Social Justice and the Financial Crisis

Social justice comes in many forms – strict equality; affirmative action; proportionality; immediate; delayed; promised – to name a few. In many respects, social justice and even democracy are at odds with free-market economics and capitalism.

How then, does the current economic crisis look through a social justice lens? And does such a lens have any applicability to the crisis or its proposed solution?

The current U.S. economic crisis is essentially the result of the traditional “boom and bust” economic cycle. In the ‘90s and early 2000s the U.S. experienced the boom and bust of the “dot com” cycle. Huge amounts were invested (mostly speculatively) in firms where the “there” was not really there. Not surprisingly, the nakedness of the emperor was soon discovered and investors lost their shirts. (Were the investors, perhaps, trying to emulate the emperor?) There was no cry for a bail out at the time. Instead, the market was seen as “adjusting” itself.

Today’s crisis is essentially a credit crisis played out mostly in the housing market. Again, houses were priced well beyond their actual value and almost every party to the transaction ignored this fact. The real estate agents knew 6% of $500,000 was more than 6% of $300,000; the appraisers looked at prices rather than value (otherwise no one would use their services anymore); lenders created hugely risky loans to make money today with no thought of tomorrow; borrowers believed that the market would continue to rise and they would be able to make enough to pay the delayed cost of the house – or sell it at a profit. Insurers went along with the euphoria. After some time, consumers, lenders, and others realized that price and value were not aligned. Buyers realized they could not pay for the delayed cost of the house – nor sell it at a profit – so they walked away. Lenders now owned over-priced housing and owed their investors and/or the insurance companies huge sums with no foreseeable source for repayment. As a result, large and venerable corporations (with huge numbers of wealthy and less wealthy investors) joined the house buyers in the decision to just walk away. For individuals and fictitious individuals, bankruptcy was the solution. Except now there is a cry for a bail out. The market is not adjusting – it is in imminent danger of collapse.

How does social justice fit into this picture? The proposed bail out (at this writing) is essentially to purchase the bad debt of the lenders and insurance companies. This is proposed on the theory that if the market can be stabilized, it will once again serve as that “invisible hand” that brings justice and fairness to all. (I am disregarding the sweeping and unreviewable powers to be granted to the Secretary of Treasury here.) The “justice” of this proposal is that it is more important to stabilize the overall economy than to let the natural consequences of bad decisions play themselves out. Good people make bad decisions, but we must protect the system and the investors from those bad decisions. (I am also ignoring the economic theory that credit is not inexhaustible and that government borrowing on the scale of $700 billion will almost certainly “use up” any slack in the credit market making it ever more difficult for anyone to borrow – including the government.)

Counter-proposals appeared almost as soon as the original proposal was made. Among the most common features of these counter-proposals are the following: no corporate bail out without some form of limit on executive compensation – especially for executives leaving the bailed out firms; no corporate bail out without some form of relief for the home buyers facing foreclosure; no corporate bailout without some form of Congressional oversight; no bailout unless the funds are provided as loans at a market interest rate (so U.S. taxpayers eventually are “reimbursed” with a “profit”) or to purchase an ownership interest in the corporations; no bail out without an expectation of increased government regulation. The “justice” of these proposals is largely punitive – no “excessive” compensation for individuals deemed to have been party to the crisis; increased regulation or Congressional oversight; pay for corporate mistakes with market interest rates or reduction of ownership. Only the proposal to provide some form of relief to home buyers facing foreclosure (or “bad” mortgages, in some versions) extends relief past the impacted corporations, and to the extent relief is just, provide comparable treatment to all parties to the bad decision-making process.

While about 68% of U.S. households owned their home in 2007, only 47% of African-American households owned homes and 50% of Hispanic households owned homes. 75% of white, non-Hispanic households owned homes. Providing relief to large corporations (and their stock holders) and/or to home buyers who made very bad deals will provide an advantage to the “haves” of our society and provide nothing to the “have-nots.”

Strict equality would call for doing nothing – let those who make bad decisions live with the consequences. “Affirmative action” would provide every U.S. resident with some housing and/or credit relief – and increase the price of the bailout considerably. The current proposal and the counter proposals seem to offer proportionate justice – with corporations and their investors receiving the largest portion; some home buyers receiving a reduced amount; and the majority of U.S. residents, many of whom own homes, receiving nothing (unless, of course, you count the tax bill we, our children and at least our grandchildren will be paying). And in the cruelest of ironies, the poor and working poor will be worse off since marginal home buyers will have been “bailed out” and therefore have increased wealth (ownership) while those at the bottom of the income scale will have no ownership and a reduced chance of ever owning since “we won’t make that mistake again.”

James Nordin, D.P.A. is half of a Hispanic/white household that owns a home.