MYTH: Congressional Democrats, led by Barney Frank, opposed strengthening oversight over Fannie and Freddie
In a September 18 column, Fox News host Bill O'Reilly falsely claimed that Frank "sat by as mortgage brokers Fannie Mae and Freddie Mac made bad loans" and asserted that "[i]nstead of demanding responsible business practices from Fannie and Freddie, Frank continued to pound the table to extend even more credit to 'low income' families." In fact, Frank did not "s[i]t by." Frank's efforts to enhance regulatory oversight on Fannie Mae and Freddie Mac include:
* In 2005, Frank, then the ranking Democrat on the House Financial Services Committee, worked with committee chairman Rep. Michael Oxley (R-OH) on the Federal Housing Finance Reform Act of 2005, which would have established the Federal Housing Finance Agency (FHFA) to replace the Office of Federal Housing Enterprise Oversight (OFHEO) as overseer of the activities of Fannie Mae and Freddie Mac. After voting for the bill in committee, Frank voted against final passage of the bill on the House floor, stating that he was doing so because an amendment to the bill on the House floor imposed restrictions on the kinds of nonprofit organizations that could receive funding under the bill.
* In early 2007, as chairman of the House Financial Services Committee, Frank sponsored H.R. 1427, a bill to create the FHFA, granting that agency "general supervisory and regulatory authority over" Fannie Mae and Freddie Mac, and directing it to reform the companies' business practices and regulate their exposure to credit and market risk. Among other things, Frank's legislation, titled the "Federal Housing Finance Reform Act of 2007," directed the FHFA director to "ensure" that Fannie Mae and Freddie Mac "operate[] in a safe and sound manner, including maintenance of adequate capital and internal controls" and to establish standards for "management of credit and counterparty risk" and "management of market risk." The FHFA was eventually created after Congress incorporated provisions that House Speaker Nancy Pelosi (D-CA) said were "similar" to those of H.R. 1427 into the Housing and Economic Recovery Act of 2008, which the president signed into law on July 30.
Some in the conservative media have taken the charge further, suggesting that in the 1990s, Frank allowed his relationship with Fannie Mae executive Herb Moses to affect his responsibility as a senior member of the House Financial Services Committee to conduct oversight over Fannie Mae. For example, in an October 3 article, Fox News deputy Washington Managing editor Bill Sammon asserted, in a charge he later echoed on Fox News' The O'Reilly Factor, "Unqualified home buyers were not the only ones who benefitted from Massachusetts Rep. Barney Frank's efforts to deregulate Fannie Mae throughout the 1990s. So did Frank's partner, a Fannie Mae executive at the forefront of the agency's push to relax lending restrictions."
In his article, however, Sammon cited only two sources: an anonymous Republican congressional staffer and Dan Gainor, who, Sammon did not note, is an employee of the conservative Media Research Center. Moreover, Sammon misrepresented Frank's record by reporting in his article that Frank "spent years blocking GOP lawmakers from imposing tougher regulations" on Fannie Mae and Freddie Mac. Sammon did not note in his article or during an October 6 appearance on The O'Reilly Factor that in the early 1990s, while Frank's Democratic Party still held the majority in Congress, and while Moses was at Fannie Mae, Frank supported bills to increase regulation of Fannie Mae and create a government regulatory agency that would supervise and have authority over some aspects of the company:
* On September 30, 1991, Frank voted for a bill to create a new regulatory agency to oversee Fannie and Freddie that would have "[r]equire[d] the [agency's] Director to establish by regulation a risk-based capital test for the enterprises," "[r]equire[d] the Director to establish risk-based capital levels for each enterprise according to statutory guidelines," "[e]stablishe[d] minimum capital levels, critical capital levels, and enforcement levels," and "[s]et[] forth mandatory supervisory actions for the enterprises at various capital levels, including mandatory conservatorship."
* In October 1992, Frank voted for the Housing and Community Development Act of 1992, creating OFHEO, which was tasked with "ensur[ing] that Fannie Mae and Freddie Mac (the enterprises) and their affiliates are adequately capitalized and operating safely." As with the bill Frank voted for in September 1991, the new law gave OFHEO authority to set, monitor, and enforce risk-based capital requirements for Fannie and Freddie.
Neal Boortz also advanced this claim about Frank and his former partner during the October 8 edition of his nationally syndicated radio show. On October 8, The Wall Street Journal reported that "[a] conservative political organization will begin airing nationwide TV advertisements Wednesday that criticize congressional Democrats for their ties to mortgage giants Freddie Mac and Fannie Mae."
You people will never learn. Every time you pass one of these fluffy acts the maggots come out and feed.
The loans were not originated by CRA regulated entities, they were originated by local loan shops then sold to CRA regulated entities who then sold them again to Wall street
So your technically right but your connection is wrong
this needs to be a multi pronged attack; mortgages need to be stabilized, a floor needs to be put under them, then those assets need to be sold, which won't happen, at least privately, because who in the private sector will buy a depreciating/toxic asset, and the banks need to be recapitalized. prices for assets and recapitalization can't seem to happen if foreclosures and property values keep plummeting.
There are hundreds of housnads of people waiting to buy the houses. I have been calling REO managers at banks trying to get info on foreclosure portfolios - they are guarding them like gold. Selling off these houses at 50% discounts will not hurt the market the way selling seized automobiles doesnt hurt the market. The admistration is grandstanding and trying to play hero when in reality they are standing in the way. Bush Paulson to.
what I don't understand about the let's screw them philosphy is this:
say seven in fifty houses in your neighborhood go into foreclosure. when those seven houses are resold at auction for a lot less than the previous owners paid for them everyone's property values go down. If you keep the seven in their homes the the property values for the neighborhood wouldn't go down as much (or maybe even at all because they are occupied and being taken care of, etc.), right?
"what I don't understand about the let's screw them philosphy is this:
say seven in fifty houses in your neighborhood go into foreclosure. when those seven houses are resold at auction for a lot less than the previous owners paid for them everyone's property values go down. If you keep the seven in their homes the the property values for the neighborhood wouldn't go down as much"
No, because at auction they would comprise of an aftermarket similar to used vehicle sales. They are not the same as lived in homes, they are tainted, often times damaged and in disrepair. The effects on neighboring home values would be in some case positive as the neighborhood cleans out empty homes, and in some cases mabbey small decreases in value but at least they will get to the bottom quick and cleanly.
Link
Do you read the comments in the NY Times? Yesterday, hundreds of NY Times readers weighed in and were almost universally outraged at the unfairness of this plan.
How can you say that the intense reaction “pretty much broke along partisan lines.” THAT IS FALSE.
Many progressives, liberals and Obama-supporters are outraged. This is so patently irresponsible and unfair that people of all political stripes are furious.
Please don’t ignore reality! People are gearing up for revolution. THIS IS NO WAY TO RUN A COUNTRY!
" Writing on his Carpe Diem blog, University of Michigan professor Mark Perry notes that while California home prices dropped 41% in 2008, home sales in the state jumped 85%. It now looks like 2008 sales for single-family houses will exceed levels reached in 2007.
What's more, the unsold-inventory index for existing single-family detached homes in December 2008 was 5.6 months, compared with 13.4 months for the year-ago period. And the median number of days it took to sell a single-family home dropped to 46.1 in December 2008, compared with 66.7 in December 2007.
So inventories are dropping, the number of days to sell a home is falling, and sales are rising in the wake of lower prices.
If the government really wants to help, instead of bailing out irresponsible mortgage-holders, it should support new and younger families who want to buy starter homes and begin to climb the ladder of prosperity.
