Last week, JP Morgan Chase launched the 2010 Wall Street Bonus Sweepstakes. The bank is still losing money on consumer services, but well-heeled investors and financial traders more than made up the difference. The bank announced $11.7 billion in profits and $26.9 billion in compensation, including bonuses that will run in the multimillions for the top executives. Goldman Sachs reported record profits of $13.4 billion, and is set to dole out a staggering $16.2 billion in compensation and bonuses, which could provide an average of nearly $500,000 per employee. And Morgan Stanley, even having sustained a loss in 2009, has set aside $14.4 billion for compensation and bonuses.
Then there's Roberto Velasquez -- the other face of the foreclosure crisis.
Mr. Velasquez, a general contractor, bought a single-family home in Dedham, Massachusetts six years ago. Unfortunately, his mortgage turned out to be a predatory time bomb. After a few affordable years, the interest rate on his adjustable-rate mortgage ballooned and his payments rose to $4,800 a month. He kept up though; until the Wall Street crash knocked the stuffing out of the construction industry. Then he fell three months behind.
Mr. Velasquez found jobs and came up with the three months' payments, but the bank wouldn't work with him. His home was foreclosed on in November. A local bank offered to buy the home and sell it back to Mr. Velasquez for its present market value, which is the most his bank would get for the house if they sold it at auction. Still no deal. "We did what they asked," says Mr. Velasquez, "but they don't want to work with anybody."
Arrogance like that is going to sink more than Mr. Velasquez, his wife, their nine-year-old and their four-year-old. Foreclosures feed on themselves, taking down the value of nearby homes and putting ever more people underwater. There were 3.4 million foreclosures in 2009. That number is expected to rise in 2010. Unless foreclosures stop, the housing market will keep spiraling downward, and it will take the building and mortgage industries with it, ultimately stalling any economic recovery.
A new report from the McKinsey Global Institute confirms this picture, noting that it usually takes six to seven years to squeeze the debt out of a big bubble. During the first several years, gross domestic product shrinks. "At this writing, the deleveraging process has barely begun," warns McKinsey. "The bursting of the great global credit bubble is not over yet." In short, all of us will be hurting for years because Washington is refusing to make the banks eat the debt bubble they created. Instead, the bailed-out banks are walking away with record profits and fat bonuses.
There's a way to avoid another decade of downturn. United for a Fair Economy's new report, State of the Dream 2010: Drained, outlines key proposals that can stem the massive loss of personal wealth and homes. States and the federal government should put an immediate hold on foreclosures when unemployment causes homeowners to default. Bankruptcy judges must be given the power to cut down mortgages to levels homeowners can afford, as they already can for other types of loans. Both of these reforms would stabilize families and communities, especially communities of color that are seeing hard-earned wealth stripped from them at alarming rates. They would also push the banks to accept realistic write-downs on the inflated property values their books still reflect, squeeze debt out of the economy, and hasten a recovery. And they might even keep the banks from doing this to us again.
President Obama just proposed a "Financial Crisis Responsibility Fee" to be imposed on the Wall Street firms that caused the crash and soaked up most of the relief funds. While this is a good start, the fee is temporary. When it ends, the banks can return to their irresponsible ways. A permanent financial transactions tax would discourage speculative trading in home mortgages and the derivative pyramids that were piled on top of them. Serious financial re-regulation, like that outlined in the State of the Dream report, is also essential.
In the end, recovery is not enough. The banks whose irresponsible behavior led to the meltdown must accept part of the responsibility, or they will do it again. At the same time, we must aid the hardest hit communities where joblessness and foreclosures are still wreaking havoc. That is the only route to a fair recovery and a healthy economy.