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August 8, 2008 This is the fourth of a
multipart series on the state of the economy
and how we got here.
Let's talk about evil. The evil I'm talking
about is not just the billion taxpayer-funded
bailout of Bear Stearns, about which I have
previously written. It's not the billions of
dollars that are now being lent from the Fed's
"discount window" to Wall Street's
broker-dealer community-those like Merrill
Lynch, UBS, Morgan Stanley and Lehman
Brothers-on a daily basis. It's not even such
banks as Citigroup, Bank of America, Wachovia
and IndyMac that lent recklessly during the
subprime era and are also borrowing heavily
just to keep afloat during the current credit
crisis. And really, it's not the recent
bailout of Fannie Mae and Freddie Mac that the
U.S. Budget Office conservatively estimates
will cost taxpayers billion to billion.
No, the evil I'm talking about is the evil
that lies buried in one paragraph of the
694-page housing bill that was passed by
Congress and signed by President Bush last
week. It is the evil of a monstrous national
debt, some .615 trillion, authorized in
Section 3083 of that bill called "Increase in
Statutory Limit on the Public Debt." The 10
zeroes found in .615 trillion represents an
increase of 0 billion, and the first time the
limit on the government's credit card has
grown to 14 digits.
But the real evil-an evil that underlies
even the evil of our national debt-is the
attitude of the Bush administration
illustrated in what Dick Cheney said to former
secretary of the treasury Paul O'Neill during
a Cabinet meeting on Jan. 19, 2004.
"Deficits," he dismissed, "don't matter."
It is the evil of the fall of America, as
we lose our leadership position in the global
marketplace. It is the evil of the fall of a
once great nation-under God, with liberty and
justice for all-as the dollar collapses and
our trading partners lose confidence in the
United States to pay its bills and honor its
agreements.
Hoping to stretch a safety net under
hundreds of thousands of families losing their
homes to foreclosure is not such a bad thing,
right? Trying to limit the shock waves in
credit markets as they ripple from the housing
sector all across the American economy and the
world financial system is not such a bad
thing, right?
Well, the answer is yes. And no. As usual,
it kind of depends on with whom you speak.
During the week of July 28, I attended six D.
C. press conferences as politicos rolled out
their plans for the housing bill.
"The bill will make a big difference not
only in the housing market, but also in the
entire economy," said Sen. Harry Reid, Senate
Majority Leader. The White House agreed in a
rare show of bipartisan agreement. "It's good
that the Democratic Congress has finally
acted," said Tony Fratto, the deputy White
House press secretary.
This is all true.
As many as 400,000 Americans families will
be saved from foreclosure in the near future.
Up to 0 billion will be available in
refinanced mortgages to help borrowers at risk
of losing their homes by trading in
"unaffordable" mortgages for mortgages backed
by the government. Also, there will be grants
of billion to local governments to buy and
refurbish properties that have already been
foreclosed upon, and in many cases, also
abandoned.
There will be loan limits on reverse
mortgages, popular with many senior citizens,
and the maximum fees that lenders can charge
seniors on these mortgages will also be
reduced. First-time buyers who purchase homes
from April 9, 2008, to July 1, 2009, will be
eligible for a tax credit of ,500. There will
be new housing tax benefits for veterans, too.
And of course, there are also tax breaks for
homebuilders and other large corporations.
For all consumers-not just past
homebuyers-there will be new laws requiring
fuller disclosure and clear language used in
variable-rate mortgage contracts. And there
will be stricter broker oversight. New minimum
standards will be set for licensing mortgage
brokers and bank loan officers. And the Feds
will authorize state and local housing
agencies to issue up to billion in tax-exempt
bonds to refinance bad mortgages not eligible
in any other program.
Almost unnoticed in the bill is a small
provision for creating a permanent affordable
housing trust fund, with the long-term goal of
building more rental housing for people too
poor to buy homes. (Why didn't anybody think
of this first, before all the subprime
borrowers were preyed upon and lent to?)
This all sounds good. So what's the
problem?
Here's the problem. The housing bill just
signed by the president is the latest in a
series of extraordinary interventions by the
Bush administration, Congress and the Federal
Reserve to bail Wall Street out. And it gives
broad-and unprecedented- authority to the
Treasury Department.
On the surface, the bill looks good. It
safeguards two mortgage finance giants, Fannie
Mae and Freddie Mac, by presumably spending
only a few billion to prevent the collapse of
the two companies which own or guarantee half
of the nation's trillion in mortgages. Look
more closely and you'll see two corporations
controlled by Wall Street's robber barons, and
used by them as their personal Speed Queen
heavy-duty, industrial money-laundering
machines.
Look even more closely and you'll see the
little-noticed Section 3083. You see a
national debt ceiling raised by 0 billion,
because we are blackmailed into thinking our
economy will collapse if we don't raise it.
Imagine that 0 billion spent on our nation's
schools, healthcare or decaying
infrastructure. Imagine an 0 billion
investment in alternative energy and our
nation's energy independence.
Again, remember that this bailout insures
up to 0 billion in refinanced mortgages. The
remainder-0 billion-could conceivably be spent
on other bailouts that loom ahead.
