Economic Crisis and Crime: Volume 16

Writing shortly after the economic turmoil that began in earnest since the fall of 2008, it is clear to any reader what is meant when reference is made to “the” crisis. The financial crisis that developed out of the implosion of the United States housing bubble that reached its peek around 2006–2007 no doubt can be told, in its origins and consequences, in terms of a complex economic tale. But even and especially for nonexperts, the crisis need not to be argued to be of special significance in any more detail than to consider the reality that, on a near worldwide scale, millions of people have lost their jobs and/or their homes, while governments have been scrambling to develop appropriate policies to rectify conditions which they had helped to create.

This chapter examines how deregulatory fiscal policies undermined federal legislation intended to reduce racial and economic inequality through measures that included wider access to home loans among minority populations. We focus specifically on structural tensions that existed between fostering the goals of economic and racial equality within a political structure that also serves the needs of finance capitalism. The Community Reinvestment Act (CRA), typically considered a triggering point for the financial meltdown by conservative commentators, was passed to address racial and economic inequalities, yet financial deregulation and the growth of the subprime mortgage industry ended up completely subverting these goals. The unprecedented growth and evolution of the subprime mortgage industry that occurred largely outside of the law's reach helped minorities and other economically disadvantaged groups enter into the housing market. However, a crime-facilitative environment brought on by inadequate regulation resulted in a significant degree of fraud by lenders. While this expanded homeownership among minorities, it eventually pushed them into default and brought chaos to the entire U.S. economy. This chapter details how the collapse of the subprime industry disproportionately impacted minority populations, and exposes how deregulatory policies subverted the effectiveness and reach of the FHA and CRA. The history of the CRA provides a clear example of the contradictory tensions within the U.S. legal system that espouses equality yet ultimately fails those it was designed to help as a consequence of unfettered capitalism.

The 2000–2006 housing market bubble conformed to a classic boom–bust scenario that triggered the most serious and costly financial crisis since the Great Depression. The 2008 subprime mortgage collapse leveraged a financial system that privatizes profits and socializes risks. Several factors converge to set up the subprime mortgage market as an easy target for industry insiders to exploit. Enabling legislation expanded the potential pool of borrowers eligible for subprime mortgages and structured incentives to lenders willing to assume the risks. The securitization of subprime mortgages transformed bundles of high-risk loans into mortgage-backed securities that were in demand by domestic and foreign investors. Pressure to edge out competition produced high-risk loans marketed to unqualified borrowers. The final piece in the setup of the subprime lending crisis was a move from an origination model to a distributive model by many financial institutions in the business of lending. We find that the diffusion and totality of these business practices produced a criminogenic opportunity structure for industry insiders to profit at the expense of homebuyers and later investors.

The twenty-first century has seen a wave of white-collar and corporate crime scandals and the economic crisis associated with the home mortgage foreclosure debacle is but one prominent example. Understanding who is to blame for this crisis and what steps can be taken in the future to limit a reoccurrence are important topics of inquiry. Similarly important is understanding public perceptions associated with the mortgage foreclosure crisis, especially since public sentiments are potentially important in influencing crime control policy. Using data from a random sample survey of American adults, this chapter examines the degree to which the public blames banks/lenders as opposed to individual homebuyers for the American foreclosure problems as well as the extent to which they favor specific control and prevention strategies such as government limitations on executive pay or bonuses and legislation aimed at increasing the regulation of business.

A subprime loan to straw borrower Charlotte Delaney was used to fraudulently strip equity from an elderly African American couple in Chicago. Following this loan from origination to securitization highlights responsibility for the wave of early payment default loans that contributed to the implosion of subprime lending. The Delaney loan, funded by subprime lender Mortgage Investment Lending Associates (MILA), was representative of the stated income, no down payment loans that defaulted in 2006 at the peak of the subprime bubble. MILA was suffering financially from demands to repurchase loans and was insolvent as early as 2004. MILA underwriters approved the Delaney loans despite obvious indications of fraud. Goldman Sachs bought MILA loans for inclusion in a $1.5 billion residential mortgage-backed security. Goldman Sachs warned investors that subprime loans were high risk and promised extensive due diligence. When subpoenaed for evidence of due diligence on MILA, Goldman Sachs provided none. The drive to generate profits through securitization explains why Goldman Sachs did not investigate and did not uncover MILA's inability to repurchase a growing portfolio of early payment default loans. Competition to buy subprime loans for securitization relieved lenders like MILA of pressure to verify that their loans were sustainable and not fraudulent.