All this is free-market economics 101. And I say, let free markets work. "
i'm sorry, but i'll take get my information from Dr. Doom, he and many other economists believe that a reduction in the face value of mortgages will stem the crisis. the man predicted this mess.
i don't remember anyone calling this, and i found out early last year about CDS and MBS and the impact this would have, and this is all the while the market was skyrocketing, and CNBC talking heads were pimping this economy. Roubini and Nasim Taleb have been sounding the alarm for over three years, and apparently no one was listening and were in fact calling these two heretics.
No your wrong, tons of short sellers where in the market and many bond traders put themselves into position; not to mention guys like Rick Santelli who abhor where badmouthing the FED's low rate Treasury giveaway spree for a while now.
Roubini is an ivory tower observer. He's pointless. Let him grade tests.
And apparently some Lehman traders as early as 05, 06 already knew it was a "house of cards". Thats where people like Roubini get there "ideas" - from the real world then they go toss them off like there original. Hes a fucktard NYT celeb, same as your CNBC talking heads
"Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's."
If you keep the mortgages, then you'd be more careful. You'd actually have a relationship with the people in question. There are institutions that are successful at this. They are small and good to work with. My next mortgage will come from one of them.
Then these monster lenders sold these things. That wasn't regulated at all. They then leveraged these assets at 30x and 50x in the case of Citibank.
There's nothing wrong with the idea of what Freddie did. It should have been better managed and the securitization of these notes should not have been prohibited.If the banks had to keep the mortgages, then it would be different.
Watch for the FDIC to take over Citibank in the next couple of weeks.
I agree about Citi and BOA, they were dumb and should be dissmantled, and i think reversed engineered to find out which divisions that got rolled up into citi group where more responsible and those execs tried for fraud.
But the matter of underwater mortgages needs to be addressed first and sorry to say but its not a life, its an asset, and get these people out, and get the assets into market.
Think of it like this, the forclosed houses are like dead animals littering the forest floor. Nothing can grow right and the stink of death is permating the air scaring away all the critters. Until the maggots come out and devout the carcass and break it down no new life can survive.
EP many responsible people paying their mortgages, not delinquent, with jobs find that even with a 10 or 20% down payment, their homes are underwater. they may have even bought their home not for the purpose of flipping in a year or two because of increased value, but like the neighborhood, and want to stay there for the long term. are they at fault in this environment, are their homes rotting corpses?
ok. 2 weeks ago i remember hearing on NPR about this "kid" a recent electrical engineering grad, 40k salary with a 400k home, an ARM, and now he was looking for a bailout.
on friday's NPR on the ethicist Randy Cohen spoke about "moral hazard" and who is responsible "ethically" in the mortgage crisis.
Gin got me all excited there, I had to go to the source - Daily Koz via Playboy. Nothing says unbiased reporting like Daily Koz.
"So today’s protests show that the corporate war is on, and this is how they’ll fight it: hiding behind “objective” journalists and “grassroots” new media movements. Because in these times, if you want to push for policies that help the super-wealthy, you better do everything you can to make it seem like it’s “the people” who are “spontaneously” fighting your fight."
If true - sounds like the fiscal conservatives finally got smart and learned how to play the democrat's game of media. Maybe the fight is on after all. Cant wait. The smart vs. The ignorant, the able versus the dead.
Obama's approval ratings are falling.
GIN your such a loser, seriously - get a life. They are just using you.
Oh and BTW GIN the chicago tea party scheduled for last week was scheduled well in advance of Rick who called for his own in July - but I know you paranoid types like to see gohsts everywhere in your dark world, let me shine some light - tea party is an extremely common term, in fact theres tea party's all the time, hell google chicago tea party and you pull up a protest over bottled water tax from 2007 on Mich ave. bridge.
Several thousand tea baggers in Atlanta in the rain / 1500 in St. Loius and DC - not even the real tea party either. Prob be more if the people didnt actualy have to work for a living unlike the well bearded unwashed liberal pertuli oil crowd holding signs like "Fuck Bush" and "Baby Killer". They really nice kids when you get to know them. Sure they may smash a few honest businesses windows but man they wont be fooled into paying their mortgages or taxes.
about the Daily Bail mentioned in the Playboy article:
[url=http://dailybail.com/home/2009/3/1/the-mother-of-all-irony-playboy-magazine-targets-the-daily-b.html
]dailybail[/url]
And I guess it was such a conspiracy that CNBC didnt tell matt williams that night to not lead with it on the Evening News over at Network. Please. I guess He's in it to? Maybe Kieth O and Rachel were'nt told either. In fact I think everyone knew except Gin and the Koz.
Maybe Playboy should have actually called the sites they accused of conspiracy first. The taking down of the Koch Trust Sponsored Youth Scholarship link registration after it was over certainly smells funny to me!
"Lawmakers across the country are sponsoring resolutions — most of them only symbolic — asserting state sovereignty, in effect the right to ignore any federal law or policies they deem unconstitutional, including the stimulus bill, the No Child Left Behind Act and any new assault rifle ban."
Santelli is outraged about a stimulus bill worth $400 billion. AIG and Citibank has cost taxpayers more than that. And that's money down a sink hole. The stimulus gives us roads and But Santelli isn't interested in picking fights with his own.
AIG's problems from what I've heard have to do with a hedge fund department that was dealing with credit default swaps. the rest is apparently a conservatively run insurance business.(i think) i doubt that the policies that AIG has now would not be taken over by other insurance companies. That seems to be the good part of their business and the biggest part. so, if they were to fail the void would be filled by others. wouldn't it?
AIG guaranteed things that could not possibly pay up on:
The scandal here is not the size of the losses from the global financial meltdown -- those are losses which sooner or later, in one form or another, would have had to be borne by the government anyway. Rather, the scandal is that AIG could have earned billions of dollars by selling insurance against a meltdown, even as it was wholly incapable of paying out on those policies. I wouldn't be surprised to learn that Hank Greenberg was still a billionaire, even as the policies his company wrote have cost the average American household some $1,600. It's time for his wealth to be confiscated: it might be only a drop in the bucket compared to AIG's total losses, but it would feel very right. -Felix Salmon of the FT
You go to jail for this kind of thing. It's called FRAUD. If most Americans knew about this, there would be real civil disobedience. Greenberg has his billions and the US taxpayers are cleaning up the mess he created.
one thing we must keep in mind when considering the general involvement of the government in economic affairs is the governments ability to catalyze development. Even the most ardent conservative would argue that the government CAN have a roll in stimulating the economy, its a matter of WHAT roll it plays, and HOW it executes.
One the most basic level, we all accept the boom and bust nature of capitalism. We can accept that we will make a shit ton one year, but give half of it back then next. The important part is what we do with that money while we are booming. We boomed in the 1800's and ended up with a rail system that would prove crucial to future development. Those companies busted, but the infrastructure remained. We boomed a few decades later and ended up with massive manufacturing capabilities and highways coast to coast. Yes, we busted again but were left with massively increased economic capacity. More recently, the tech boom created the world we live in now, and yes, the dot com bust bankrupted thousands, but we were left with the broad band lines and cell phone towers we depend on now.
This time however, we boomed, and laid town thousands of homes which far, far outstripped our capacity. Im afraid there will be no long lasting positive effect from one of our most prosperous stretches in history.
Thats the governments role, i believe. And thats one major positive i see from this stimulus. Give the market some direction, and then let it go... i have no problem bowling with the bumpers up... sure... its less sexy, but you better believe more scores will be more consistent...
If a company is too big to fail and that means government dough to keep them from failing then that companies every move should be scrutinized by a myopic little man in a back office looking over the books of these too big to fail companies.
There was actualy a good editorial on Credit Default Swaps in WSJ a few weeks ago - it basicly asked why was this one financial instrument not well regulated when all the other ones are overly regulated? It also asked if the CDS market was essentially insurance then why werent the credit desks at major banks and insurers regulated under the same rules as insurance requiring a certain amount of equity reserves? In essence it was saying this was obviously a known problem so they decided to NOT regulate it. I cant even begin to understand the complex shenanigans that goes into this - maybe the idea is if you make a mess so spectaculariliy large - what could anyone do about it? What was their motives? Are they really that dumb? Is the fix even worse?