Even Secretary of the Treasury Henry
Paulson, the architect of the rescue plan,
said he never expected to be given this much
new authority. The only real limit on his
spending is the new .615 trillion debt
ceiling.
Critics in Congress who voted against the
bill voiced concern that we were rewarding
Wall Street's greed. They argued that we, as a
nation, were rewarding predatory lending
practices. They argued that we were rewarding
massive fraud. They specifically argued that
the housing bill bails out the banks and
broker-dealers that are joined at the hip with
Fannie Mae and Freddie Mac through the
trillions and trillions of dollars of those
bogus insurance policies against default
called credit-default swaps.
Finally, critics in Congress were outraged
we were rewarding lobbyists-lobbyists hired by
the fat cat executives at Fannie Mae and
Freddie Mac-at a cost to taxpayers of tens of
millions of dollars. Yes, you, the taxpayer,
paid for Fannie Mae and Freddie Mac's
lobbyists for this bill. How's that for adding
insult to injury!
"This bill has fallen prey to the special
interests on Wall Street and K Street at
unjustifiable expenses to taxpayers and
homeowners on Main Street," said Sen. Charles
Grassley, R-Iowa, who voted against the bill
even though he had worked on many of its tax
provisions in committee.
"The bill should have barred the mortgage
companies from spending millions to lobby
Congress to raise our national debt," said
Sen. Jim DeMint, R-S.C.
A look at the history books shows that
there is no precedent for this bailout. Not
the 1989 response to the savings and loan
crisis. Not even the creation of the Home
Owners' Loan Corporation in 1933 that was part
of the New Deal. There's also no precedent for
this national debt. Yet no one seems worried.
During the week I spent in Washington
reporting this story, I have concluded that we
are a nation of disinterested and mostly happy
bystanders. Polling data tells us this much:
As long as our paychecks clear every two
weeks, we are happy. As long as our beer is
cold, we are happy. As long as we have a warm
puppy to hold, we are happy. As long as we can
fill up our Chevy Mastodons, we are happy. As
long as we have HBO and Showtime, we are
happy. As long as we are not foreclosed upon
and homeless, we are happy.
A .615 trillion national debt is more than
we want to think about. Fannie Mae and Freddie
Mac are also more than we want to think about.
We like to think of the United States as a
participatory democracy It is-but only in
theory. Participatory democracy is for the
disgruntled and for kooks.
This is what we're not told: Fannie Mae and
Freddie Mac are not essential to the mortgage
market. If they were phased out over five or
10 years, the market would absorb the business
they left behind. That's the way competitive
markets work. Fannie and Freddie exist only to
guarantee debt-backed securities, like CMOs,
CDOs and SIVs.
These are securities that were underwritten
by the robber barons of Wall Street and that
were pushed by the new master race on Wall
Street-the prime brokers working in the shadow
banking system-and that are now held by chumps
who were lied to: pension plans, insurance
companies, mutual funds, hedge funds and other
institutional holders.
Fannie and Freddie were only in the
insurance business, a business now corrupted
by credit-default swaps and other swaps and
derivatives, things that didn't exist 10 years
ago. So why bail out Fannie and Freddie? And
why give them special advantages that suppress
competition?
Because Fannie and Freddie spent more than
0 million for lobbyists in the last decade,
more than what our No. 1 defense contractor,
General Electric, spent.
Because senior executives at Fannie and
Freddie get annual pay packages that they
don't want to lose. In 2007, Freddie Mac paid
chairman and CEO Richard Syron .8 million,
even though the company's stock lost half its
value. Meanwhile, at Fannie Mae, president and
CEO Daniel Mudd got a 7 percent raise. Total
compensation: .4 million, including a .4
million stock award. Again, the mortgage
company lost billions during 2007.
Other government agencies can't hire
lobbyists or award exorbitant CEO bonuses, so
why Fannie and Freddie? Because Wall Street's
balance sheets are too inextricably linked to
Fannie and Freddie. As the stock prices of
Fannie and Freddie go, so does much of Wall
Street.
But mainly because other federal bailouts
are looming on the horizon. William Poole of
the Cato Institute, a chief executive at the
Federal Reserve Bank of St. Louis from 1998 to
2008, said last week, "Congressional inaction
and taxpayer indifference over the last 15
years has committed us to a generation of
bailouts."
With a debt ceiling of .615 trillion, our
children, and our children's children, will be
paying the price. And this is evil. We have
mortgaged their futures.
I am deeply ashamed of my generation's
apathy and willful ignorance. Here and now, I
apologize to my children and any future
grandchildren for blowing it.
It's too late to get out of the bailout
business. Too late. The stock and bond markets
sank. Treasury securities sank. The dollar
sank. The national economy sank. The world
economy sank.
In my generation, everything sank.
We may be a nation of the stupidly happy,
but at this time in our history I am reminded
of Pablo Neruda's "Song of Despair": "You
swallowed everything, like distance. / Like
the sea, like time. In you, everything sank."
At the Group of Seven (G7) conference in
Tokyo this year, Gilles Moec, chief economist
for Bank America London, said it all. "The
problems are going through financial markets
in all parts of the world, right now. There's
not much we can do about it-not the G7, not
anybody. The danger is that a real depression
will turn into a self-fulfilling prophecy." --
Bohemian |
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