Hi. This morning's news of imminent public rescue of these private, for-profit, giant institutions, with no end stated or in sight, should have taxpayers marching on Washington, candidates advancing serious alternatives and columnists throughout the nation analyzing and denouncing the system which perpetuates our growing, human disaster. National paralysis, as Bob Herbert phrases it. I'll happily post essays by McKinney, Nader, Obama (?!), et al, and send reports of activities. Meanwhile, these will have to do. -Ed
http://www.nytimes.com/2008/07/14/opinion/14krugman.html?th&emc=th Fannie, Freddie and You By PAUL KRUGMAN NY Times Op-Ed: July 14, 2008 And now we've reached the next stage of our seemingly never-ending financial crisis. This time Fannie Mae and Freddie Mac are in the headlines, with dire warnings of imminent collapse. How worried should we be? Well, I'm going to take a contrarian position: the storm over these particular lenders is overblown. Fannie and Freddie probably will need a government rescue. But since it's already clear that that rescue will take place, their problems won't take down the economy. Furthermore, while Fannie and Freddie are problematic institutions, they aren't responsible for the mess we're in. Here's the background: Fannie Mae - the Federal National Mortgage Association - was created in the 1930s to facilitate homeownership by buying mortgages from banks, freeing up cash that could be used to make new loans. Fannie and Freddie Mac, which does pretty much the same thing, now finance most of the home loans being made in America. The case against Fannie and Freddie begins with their peculiar status: although they're private companies with stockholders and profits, they're "government-sponsored enterprises" established by federal law, which means that they receive special privileges. The most important of these privileges is implicit: it's the belief of investors that if Fannie and Freddie are threatened with failure, the federal government will come to their rescue. This implicit guarantee means that profits are privatized but losses are socialized. If Fannie and Freddie do well, their stockholders reap the benefits, but if things go badly, Washington picks up the tab. Heads they win, tails we lose. Such one-way bets can encourage the taking of bad risks, because the downside is someone else's problem. The classic example of how this can happen is the savings-and-loan crisis of the 1980s: S.& L. owners offered high interest rates to attract lots of federally insured deposits, then essentially gambled with the money. When many of their bets went bad, the feds ended up holding the bag. The eventual cleanup cost taxpayers more than $100 billion. But here's the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble. Partly that's because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn't do any subprime lending, because they can't: the definition of a subprime loan is precisely a loan that doesn't meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income. So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works. In that case, however, how did they end up in trouble? Part of the answer is the sheer scale of the housing bubble, and the size of the price declines taking place now that the bubble has burst. In Los Angeles, Miami and other places, anyone who borrowed to buy a house at the peak of the market probably has negative equity at this point, even if he or she originally put 20 percent down. The result is a rising rate of delinquency even on loans that meet Fannie-Freddie guidelines. Also, Fannie and Freddie, while tightly regulated in terms of their lending, haven't been required to put up enough capital - that is, money raised by selling stock rather than borrowing. This means that even a small decline in the value of their assets can leave them underwater, owing more than they own. And yes, there is a real political scandal here: there have been repeated warnings that Fannie's and Freddie's thin capitalization posed risks to taxpayers, but the companies' management bought off the political process, systematically hiring influential figures from both parties. While they were ugly, however, Fannie's and Freddie's political machinations didn't play a significant role in causing our current problems. Still, isn't it shocking that taxpayers may end up having to rescue these institutions? Not really. We're going through a major financial crisis - and such crises almost always end with some kind of taxpayer bailout for the banking system. And let's be clear: Fannie and Freddie can't be allowed to fail. With the collapse of subprime lending, they're now more central than ever to the housing market, and the economy as a whole. *** http://www.nytimes.com/2008/07/12/opinion/12herbert.html?th&emc=th Feeling No Pain "The biggest failing of both parties in this presidential campaign has been the unwillingness to be forthright with the public about the true extent of the crises facing the country. The federal government and ordinary Americans are up to their eyeballs in debt. Much of the financial sector is in deep trouble, with previously blue-chip companies wobbling along on legs as rubbery as a bad check. Perpetual war in Iraq and oil prices spiking toward the moon are adding to a sense of national paralysis. Where is the money to invest in ventures that will create good new jobs, that will chart new directions in energy self-sufficiency, that will revitalize the public schools, rebuild the nation's infrastructure, put New Orleans back on its feet? Where are the grand ideas, the ideas worthy of a great nation?" By BOB HERBERT NY Times Op-Ed: July 12, 2008 A pro basketball player named Micheal (yes, that's the way he spells