I do honestly to God believe in finacial conspiracies, and I believe this is one of them cooked up for a long time coming. You cant insure some trillion dollars of transactions and the sec or treasury department NOT have something to say about it - unless of course, they are in on it.
well in a way its this enron phenomenon youve got scores of guys and gals with their mbas and law degrees looking around for loopholes in a system, inventing new ways of accounting, selling it to shareholders because of the quick profits and then letting the tax payers clean up the mess. yesterday when bernanke was on he talked about his anger with AIG but did he know about it or what it was? he seemed to be taken by surprise, all of these people seemed to be as surprised as us about it. it's so fucked up there's no analogy for it.
They arent surprised - I remember Santelli of all people talking about the explosion of CDS a few years ago - something like $1trillion globaly in the 90s to now 50 Trillion - They knew, they just play dumb - between Greengurgn Bernaki, Greenspan and Madoff - I think we can put the Jews are good with money stereotype to bed.
Vado - all the mbas and accounting cant hide that much money - its more like institutional fraud, with the help of regulators - their only excuse could be "its fraud for the common good"
The American economy has gone away. It is not coming back until free trade myths are buried six feet under.
America’s 20th century economic success was based on two things. Free trade was not one of them. America’s economic success was based on protectionism, which was ensured by the union victory in the Civil War, and on British indebtedness, which destroyed the British pound as world reserve currency. Following World War II, the US dollar took the role as reserve currency, a privilege that allows the US to pay its international bills in its own currency.
Obama’s cabinet and National Economic Council are filled with representatives of the interest groups that caused the problem.
World War II and socialism together ensured that the US economy dominated the world at the mid 20th century. The economies of the rest of the world had been destroyed by war or were stifled by socialism [in terms of the priorities of the capitalist growth model. Editors.]
The ascendant position of the US economy caused the US government to be relaxed about giving away American industries, such as textiles, as bribes to other countries for cooperating with America’s cold war and foreign policies. For example, Turkey’s US textile quotas were increased in exchange for over-flight rights in the Gulf War, making lost US textile jobs an off-budget war expense.
In contrast, countries such as Japan and Germany used industrial policy to plot their comebacks. By the late 1970s, Japanese auto makers had the once dominant American auto industry on the ropes. The first economic act of the “free market” Reagan administration in 1981 was to put quotas on the import of Japanese cars in order to protect Detroit and the United Auto Workers.
Eamonn Fingleton, Pat Choate, and others have described how negligence in Washington DC aided and abetted the erosion of America’s economic position. What we didn’t give away, the United States let be taken away while preaching a “free trade” doctrine at which the rest of the world scoffed.
Fortunately, the U.S.’s adversaries at the time, the Soviet Union and China, had unworkable economic systems that posed no threat to America’s diminishing economic prowess.
This furlough from reality ended when Soviet, Chinese, and Indian socialism surrendered around 1990, to be followed shortly thereafter by the rise of the high speed Internet. Suddenly, American and other first world corporations discovered that a massive supply of foreign labor was available at practically free wages.
To get Wall Street analysts and shareholder advocacy groups off their backs, and to boost shareholder returns and management bonuses, American corporations began moving their production for American markets offshore. Products that were made in Peoria are now made in China.
As offshoring spread, American cities and states lost tax base, and families and communities lost jobs. The replacement jobs, such as selling the offshored products at Wal-Mart, brought home less pay.
“Free market economists” covered up the damage done to the US economy by preaching a New Economy based on services and innovation. But it wasn’t long before corporations discovered that the high speed Internet let them offshore a wide range of professional service jobs. In America, the hardest hit have been software engineers and information technology (IT) workers.
The American corporations quickly learned that by declaring “shortages” of skilled Americans, they could get from Congress H-1b work visas for lower paid foreigners with whom to replace their American work force. Many US corporations are known for forcing their US employees to train their foreign replacements in exchange for severance pay.
Chasing after shareholder return and “performance bonuses,” US corporations deserted their American workforce. The consequences can be seen everywhere. The loss of tax base has threatened the municipal bonds of cities and states and reduced the wealth of individuals who purchased the bonds. The lost jobs with good pay resulted in the expansion of consumer debt in order to maintain consumption. As the offshored goods and services are brought back to America to sell, the US trade deficit has exploded to unimaginable heights, calling into question the US dollar as reserve currency and America’s ability to finance its trade deficit.
As the American economy eroded away bit by bit, “free market” ideologues produced endless reassurances that America had pulled a fast one on China, sending China dirty and grimy manufacturing jobs. Free of these “old economy” jobs, Americans were lulled with promises of riches. In place of dirty fingernails, American efforts would flow into innovation and entrepreneurship. In the meantime, the “service economy” of software and communications would provide a leg up for the work force.
Education was the answer to all challenges. This appeased the academics, and they produced no studies that would contradict the propaganda and, thus, curtail the flow of federal government and corporate grants.
The “free market” economists, who provided the propaganda and disinformation to hide the act of destroying the US economy, were well paid. And as Business Week noted, “outsourcing’s inner circle has deep roots in GE (General Electric) and McKinsey,” a consulting firm. Indeed, one of McKinsey’s main apologists for offshoring of US jobs, Diana Farrell, is now a member of Obama’s White House National Economic Council.
The pressure of jobs offshoring, together with vast imports, has destroyed the economic prospects for all Americans, except the CEOs who receive “performance” bonuses for moving American jobs offshore or giving them to H-1b work visa holders. Lowly paid offshored employees, together with H-1b visas, have curtailed employment for older and more experienced American workers. Older workers traditionally receive higher pay. However, when the determining factor is minimizing labor costs for the sake of shareholder returns and management bonuses, older workers are unaffordable. Doing a good job, providing a good service, is no longer the corporation’s function. Instead, the goal is to minimize labor costs at all cost.
Thus, “free trade” has also destroyed the employment prospects of older workers. Forced out of their careers, they seek employment as shelf stockers for Wal-Mart.
I have read endless tributes to Wal-Mart from “libertarian economists,” who sing Wal-Mart’s praises for bringing low price goods, 70 per cent of which are made in China, to the American consumer. What these “economists” do not factor into their analysis is the diminution of American family incomes and government tax base from the loss of the goods producing jobs to China. Ladders of upward mobility are being dismantled by offshoring, while California issues IOUs to pay its bills. The shift of production offshore reduces US GDP. When the goods and services are brought back to America to be sold, they increase the trade deficit. As the trade deficit is financed by foreigners acquiring ownership of US assets, this means that profits, dividends, capital gains, interest, rents, and tolls leave American pockets for foreign ones.
The demise of America’s productive economy left the US economy dependent on finance, in which the US remained dominant because the dollar is the reserve currency. With the departure of factories, finance went in new directions. Mortgages, which were once held in the portfolios of the issuer, were securitized. Individual mortgage debts were combined into a “security.” The next step was to strip out the interest payments to the mortgages and sell them as derivatives, thus creating a third debt instrument based on the original mortgages.
In pursuit of ever more profits, financial institutions began betting on the success and failure of various debt instruments and by implication on firms. They bought and sold collateral debt swaps. A buyer pays a premium to a seller for a swap to guarantee an asset’s value. If an asset “insured” by a swap falls in value, the seller of the swap is supposed to make the owner of the swap whole. The purchaser of a swap is not required to own the asset in order to contract for a guarantee of its value. Therefore, as many people could purchase as many swaps as they wished on the same asset. Thus, the total value of the swaps greatly exceeds the value of the assets.*
The next step is for holders of the swaps to short the asset in order to drive down its value and collect the guarantee. As the issuers of swaps were not required to reserve against them, and as there is no limit to the number of swaps, the payouts could easily exceed the net worth of the issuer.
