In the year 2000, I worked as a community organizer for ACORN. I spent my days in the poorest Seattle neighborhoods talking with the poorest residents about their biggest problems. I thought drugs and crime would be the issues – but instead it was predatory lending and gentrification.
Predatory lending- led by Countrywide – worked like this. They would find poor homeowners who had bought their homes prior to the 1990s and offer them great heavy cash mortgages on the homes for upgrades, vacations, paying off credit, etc. Then, when the borrowers couldn’t repay the loans, they would foreclose – thus buying the homes for a fraction of the then still very low valuations. And they almost always foreclosed because they loaned people more than they could repay. And they knew this.
Gentrification worked like this – those foreclosed homes were sold to people with higher incomes. The higher income people moved into the poor neighborhoods, rents went up, taxes went up, police presence increased (and focused on the residents who had been there before) more predatory loans came in, more wealthy folks came in. The entire demographics changed and the neighborhood became a different place. Not cool for long time residents.
Both of these practices – as well as loaning larger than they could repay mortgages to the gentrifiers – eventually led to the houseing crisis and the recession of 2008.
All of this falls under the onus of ‘shadow banking’.
A “shadow bank” is any unregulated financial institution that acts like a bank but instead of financing activities through deposits, it does so through investors, borrowing, or creating financial products. The world of shadow banking includes hedge funds, private equity firms, special purpose vehicles, insurance companies, crowdfunding organizations, and money market funds.
But it also includes traditional financial institutions. Leading up to the financial crisis, commercial banks were very active in the sector, as were government-sponsored entities like Freddie Mac and Fannie Mae. These businesses still have activities that are “off the books,” meaning that, despite new regulations, they’re still participating in shadow activities.
Essentially, after the Great Depression and the Glass-Steagal Act, commercial banks were tightly regulated in order to preserve the stability of the financial system. For example, the Fed could cap the interest rates that banks paid to depositors. When interest rates were low, that was fine, but when inflation started rising new competitors came on the horizon.
You can read more about shadow banking at https://www.fool.com/investing/general/2014/06/26/what-is-shadow-banking.aspx
Currently, there is a lot of deregulation happening. The regulation was put in place after the Great Depression and after the 2008 recession to protect our economy from being undermined by shadow banking again. We are in the midst of another bubble such as happened pre-1929 and pre-2008. It’s not Countrywide this time, but it’s the same people that were behind it. They don’t care about you, they don’t care about your family, they don’t care about your investments, they don’t care if you lose everything and become homeless.
I threw a brick through the window of Countrywide’s office back in 2000. I showed pictures to the people I was helping to organize. ACORN said I was too radical. It turns out I wasn’t nearly radical enough.