it) Ray Richardson once famously said of the New York Knicks franchise: "The ship be sinking." When a reporter asked him how far it could sink, Richardson reportedly replied: "Sky's the limit." Something similar might be said about today's economy, although Phil Gramm, a remarkably out-of-touch former senator from Micheal Ray's home state of Texas, would beg to differ. You may have lost your job or the family home. Or maybe you're behind in your car payment or your health insurance premium. Perhaps you can't afford the gas to get to work. Phil Gramm will have none of your complaints: Get over it! Stop whining and eat your gruel. This recession's all in your head. No one (not even John McCain, who tended toward the rapturous when describing Mr. Gramm's economic bona fides) could mistake this sour-visaged investment banker for a populist. "We're the only nation in the world," Mr. Gramm once said, "where all our poor people are fat." During one of the many Republican assaults on Social Security, the issue of cutting back benefits for the elderly came up in the Senate. "They are 80-year-olds," howled Mr. Gramm. "Most people don't have the luxury of living to be 80 years old, so it's hard for me to feel sorry for them." John McCain, whose Straight Talk Express ran out of gas long ago, tried to paper over the implications of Mr. Gramm's unseemly outburst this week about the very real suffering that has descended on millions of Americans. "Phil Gramm does not speak for me," said Senator McCain. "I speak for me." But the truth is that Mr. Gramm, a close friend of Senator McCain's for many years, has had a very loud say in the economic policies of the McCain presidential campaign. And those policies are an extension of the G.O.P. orthodoxy that is threatening to sink the ship of state, even as the very wealthy are dancing mindlessly to the music of another Gilded Age. In the real world, somewhere outside of Phil Gramm's field of vision, increasing numbers of Americans are working two and three jobs to make ends meet; struggling families are worried sick in July about what it will cost to heat their homes in January; food costs and home foreclosures are soaring; the job market has tanked; and the stock markets are running with the bears. In that kind of atmosphere, it's beyond obscene to have to listen to some platinum-card-carrying fat cat tell us, in a tone dripping with condescension: "You've heard of mental depression; this is a mental recession." What does it say about John McCain's judgment that this guy was one of his top - and possibly his pre-eminent - economic adviser? What does it say about Mr. McCain's judgment that in 1996, he believed Phil Gramm was the best choice to be president? The biggest failing of both parties in this presidential campaign has been the unwillingness to be forthright with the public about the true extent of the crises facing the country. The federal government and ordinary Americans are up to their eyeballs in debt. Much of the financial sector is in deep trouble, with previously blue-chip companies wobbling along on legs as rubbery as a bad check. Perpetual war in Iraq and oil prices spiking toward the moon are adding to a sense of national paralysis. Where is the money to invest in ventures that will create good new jobs, that will chart new directions in energy self-sufficiency, that will revitalize the public schools, rebuild the nation's infrastructure, put New Orleans back on its feet? Where are the grand ideas, the ideas worthy of a great nation? Barack Obama got a lot of play with his clever response to the Phil Gramm madness. "You know, America already has one Dr. Phil," said Mr. Obama. "When it comes to the economy, we don't need another." Cute. But woefully inadequate. The Democrats, timid as always, should be pounding the populist pavement from one coast to another, explaining how the reckless and deliberately inequitable policies of the past several years have gotten the U.S. into this terrible fix. We should be getting chapter and verse about how badly the war in Iraq is hurting us here at home. We should be seeing charts and graphs explaining how ordinary Americans, now the hardest-working people on the planet, have been cheated out of their share of the extraordinary productivity improvements they've racked up over the years. There should be a sense of urgency coming from the Democrats in this campaign, a clarion call compelling enough to rally the legions who have been treated unfairly and badly hurt in the nation's other undeclared war: the class war. Phil Gramm was a general in that conflict, and there was nothing cute about it. ------------------------------------ --------------------------------------------------------------------------- LAAMN: Los Angeles Alternative Media Network --------------------------------------------------------------------------- Unsubscribe: <mailto:[EMAIL PROTECTED]> --------------------------------------------------------------------------- Subscribe: <mailto:[EMAIL PROTECTED]> --------------------------------------------------------------------------- Digest: <mailto:[EMAIL PROTECTED]> --------------------------------------------------------------------------- Help: <mailto:[EMAIL PROTECTED]> --------------------------------------------------------------------------- Post: <mailto:[EMAIL PROTECTED]> --------------------------------------------------------------------------- Archive1: <http://www.egroups.com/messages/laamn> --------------------------------------------------------------------------- Archive2: <http://www.mail-archive.com/[EMAIL PROTECTED]> --------------------------------------------------------------------------- Yahoo! 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