This was the most shameful and most mindless form of speculation. Gamblers were betting hands that they could not cover. The US regulators fled their posts. The American financial institutions abandoned all integrity. As a consequence, American financial institutions and rating agencies are trusted nowhere on earth.
The US government should never have used billions of taxpayers’ dollars to pay off swap bets as it did when it bailed out the insurance company AIG. This was a stunning waste of a vast sum of money. The federal government should declare all swap agreements to be fraudulent contracts, except for a single swap held by the owner of the asset. Simply wiping out these fraudulent contracts would remove the bulk of the vast overhang of “troubled” assets that threaten financial markets.
A d v e r t i s e m e n t
The billions of taxpayers’ dollars spent buying up subprime derivatives were also wasted. The government did not need to spend one dime. All government needed to do was to suspend the mark-to-market rule. This simple act would have removed the solvency threat to financial institutions by allowing them to keep the derivatives at book value until financial institutions could ascertain their true values and write them down over time.
Taxpayers, equity owners, and the credit standing of the US government are being ruined by financial shysters who are manipulating to their own advantage the government’s commitment to mark-to-market and to the “sanctity of contracts.” Multi-trillion dollar “bailouts” and bank nationalization are the result of the government’s inability to respond intelligently.
Two more simple acts would have completed the rescue without costing the taxpayers one dollar: an announcement from the Federal Reserve that it will be lender of last resort to all depository institutions including money market funds, and an announcement reinstating the uptick rule.
The uptick rule was suspended or repealed a couple of years ago in order to permit hedge funds and shyster speculators to rip-off American equity owners. The rule prevented short-selling any stock that did not move up in price during the previous day. In other words, speculators could not make money at others’ expense by ganging up on a stock and short-selling it day after day.
As a former Treasury official, I am amazed that the US government, in the midst of the worst financial crises ever, is content for short-selling to drive down the asset prices that the government is trying to support. No bailout or stimulus plan has any hope until the uptick rule is reinstated.
The bald fact is that the combination of ignorance, negligence, and ideology that permitted the crisis to happen still prevails and is blocking any remedy. Either the people in power in Washington and the financial community are total dimwits or they are manipulating an opportunity to redistribute wealth from taxpayers, equity owners and pension funds to the financial sector.
The Bush and Obama plans total 1.6 trillion dollars, every one of which will have to be borrowed, and no one knows from where. This huge sum will compromise the value of the US dollar, its role as reserve currency, the ability of the US government to service its debt, and the price level. These staggering costs are pointless and are to no avail, as not one step has been taken that would alleviate the crisis.
If we add to my simple menu of remedies a ban, punishable by instant death, for short selling any national currency, the world can be rescued from the current crisis without years of suffering, violent upheavals and, perhaps, wars.
According to its hopeful but economically ignorant proponents, globalism was supposed to balance risks across national economies and to offset downturns in one part of the world with upturns in other parts. A global portfolio was a protection against loss, claimed globalism’s purveyors. In fact, globalism has concentrated the risks, resulting in Wall Street’s greed endangering all the economies of the world. The greed of Wall Street and the negligence of the US government have wrecked the prospects of many nations. Street riots are already occurring in parts of the world. On Sunday February 22, the right-wing TV station, Fox “News,” presented a program that predicted riots and disarray in the United States by 2014.
How long will Americans permit “their” government to rip them off for the sake of the financial interests that caused the problem? Obama’s cabinet and National Economic Council are filled with representatives of the interest groups that caused the problem. The Obama administration is not a government capable of preventing a catastrophe.
If truth be known, the “banking problem” is the least of our worries. Our economy faces two much more serious problems. One is that offshoring and H-1b visas have stopped the growth of family incomes, except, of course, for the super rich. To keep the economy going, consumers have gone deeper into debt, maxing out their credit cards and refinancing their homes and spending the equity. Consumers are now so indebted that they cannot increase their spending by taking on more debt. Thus, whether or not the banks resume lending is beside the point.
The other serious problem is the status of the US dollar as reserve currency. This status has allowed the US, now a country heavily dependent on imports just like a third world or lesser-developed country, to pay its international bills in its own currency. We are able to import $800 billion annually more than we produce, because the foreign countries from whom we import are willing to accept paper for their goods and services.
If the dollar loses its reserve currency role, foreigners will not accept dollars in exchange for real things. This event would be immensely disruptive to an economy dependent on imports for its energy, its clothes, its shoes, its manufactured products, and its advanced technology products.
If incompetence in Washington, the type of incompetence that produced the current economic crisis, destroys the dollar as reserve currency, the “unipower” will overnight become a third world country, unable to pay for its imports or to sustain its standard of living.
How long can the US government protect the dollar’s value by leasing its gold to bullion dealers who sell it, thereby holding down the gold price? Given the incompetence in Washington and on Wall Street, our best hope is that the rest of the world is even less competent and even in deeper trouble. In this event, the US dollar might survive as the least valueless of the world’s fiat currencies.
"The ascendant position of the US economy caused the US government to be relaxed about giving away American industries, such as textiles, as bribes to other countries for cooperating with America’s cold war and foreign policies. For example, Turkey’s US textile quotas were increased in exchange for over-flight rights in the Gulf War, making lost US textile jobs an off-budget war expense.
"
Ive always thought this, and still do. I dont agree free trade is myth - there exists synergisms that occur with cross border production, but we did offer up industries as a way of buying allies. Gee nice friends, huh?
As for the rest of the article, not so much. Walmart is despite all it's critisim a benefit for society. The lower you can make costs on manufactured items the more capital is free to devolp more advanced things. Cheap toilet paper leads to Genetic breakthroughs.
its funny when you watch the news and they do a story about retraining america's workforce. they show some guy or woman who used to work in a factory which has been outsourced or closed and invariably they seem to be learning how to be a cook. well, line cooks, sous chefs whatever even in the best restaurants make like eight bucks an hour. since this meltdown has happened it seems that the usa would want to start making underwear again, start making tvs and dvd players not only to revive the manufacturing sector create those jobs that everyone's talkin' about, and keep china from becoming a superpower. and as far as defense goes we should be charging our "friends" like saudi arabia and kuwait and anybody else for keeping them in their palaces.
When I worked in construction we worked in all kinds of factories in Chicagoland. A real factory, like Fel-Pro Gaskets, is an amazing sight. Theres nothing old economy about this stuff. Its high tech R&D, High Tech Cad / Cam, Big money, big employer endevours. Every dam MBA should have to spend 1 week in a 3 shift factory and see what production is. The multiplier of factory wages, to vending machine guy, to cafeteria supplier, scrapper, lab workers, PHDs, marketing dept. It goes on and on.
Chicago Tea Party
MYTH: Congressional Democrats, led by Barney Frank, opposed strengthening oversight over Fannie and Freddie
In a September 18 column, Fox News host Bill O'Reilly falsely claimed that Frank "sat by as mortgage brokers Fannie Mae and Freddie Mac made bad loans" and asserted that "[i]nstead of demanding responsible business practices from Fannie and Freddie, Frank continued to pound the table to extend even more credit to 'low income' families." In fact, Frank did not "s[i]t by." Frank's efforts to enhance regulatory oversight on Fannie Mae and Freddie Mac include:
* In 2005, Frank, then the ranking Democrat on the House Financial Services Committee, worked with committee chairman Rep. Michael Oxley (R-OH) on the Federal Housing Finance Reform Act of 2005, which would have established the Federal Housing Finance Agency (FHFA) to replace the Office of Federal Housing Enterprise Oversight (OFHEO) as overseer of the activities of Fannie Mae and Freddie Mac. After voting for the bill in committee, Frank voted against final passage of the bill on the House floor, stating that he was doing so because an amendment to the bill on the House floor imposed restrictions on the kinds of nonprofit organizations that could receive funding under the bill.