A number of approaches might be taken to the relationship between economic crises and white-collar crimes. One is to review the role that white-collar crimes played in causing economic crisis, but this is legally problematic. This chapter begins with a discussion of social reaction to different forms of white-collar crime, and then goes on to examine briefly the evidence for the impact of the economic crisis on levels of frauds. The core argument is that the economic crisis did affect social and official reaction to some frauds – though the impact of this may be temporary – but that unlike most “law and order” issues, politicians around the world have typically downplayed fears of elite criminality and serious misconduct. Most reactions to white-collar crime reflect longer-term populist sentiments that prioritize offenses such as identity theft and fraud. Furthermore, there is little evidence that the Global Financial Crisis did much to increase the risk of fraud, though it is easy to misattribute the revelation of longer-running frauds to the crisis instead of to the fact that the recession smoked them out of the woodwork.

This chapter examines four possible relationships between the credit crunch and corporate crime. A first relation is that cases of accounting fraud have contributed to the causes of the crisis. Because of these accounting scandals, the trust in large corporations and the financial sector possibly eroded. A second possible relation is the reverse: the crisis leads to more corporate crime. As a result of the crisis, companies run into financial difficulties. In their despair, they possibly cut costs by not complying with business regulations, or they may try to gain illegal profit through fraud. The third relation is the criminalization of more unethical corporate behavior. The moral outrage regarding the behavior of banks and insurance companies that contributed to the crisis might lead to an increased labeling of “risky” or “greedy” behavior of corporate executives as criminal. This results in more legal regulation. The fourth and final relation is that these amplification effects will lead to the discovery of more corporate crime.

The illegal backdating of stock options has been studied by economists and lawyers, but totally neglected by criminologists. We examine three cases in order to convey a sense of how backdating has played out in practice, and consider the results of empirical research that has been published on the subject. Traditional legal analyses, mostly by law students, have detailed the statutory history and standing of the law regarding stock options. Economic writings focus almost exclusively on structural features that may correlate with outcomes. The failure of financial writers to carefully distinguish between criminal and noncriminal backdating is in part a consequence of the limited theoretical interpretations in their field beyond cost–benefit analysis and rational choice calculations. Criminologists, while having a plethora of theoretical constructs that might be applied to backdating, generally have no training to allow them to comprehend the arcane elements of economic criminal behavior. We conclude that more multidisciplinary attention is necessary to overcome the current pigeonholing of research approaches that limits both understanding of illegally backdated stock options and effective policies designed to prevent it.

Almost every city in America has felt the effects of the current home foreclosure crisis. It has been reported that 94 of the top 100 metropolitan areas reported an increase in home foreclosures in 2008. Yet, some of the varying costs of this ongoing crisis are relatively unknown. This chapter offers a theoretical examination of the influence an increase in vacant homes due to home foreclosure may have on criminal behavior. It does so by first discussing the breadth of the home foreclosure crisis. Next, the chapter covers strain, social disorganization, and disorder theories and addresses their explanations of the potential criminal consequences of vacant homes due to home foreclosure. Then, the chapter discusses if these classic theories actually apply to this crisis. This is done by introducing the concept of suburban insulation. Finally, the conclusion links the key concepts and ideas from the aforementioned theories and how they best relate to this current phenomenon.

Although the news media have speculated that the current recession has increased rates of intimate partner violence, there is no reliable evidence supporting that claim. Moreover, no well-designed studies have examined the impact of prior recessions. This chapter considers whether rising employment during a period of economic growth reduces intimate partner violence. The findings on the effect of economic growth are used to assess the likely impact of economic decline on rates of intimate partner violence. Using data from the National Crime Victim Surveys, the analyses examine both macro-level trends and individual-level effects. At the macro-level, men's and women's unemployment rates were only weakly related to rates of intimate partner violence. The individual-level results show that rising rates of employment during a period of economic growth were not responsible for producing declines in intimate partner violence. Taken together, these findings suggest that the current recession will not increase rates of intimate partner violence against women.

This chapter describes the shortfalls in local police budgets following the economic woes experienced by police departments during the Great Recession. Providing a timeline of external events impacting police budgets, in particular, the terrorist attacks on September 11, 2001 and the Great Recession, this chapter places these events since 2000 in an economic context. In addition, multiple sources, that is, interviews with police administrators, survey data, and news media content, are used to analyze police budget cuts. Most police administrators have already cut their budgets and report their jurisdictions anticipate more effects from the economic crisis. Significant reductions in police budgets, personnel and training are discussed. Both a police administrator and academic perspective of policing in an economic crisis are included in this chapter to better understand how recent budgets cuts affect the quality of policing.