due to the living costs determined by energy prices, have no money to compete, just as Scott was denied protection of law for the benefit of the institution of slavery.

      Equal protection under the law for the “individual” is an illusion under these circumstances. A mere, illusion if you ain’t got the dough, ray me, Servitude brought back to America by the SJC! Wonderful!!!

      Does this answer your question klynn?

      • klynn says:

        Oh course. And, you make the argument that needs to be made that individuals and corporations are not the same. You do a great job showing the miscarriage of justice by the Roberts court.

  14. jdmckay0 says:

    I’m glad you (Marcy) are shining light on this, especially as it relates to this latest election and dems role in maintaining status quo.

    Bigger problem (IMO) then these actual circumstances/conditions/back-room control of damn near everything money related, is majority of populace’s utter ignorance of these working realities. And I emphasize utter ignorance.

    Seeing Rove’s post election activity, or McConnell ‘s statement @ Heritage

    “We will stop the liberal onslaught,”

    Geezus…

    And BO’s response seems to be “humbled”… motivated to more fully accede to these guys’ & K-Street’s wishes.

    Incredibly, things seem to be spinning more fully out of control, and IMO we’re already past the breaking point economically.

    Nothing these guys do, R’s or D’s, makes any sense. None of it fits circumstances, none of it is anything other then a guarantee of more takings by a few who don’t give a rip about anything or anyone else… make people into things seems entirely desirable to them, even necessary.

  15. francess says:

    its very rude of me,being in the wrong country, but i read an article in a british newspaper, the guardian, about this issue, written by joseph stiglitz, and i thought it sounded a bit scary.

    if someone’s house is repossessed and they are thrown out, and the house is then sold by the mortgage lender, some money must be raised from the sale of that house, what does the former homeowner become liable for?

    • thatvisionthing says:

      Could you link to the article? I find this one (excellent!), but not the issue you raise, unless it’s that bankruptcy is different for corporations than people — they have Chapter 11 and protected equity, we have indentured servitude to the banks (thanks Congress!).

      My general picture of the whole thing is that heads the homeowner loses, tails the homeowner loses. Heads the fraudsters win, tails the fraudsters win. (Thanks govt!) And I hardly know how to distinguish amongst the fraudsters, because in my mind they’re all the same, but fraudsters got bailed out to begin with — doesn’t that mean they got paid for that toxic mortgage loss? — yet now several fraudsters/defrauded (head eats tail) try to foreclose on the same house. And a foreclosed house reenters the same fraud cycle — launder, rinse, repeat — over and over.