* In early 2007, as chairman of the House Financial Services Committee, Frank sponsored H.R. 1427, a bill to create the FHFA, granting that agency "general supervisory and regulatory authority over" Fannie Mae and Freddie Mac, and directing it to reform the companies' business practices and regulate their exposure to credit and market risk. Among other things, Frank's legislation, titled the "Federal Housing Finance Reform Act of 2007," directed the FHFA director to "ensure" that Fannie Mae and Freddie Mac "operate[] in a safe and sound manner, including maintenance of adequate capital and internal controls" and to establish standards for "management of credit and counterparty risk" and "management of market risk." The FHFA was eventually created after Congress incorporated provisions that House Speaker Nancy Pelosi (D-CA) said were "similar" to those of H.R. 1427 into the Housing and Economic Recovery Act of 2008, which the president signed into law on July 30.
Some in the conservative media have taken the charge further, suggesting that in the 1990s, Frank allowed his relationship with Fannie Mae executive Herb Moses to affect his responsibility as a senior member of the House Financial Services Committee to conduct oversight over Fannie Mae. For example, in an October 3 article, Fox News deputy Washington Managing editor Bill Sammon asserted, in a charge he later echoed on Fox News' The O'Reilly Factor, "Unqualified home buyers were not the only ones who benefitted from Massachusetts Rep. Barney Frank's efforts to deregulate Fannie Mae throughout the 1990s. So did Frank's partner, a Fannie Mae executive at the forefront of the agency's push to relax lending restrictions."
In his article, however, Sammon cited only two sources: an anonymous Republican congressional staffer and Dan Gainor, who, Sammon did not note, is an employee of the conservative Media Research Center. Moreover, Sammon misrepresented Frank's record by reporting in his article that Frank "spent years blocking GOP lawmakers from imposing tougher regulations" on Fannie Mae and Freddie Mac. Sammon did not note in his article or during an October 6 appearance on The O'Reilly Factor that in the early 1990s, while Frank's Democratic Party still held the majority in Congress, and while Moses was at Fannie Mae, Frank supported bills to increase regulation of Fannie Mae and create a government regulatory agency that would supervise and have authority over some aspects of the company:
* On September 30, 1991, Frank voted for a bill to create a new regulatory agency to oversee Fannie and Freddie that would have "[r]equire[d] the [agency's] Director to establish by regulation a risk-based capital test for the enterprises," "[r]equire[d] the Director to establish risk-based capital levels for each enterprise according to statutory guidelines," "[e]stablishe[d] minimum capital levels, critical capital levels, and enforcement levels," and "[s]et[] forth mandatory supervisory actions for the enterprises at various capital levels, including mandatory conservatorship."
* In October 1992, Frank voted for the Housing and Community Development Act of 1992, creating OFHEO, which was tasked with "ensur[ing] that Fannie Mae and Freddie Mac (the enterprises) and their affiliates are adequately capitalized and operating safely." As with the bill Frank voted for in September 1991, the new law gave OFHEO authority to set, monitor, and enforce risk-based capital requirements for Fannie and Freddie.
Neal Boortz also advanced this claim about Frank and his former partner during the October 8 edition of his nationally syndicated radio show. On October 8, The Wall Street Journal reported that "[a] conservative political organization will begin airing nationwide TV advertisements Wednesday that criticize congressional Democrats for their ties to mortgage giants Freddie Mac and Fannie Mae."
You people will never learn. Every time you pass one of these fluffy acts the maggots come out and feed.
The loans were not originated by CRA regulated entities, they were originated by local loan shops then sold to CRA regulated entities who then sold them again to Wall street
So your technically right but your connection is wrong
this needs to be a multi pronged attack; mortgages need to be stabilized, a floor needs to be put under them, then those assets need to be sold, which won't happen, at least privately, because who in the private sector will buy a depreciating/toxic asset, and the banks need to be recapitalized. prices for assets and recapitalization can't seem to happen if foreclosures and property values keep plummeting.
There are hundreds of housnads of people waiting to buy the houses. I have been calling REO managers at banks trying to get info on foreclosure portfolios - they are guarding them like gold. Selling off these houses at 50% discounts will not hurt the market the way selling seized automobiles doesnt hurt the market. The admistration is grandstanding and trying to play hero when in reality they are standing in the way. Bush Paulson to.
what I don't understand about the let's screw them philosphy is this:
say seven in fifty houses in your neighborhood go into foreclosure. when those seven houses are resold at auction for a lot less than the previous owners paid for them everyone's property values go down. If you keep the seven in their homes the the property values for the neighborhood wouldn't go down as much (or maybe even at all because they are occupied and being taken care of, etc.), right?
Can I sell tickets to the EvilP vs. Beta cage match?
"what I don't understand about the let's screw them philosphy is this:
say seven in fifty houses in your neighborhood go into foreclosure. when those seven houses are resold at auction for a lot less than the previous owners paid for them everyone's property values go down. If you keep the seven in their homes the the property values for the neighborhood wouldn't go down as much"
No, because at auction they would comprise of an aftermarket similar to used vehicle sales. They are not the same as lived in homes, they are tainted, often times damaged and in disrepair. The effects on neighboring home values would be in some case positive as the neighborhood cleans out empty homes, and in some cases mabbey small decreases in value but at least they will get to the bottom quick and cleanly.
I like this comment
16. February 20, 2009
1:34 pm
Link
Do you read the comments in the NY Times? Yesterday, hundreds of NY Times readers weighed in and were almost universally outraged at the unfairness of this plan.
How can you say that the intense reaction “pretty much broke along partisan lines.” THAT IS FALSE.
Many progressives, liberals and Obama-supporters are outraged. This is so patently irresponsible and unfair that people of all political stripes are furious.
Please don’t ignore reality! People are gearing up for revolution. THIS IS NO WAY TO RUN A COUNTRY!
— USMC vet Fairfield County CT
" Writing on his Carpe Diem blog, University of Michigan professor Mark Perry notes that while California home prices dropped 41% in 2008, home sales in the state jumped 85%. It now looks like 2008 sales for single-family houses will exceed levels reached in 2007.
What's more, the unsold-inventory index for existing single-family detached homes in December 2008 was 5.6 months, compared with 13.4 months for the year-ago period. And the median number of days it took to sell a single-family home dropped to 46.1 in December 2008, compared with 66.7 in December 2007.
So inventories are dropping, the number of days to sell a home is falling, and sales are rising in the wake of lower prices.
If the government really wants to help, instead of bailing out irresponsible mortgage-holders, it should support new and younger families who want to buy starter homes and begin to climb the ladder of prosperity.
All this is free-market economics 101. And I say, let free markets work. "
The shit is hitting the fan in Cali, Evil.
There's another wave coming.
i'm sorry, but i'll take get my information from Dr. Doom, he and many other economists believe that a reduction in the face value of mortgages will stem the crisis. the man predicted this mess.
It wasnt very hard to predict this mess
i don't remember anyone calling this, and i found out early last year about CDS and MBS and the impact this would have, and this is all the while the market was skyrocketing, and CNBC talking heads were pimping this economy. Roubini and Nasim Taleb have been sounding the alarm for over three years, and apparently no one was listening and were in fact calling these two heretics.
No your wrong, tons of short sellers where in the market and many bond traders put themselves into position; not to mention guys like Rick Santelli who abhor where badmouthing the FED's low rate Treasury giveaway spree for a while now.
Roubini is an ivory tower observer. He's pointless. Let him grade tests.
And apparently some Lehman traders as early as 05, 06 already knew it was a "house of cards". Thats where people like Roubini get there "ideas" - from the real world then they go toss them off like there original. Hes a fucktard NYT celeb, same as your CNBC talking heads
Hell even the NYT saw it comming in 1999;
"Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's."
If you keep the mortgages, then you'd be more careful. You'd actually have a relationship with the people in question. There are institutions that are successful at this. They are small and good to work with. My next mortgage will come from one of them.
Then these monster lenders sold these things. That wasn't regulated at all. They then leveraged these assets at 30x and 50x in the case of Citibank.
There's nothing wrong with the idea of what Freddie did. It should have been better managed and the securitization of these notes should not have been prohibited.If the banks had to keep the mortgages, then it would be different.
Watch for the FDIC to take over Citibank in the next couple of weeks.
I agree about Citi and BOA, they were dumb and should be dissmantled, and i think reversed engineered to find out which divisions that got rolled up into citi group where more responsible and those execs tried for fraud.
But the matter of underwater mortgages needs to be addressed first and sorry to say but its not a life, its an asset, and get these people out, and get the assets into market.
Think of it like this, the forclosed houses are like dead animals littering the forest floor. Nothing can grow right and the stink of death is permating the air scaring away all the critters. Until the maggots come out and devout the carcass and break it down no new life can survive.
economics 101
EP many responsible people paying their mortgages, not delinquent, with jobs find that even with a 10 or 20% down payment, their homes are underwater. they may have even bought their home not for the purpose of flipping in a year or two because of increased value, but like the neighborhood, and want to stay there for the long term. are they at fault in this environment, are their homes rotting corpses?
As long as they are paying, no. But when they walk away like brats? Then yes.
ok. 2 weeks ago i remember hearing on NPR about this "kid" a recent electrical engineering grad, 40k salary with a 400k home, an ARM, and now he was looking for a bailout.
on friday's NPR on the ethicist Randy Cohen spoke about "moral hazard" and who is responsible "ethically" in the mortgage crisis.
actually many animals will come to a corpse to feed on the maggots. raccoons particularly love maggots.
And Vado likes raccoons. ;-)
Oh, look:
CNBC's "Chicago Tea Party" was staged months in advance by the same people who gave us the whole Obama = Ayers bullshit.
And those "tea party" protests that had been planned? FAIL
Meanwhile, Obama's approval ratings are at 67%, with increased support among Republicans and independents.
Suck it, Santelli. What a fucking tool.
Gin got me all excited there, I had to go to the source - Daily Koz via Playboy. Nothing says unbiased reporting like Daily Koz.
"So today’s protests show that the corporate war is on, and this is how they’ll fight it: hiding behind “objective” journalists and “grassroots” new media movements. Because in these times, if you want to push for policies that help the super-wealthy, you better do everything you can to make it seem like it’s “the people” who are “spontaneously” fighting your fight."
If true - sounds like the fiscal conservatives finally got smart and learned how to play the democrat's game of media. Maybe the fight is on after all. Cant wait. The smart vs. The ignorant, the able versus the dead.
Obama's approval ratings are falling.
GIN your such a loser, seriously - get a life. They are just using you.
Oh and BTW GIN the chicago tea party scheduled for last week was scheduled well in advance of Rick who called for his own in July - but I know you paranoid types like to see gohsts everywhere in your dark world, let me shine some light - tea party is an extremely common term, in fact theres tea party's all the time, hell google chicago tea party and you pull up a protest over bottled water tax from 2007 on Mich ave. bridge.
God your a dork
Several thousand tea baggers in Atlanta in the rain / 1500 in St. Loius and DC - not even the real tea party either. Prob be more if the people didnt actualy have to work for a living unlike the well bearded unwashed liberal pertuli oil crowd holding signs like "Fuck Bush" and "Baby Killer". They really nice kids when you get to know them. Sure they may smash a few honest businesses windows but man they wont be fooled into paying their mortgages or taxes.
about the Daily Bail mentioned in the Playboy article:
[url=http://dailybail.com/home/2009/3/1/the-mother-of-all-irony-playboy-magazine-targets-the-daily-b.html
]dailybail[/url]
And I guess it was such a conspiracy that CNBC didnt tell matt williams that night to not lead with it on the Evening News over at Network. Please. I guess He's in it to? Maybe Kieth O and Rachel were'nt told either. In fact I think everyone knew except Gin and the Koz.
Maybe Playboy should have actually called the sites they accused of conspiracy first. The taking down of the Koch Trust Sponsored Youth Scholarship link registration after it was over certainly smells funny to me!
samadams
Weird - hit piece on Playboy picked up by Daily Koz and copied word for word on every douche blog has been pulled. I wonder why?
playboy santelli hoax story
It still doesn't change anything.
Things are in a free fall and unless there's a Resolution Trust like organization setup watch for things to really go down the crapper.
The market doesn't like uncertainty and that's what happened today with AIG.
"Lawmakers across the country are sponsoring resolutions — most of them only symbolic — asserting state sovereignty, in effect the right to ignore any federal law or policies they deem unconstitutional, including the stimulus bill, the No Child Left Behind Act and any new assault rifle ban."
Dude - I like your passion but dont turn my thread into a Ron Paul Party
Santelli is outraged about a stimulus bill worth $400 billion. AIG and Citibank has cost taxpayers more than that. And that's money down a sink hole. The stimulus gives us roads and But Santelli isn't interested in picking fights with his own.
AIG's problems from what I've heard have to do with a hedge fund department that was dealing with credit default swaps. the rest is apparently a conservatively run insurance business.(i think) i doubt that the policies that AIG has now would not be taken over by other insurance companies. That seems to be the good part of their business and the biggest part. so, if they were to fail the void would be filled by others. wouldn't it?
AIG guaranteed things that could not possibly pay up on:
The scandal here is not the size of the losses from the global financial meltdown -- those are losses which sooner or later, in one form or another, would have had to be borne by the government anyway. Rather, the scandal is that AIG could have earned billions of dollars by selling insurance against a meltdown, even as it was wholly incapable of paying out on those policies. I wouldn't be surprised to learn that Hank Greenberg was still a billionaire, even as the policies his company wrote have cost the average American household some $1,600. It's time for his wealth to be confiscated: it might be only a drop in the bucket compared to AIG's total losses, but it would feel very right. -Felix Salmon of the FT
http://www.portfolio.com/views/blogs/market-movers/2009/03/02/the-aig-scandal?tid=true
http://yglesias.thinkprogress.org/archives/2009/03/getting_some_of_our_money_back_from_aig_executives.php
You go to jail for this kind of thing. It's called FRAUD. If most Americans knew about this, there would be real civil disobedience. Greenberg has his billions and the US taxpayers are cleaning up the mess he created.
im with you make...
one thing we must keep in mind when considering the general involvement of the government in economic affairs is the governments ability to catalyze development. Even the most ardent conservative would argue that the government CAN have a roll in stimulating the economy, its a matter of WHAT roll it plays, and HOW it executes.
One the most basic level, we all accept the boom and bust nature of capitalism. We can accept that we will make a shit ton one year, but give half of it back then next. The important part is what we do with that money while we are booming. We boomed in the 1800's and ended up with a rail system that would prove crucial to future development. Those companies busted, but the infrastructure remained. We boomed a few decades later and ended up with massive manufacturing capabilities and highways coast to coast. Yes, we busted again but were left with massively increased economic capacity. More recently, the tech boom created the world we live in now, and yes, the dot com bust bankrupted thousands, but we were left with the broad band lines and cell phone towers we depend on now.
This time however, we boomed, and laid town thousands of homes which far, far outstripped our capacity. Im afraid there will be no long lasting positive effect from one of our most prosperous stretches in history.
Thats the governments role, i believe. And thats one major positive i see from this stimulus. Give the market some direction, and then let it go... i have no problem bowling with the bumpers up... sure... its less sexy, but you better believe more scores will be more consistent...
If a company is too big to fail and that means government dough to keep them from failing then that companies every move should be scrutinized by a myopic little man in a back office looking over the books of these too big to fail companies.
There was actualy a good editorial on Credit Default Swaps in WSJ a few weeks ago - it basicly asked why was this one financial instrument not well regulated when all the other ones are overly regulated? It also asked if the CDS market was essentially insurance then why werent the credit desks at major banks and insurers regulated under the same rules as insurance requiring a certain amount of equity reserves? In essence it was saying this was obviously a known problem so they decided to NOT regulate it. I cant even begin to understand the complex shenanigans that goes into this - maybe the idea is if you make a mess so spectaculariliy large - what could anyone do about it? What was their motives? Are they really that dumb? Is the fix even worse?
I do honestly to God believe in finacial conspiracies, and I believe this is one of them cooked up for a long time coming. You cant insure some trillion dollars of transactions and the sec or treasury department NOT have something to say about it - unless of course, they are in on it.
well in a way its this enron phenomenon youve got scores of guys and gals with their mbas and law degrees looking around for loopholes in a system, inventing new ways of accounting, selling it to shareholders because of the quick profits and then letting the tax payers clean up the mess. yesterday when bernanke was on he talked about his anger with AIG but did he know about it or what it was? he seemed to be taken by surprise, all of these people seemed to be as surprised as us about it. it's so fucked up there's no analogy for it.
They arent surprised - I remember Santelli of all people talking about the explosion of CDS a few years ago - something like $1trillion globaly in the 90s to now 50 Trillion - They knew, they just play dumb - between Greengurgn Bernaki, Greenspan and Madoff - I think we can put the Jews are good with money stereotype to bed.
Vado - all the mbas and accounting cant hide that much money - its more like institutional fraud, with the help of regulators - their only excuse could be "its fraud for the common good"
Evil,
You'll enjoy this:
http://blogs.ft.com/maverecon/2009/03/the-unfortunate-uselessness-of-most-state-of-the-art-academic-monetary-economics/
It hit the spot!
How the Economy was Lost
Paul Craig Roberts
The American economy has gone away. It is not coming back until free trade myths are buried six feet under.
America’s 20th century economic success was based on two things. Free trade was not one of them. America’s economic success was based on protectionism, which was ensured by the union victory in the Civil War, and on British indebtedness, which destroyed the British pound as world reserve currency. Following World War II, the US dollar took the role as reserve currency, a privilege that allows the US to pay its international bills in its own currency.
Obama’s cabinet and National Economic Council are filled with representatives of the interest groups that caused the problem.
World War II and socialism together ensured that the US economy dominated the world at the mid 20th century. The economies of the rest of the world had been destroyed by war or were stifled by socialism [in terms of the priorities of the capitalist growth model. Editors.]
The ascendant position of the US economy caused the US government to be relaxed about giving away American industries, such as textiles, as bribes to other countries for cooperating with America’s cold war and foreign policies. For example, Turkey’s US textile quotas were increased in exchange for over-flight rights in the Gulf War, making lost US textile jobs an off-budget war expense.
In contrast, countries such as Japan and Germany used industrial policy to plot their comebacks. By the late 1970s, Japanese auto makers had the once dominant American auto industry on the ropes. The first economic act of the “free market” Reagan administration in 1981 was to put quotas on the import of Japanese cars in order to protect Detroit and the United Auto Workers.
Eamonn Fingleton, Pat Choate, and others have described how negligence in Washington DC aided and abetted the erosion of America’s economic position. What we didn’t give away, the United States let be taken away while preaching a “free trade” doctrine at which the rest of the world scoffed.
Fortunately, the U.S.’s adversaries at the time, the Soviet Union and China, had unworkable economic systems that posed no threat to America’s diminishing economic prowess.
This furlough from reality ended when Soviet, Chinese, and Indian socialism surrendered around 1990, to be followed shortly thereafter by the rise of the high speed Internet. Suddenly, American and other first world corporations discovered that a massive supply of foreign labor was available at practically free wages.
To get Wall Street analysts and shareholder advocacy groups off their backs, and to boost shareholder returns and management bonuses, American corporations began moving their production for American markets offshore. Products that were made in Peoria are now made in China.
As offshoring spread, American cities and states lost tax base, and families and communities lost jobs. The replacement jobs, such as selling the offshored products at Wal-Mart, brought home less pay.
“Free market economists” covered up the damage done to the US economy by preaching a New Economy based on services and innovation. But it wasn’t long before corporations discovered that the high speed Internet let them offshore a wide range of professional service jobs. In America, the hardest hit have been software engineers and information technology (IT) workers.
The American corporations quickly learned that by declaring “shortages” of skilled Americans, they could get from Congress H-1b work visas for lower paid foreigners with whom to replace their American work force. Many US corporations are known for forcing their US employees to train their foreign replacements in exchange for severance pay.
Chasing after shareholder return and “performance bonuses,” US corporations deserted their American workforce. The consequences can be seen everywhere. The loss of tax base has threatened the municipal bonds of cities and states and reduced the wealth of individuals who purchased the bonds. The lost jobs with good pay resulted in the expansion of consumer debt in order to maintain consumption. As the offshored goods and services are brought back to America to sell, the US trade deficit has exploded to unimaginable heights, calling into question the US dollar as reserve currency and America’s ability to finance its trade deficit.
As the American economy eroded away bit by bit, “free market” ideologues produced endless reassurances that America had pulled a fast one on China, sending China dirty and grimy manufacturing jobs. Free of these “old economy” jobs, Americans were lulled with promises of riches. In place of dirty fingernails, American efforts would flow into innovation and entrepreneurship. In the meantime, the “service economy” of software and communications would provide a leg up for the work force.
Education was the answer to all challenges. This appeased the academics, and they produced no studies that would contradict the propaganda and, thus, curtail the flow of federal government and corporate grants.
The “free market” economists, who provided the propaganda and disinformation to hide the act of destroying the US economy, were well paid. And as Business Week noted, “outsourcing’s inner circle has deep roots in GE (General Electric) and McKinsey,” a consulting firm. Indeed, one of McKinsey’s main apologists for offshoring of US jobs, Diana Farrell, is now a member of Obama’s White House National Economic Council.
The pressure of jobs offshoring, together with vast imports, has destroyed the economic prospects for all Americans, except the CEOs who receive “performance” bonuses for moving American jobs offshore or giving them to H-1b work visa holders. Lowly paid offshored employees, together with H-1b visas, have curtailed employment for older and more experienced American workers. Older workers traditionally receive higher pay. However, when the determining factor is minimizing labor costs for the sake of shareholder returns and management bonuses, older workers are unaffordable. Doing a good job, providing a good service, is no longer the corporation’s function. Instead, the goal is to minimize labor costs at all cost.
Thus, “free trade” has also destroyed the employment prospects of older workers. Forced out of their careers, they seek employment as shelf stockers for Wal-Mart.
I have read endless tributes to Wal-Mart from “libertarian economists,” who sing Wal-Mart’s praises for bringing low price goods, 70 per cent of which are made in China, to the American consumer. What these “economists” do not factor into their analysis is the diminution of American family incomes and government tax base from the loss of the goods producing jobs to China. Ladders of upward mobility are being dismantled by offshoring, while California issues IOUs to pay its bills. The shift of production offshore reduces US GDP. When the goods and services are brought back to America to be sold, they increase the trade deficit. As the trade deficit is financed by foreigners acquiring ownership of US assets, this means that profits, dividends, capital gains, interest, rents, and tolls leave American pockets for foreign ones.
The demise of America’s productive economy left the US economy dependent on finance, in which the US remained dominant because the dollar is the reserve currency. With the departure of factories, finance went in new directions. Mortgages, which were once held in the portfolios of the issuer, were securitized. Individual mortgage debts were combined into a “security.” The next step was to strip out the interest payments to the mortgages and sell them as derivatives, thus creating a third debt instrument based on the original mortgages.
In pursuit of ever more profits, financial institutions began betting on the success and failure of various debt instruments and by implication on firms. They bought and sold collateral debt swaps. A buyer pays a premium to a seller for a swap to guarantee an asset’s value. If an asset “insured” by a swap falls in value, the seller of the swap is supposed to make the owner of the swap whole. The purchaser of a swap is not required to own the asset in order to contract for a guarantee of its value. Therefore, as many people could purchase as many swaps as they wished on the same asset. Thus, the total value of the swaps greatly exceeds the value of the assets.*
The next step is for holders of the swaps to short the asset in order to drive down its value and collect the guarantee. As the issuers of swaps were not required to reserve against them, and as there is no limit to the number of swaps, the payouts could easily exceed the net worth of the issuer.
This was the most shameful and most mindless form of speculation. Gamblers were betting hands that they could not cover. The US regulators fled their posts. The American financial institutions abandoned all integrity. As a consequence, American financial institutions and rating agencies are trusted nowhere on earth.
The US government should never have used billions of taxpayers’ dollars to pay off swap bets as it did when it bailed out the insurance company AIG. This was a stunning waste of a vast sum of money. The federal government should declare all swap agreements to be fraudulent contracts, except for a single swap held by the owner of the asset. Simply wiping out these fraudulent contracts would remove the bulk of the vast overhang of “troubled” assets that threaten financial markets.
A d v e r t i s e m e n t
The billions of taxpayers’ dollars spent buying up subprime derivatives were also wasted. The government did not need to spend one dime. All government needed to do was to suspend the mark-to-market rule. This simple act would have removed the solvency threat to financial institutions by allowing them to keep the derivatives at book value until financial institutions could ascertain their true values and write them down over time.
Taxpayers, equity owners, and the credit standing of the US government are being ruined by financial shysters who are manipulating to their own advantage the government’s commitment to mark-to-market and to the “sanctity of contracts.” Multi-trillion dollar “bailouts” and bank nationalization are the result of the government’s inability to respond intelligently.
Two more simple acts would have completed the rescue without costing the taxpayers one dollar: an announcement from the Federal Reserve that it will be lender of last resort to all depository institutions including money market funds, and an announcement reinstating the uptick rule.
The uptick rule was suspended or repealed a couple of years ago in order to permit hedge funds and shyster speculators to rip-off American equity owners. The rule prevented short-selling any stock that did not move up in price during the previous day. In other words, speculators could not make money at others’ expense by ganging up on a stock and short-selling it day after day.
As a former Treasury official, I am amazed that the US government, in the midst of the worst financial crises ever, is content for short-selling to drive down the asset prices that the government is trying to support. No bailout or stimulus plan has any hope until the uptick rule is reinstated.
The bald fact is that the combination of ignorance, negligence, and ideology that permitted the crisis to happen still prevails and is blocking any remedy. Either the people in power in Washington and the financial community are total dimwits or they are manipulating an opportunity to redistribute wealth from taxpayers, equity owners and pension funds to the financial sector.
The Bush and Obama plans total 1.6 trillion dollars, every one of which will have to be borrowed, and no one knows from where. This huge sum will compromise the value of the US dollar, its role as reserve currency, the ability of the US government to service its debt, and the price level. These staggering costs are pointless and are to no avail, as not one step has been taken that would alleviate the crisis.
If we add to my simple menu of remedies a ban, punishable by instant death, for short selling any national currency, the world can be rescued from the current crisis without years of suffering, violent upheavals and, perhaps, wars.
According to its hopeful but economically ignorant proponents, globalism was supposed to balance risks across national economies and to offset downturns in one part of the world with upturns in other parts. A global portfolio was a protection against loss, claimed globalism’s purveyors. In fact, globalism has concentrated the risks, resulting in Wall Street’s greed endangering all the economies of the world. The greed of Wall Street and the negligence of the US government have wrecked the prospects of many nations. Street riots are already occurring in parts of the world. On Sunday February 22, the right-wing TV station, Fox “News,” presented a program that predicted riots and disarray in the United States by 2014.
How long will Americans permit “their” government to rip them off for the sake of the financial interests that caused the problem? Obama’s cabinet and National Economic Council are filled with representatives of the interest groups that caused the problem. The Obama administration is not a government capable of preventing a catastrophe.
If truth be known, the “banking problem” is the least of our worries. Our economy faces two much more serious problems. One is that offshoring and H-1b visas have stopped the growth of family incomes, except, of course, for the super rich. To keep the economy going, consumers have gone deeper into debt, maxing out their credit cards and refinancing their homes and spending the equity. Consumers are now so indebted that they cannot increase their spending by taking on more debt. Thus, whether or not the banks resume lending is beside the point.
The other serious problem is the status of the US dollar as reserve currency. This status has allowed the US, now a country heavily dependent on imports just like a third world or lesser-developed country, to pay its international bills in its own currency. We are able to import $800 billion annually more than we produce, because the foreign countries from whom we import are willing to accept paper for their goods and services.
If the dollar loses its reserve currency role, foreigners will not accept dollars in exchange for real things. This event would be immensely disruptive to an economy dependent on imports for its energy, its clothes, its shoes, its manufactured products, and its advanced technology products.
If incompetence in Washington, the type of incompetence that produced the current economic crisis, destroys the dollar as reserve currency, the “unipower” will overnight become a third world country, unable to pay for its imports or to sustain its standard of living.
How long can the US government protect the dollar’s value by leasing its gold to bullion dealers who sell it, thereby holding down the gold price? Given the incompetence in Washington and on Wall Street, our best hope is that the rest of the world is even less competent and even in deeper trouble. In this event, the US dollar might survive as the least valueless of the world’s fiat currencies.
Here's where I quit reading:
"The American economy has gone away. It is not coming back until free trade myths are buried six feet under."
"The ascendant position of the US economy caused the US government to be relaxed about giving away American industries, such as textiles, as bribes to other countries for cooperating with America’s cold war and foreign policies. For example, Turkey’s US textile quotas were increased in exchange for over-flight rights in the Gulf War, making lost US textile jobs an off-budget war expense.
"
Ive always thought this, and still do. I dont agree free trade is myth - there exists synergisms that occur with cross border production, but we did offer up industries as a way of buying allies. Gee nice friends, huh?
OK. now I've read more. Some things I agree with as well.
As for the rest of the article, not so much. Walmart is despite all it's critisim a benefit for society. The lower you can make costs on manufactured items the more capital is free to devolp more advanced things. Cheap toilet paper leads to Genetic breakthroughs.
its funny when you watch the news and they do a story about retraining america's workforce. they show some guy or woman who used to work in a factory which has been outsourced or closed and invariably they seem to be learning how to be a cook. well, line cooks, sous chefs whatever even in the best restaurants make like eight bucks an hour. since this meltdown has happened it seems that the usa would want to start making underwear again, start making tvs and dvd players not only to revive the manufacturing sector create those jobs that everyone's talkin' about, and keep china from becoming a superpower. and as far as defense goes we should be charging our "friends" like saudi arabia and kuwait and anybody else for keeping them in their palaces.
When I worked in construction we worked in all kinds of factories in Chicagoland. A real factory, like Fel-Pro Gaskets, is an amazing sight. Theres nothing old economy about this stuff. Its high tech R&D, High Tech Cad / Cam, Big money, big employer endevours. Every dam MBA should have to spend 1 week in a 3 shift factory and see what production is. The multiplier of factory wages, to vending machine guy, to cafeteria supplier, scrapper, lab workers, PHDs, marketing dept. It goes on and on.
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