American Elephants


Forgotten history, dredged up once again. by The Elephant's Child
September 24, 2008, 5:44 pm
Filed under: Domestic Policy, Economy, History, News the Media Doesn't Want You to Hear, Politics, Socialism, Uncategorized | Tags: , , , , ,

As we wait to see what the Congress will do in addressing the mortgage crisis, it is worthwhile noting a little history.  The New York Times reported in 2003: ” New Agency Proposed to Oversee Freddie Mac and Fannie Mae”.

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies.  It would exercise authority over any new lines of business.  And it would determine whether the two are adequately managing risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken.  A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.

“There is a general recognition that the supervisory system for housing-related government-sponsored enterprises neither has the tools, nor the stature, to deal effectively with the current size, complexity and importance of these enterprises,”Treasury Secretary John W. Snow told the House Financial Services Committee in an appearance with Housing Secretary Mel Martinez, who also backed the plan.

Mr. Snow said that Congress should eliminate the power of the president to appoint directors to the companies, a sign that the administration is less concerned about the perks of patronage than it is about the potential political problems associated with any new difficulties arising at the companies.

Do read the whole article.  This is a real crisis, though it is mostly confined to the housing and financial sectors of the economy. It’s important to do your homework, and understand what it’s about.

The debate is very much up in the air.  Economists are begging for a “clean” bill, free of extraneous language. Democrats are anxious for Government to take over financial organizations, and relieve everyone of any liability for their bad decisions, and Socialize our form of government. 

They want to bail out homeowners whose mortgages are in default, people who owe too much on their credit cards, and promise any other goodies that may help Democrats to get reelected.

Obama’s understanding of this financial crisis is very shallow. He is more interested in protecting those who bought more house than they could afford.  He is unaware that raising taxes on an economy in trouble is not the best idea, for the government may need more money.  But, he says, a new President will take over in 40 days.  Um, January 20, Mr. Obama.

He is anxious to blame everything on President Bush, for much of his campaign appeal has been to attempt to portray the Bush economy as “terrible”, in spite of all evidence to the contrary.  The Bush tax cuts have been wildly successful, enabling the economy to shrug off the damages of 9/11, the War in the Mideast, and Katrina.  And even in the current trouble, the underlying economy remains strong.

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A few comments:
“Democrats are anxious for Government to take over financial organizations, and relieve everyone of any liability for their bad decisions, and Socialize our form of government. ”
There is no evidence of this the bailout plan was worked out by Bernanke a republican leaning (though neokeynesian) economist, Hank Paulson who is a Bush administration official and Bush administration employees.
“They want to bail out homeowners whose mortgages are in default, people who owe too much on their credit cards, and promise any other goodies that may help Democrats to get reelected.”
The current bailout (not a democratic fabrication to say that again) is mainly aimed at financial institutions to avoid the risk of systemic collapse. Bailing out to homeowners makes sense to a certain extent, since people who own home and depend on the value to pay for their kids college etc. face a completely unanticipated cash crunch and do not have the means to access credit, this might lead to inefficient ressource allocation, as for example kids not being able to go to good college simply because they finished high school in the wrong year and it might reduce the systemic risk of further mortgage related write-offs hitting the financial system. I am not saying that bailing out to home-owners is a good thing but its more complex than you portray and currentlz we are not bailing out to those with strained credit cards but to investment bankers with filled bank accounts, who managed their risks irresponsably but that apparentlz does not disturb zou that much since there is no socialism to suspect.

“Democrats are anxious for Government to take over financial organizations, and relieve everyone of any liability for their bad decisions, and Socialize our form of government. ”
This crisis is very much the result of an excessive deregulation ideology which was strongly pushed by Republicans. Conservatism -> deregulate -> financial armageddon -> nationalize.

“Obama’s understanding of this financial crisis is very shallow. He is more interested in protecting those who bought more house than they could afford. He is unaware that raising taxes on an economy in trouble is not the best idea, for the government may need more money.”
Everyone´s understanding of this financial crisis is shallow and incomplete (including academic economists) and McCains is certainly not better than Obamas. He has to now square the circle after a lifetime of supporting every possible deregulation.
Your don’t raise taxes on an economy in trouble is another one of those pseudoeconomic household wisdoms, which avoid thorough analysis. First of the Obama tax-plans would onlz raise taxes on those in the top 5% of the income distribution on the remaining population he would cut taxes more severely than McCain. Secondly the current fiscal mess is aggravated by the global imbalances the Bush administration created and which lessen the trust in the financial system. The current tax and spend mentality has turned the record government surplusses under the Clinton administration into a record deficit in the 8 years under Bush. The whole mortgage party and even great parts of the bailouts are financed with money provided by China. If the budget imbalance gets too big people might loose further trust into the financial system and in the worst case even fear sovereign default (which means the U.S. government would need the next big bailout). This is an extreme scenario of course but even much less extreme cases would have very adverse consequences, so balancing the budget by raising some taxes might not be the worst idea. Plus if you are worried about the direct shock of that too the economy you should raise taxes on rich people, because a tax increase for them does not lead to a sharp reduction in their consumption patterns (this is empiricallz proven) and thus creates less of a shock. Pulling some troops out of Iraq might also help reduce the enormous global financial imbalances that are being aggravated by this crisis.

“The Bush tax cuts have been wildly successful, enabling the economy to shrug off the damages of 9/11, the War in the Mideast, and Katrina. And even in the current trouble, the underlying economy remains strong.”
This is a joke. “the economy remains strong???????
The Bush tax cuts have been successful in getting Bush reelected and in further helping the trend that all of the economic growth of the last 20 years has led to increases in the income of the top 10% while incomes below have stagnated since.
They were like throwing a party and then leaving a huge mess for the neighbours, i.e. the next administration to clean up. Do you realize the enormous deficit these tax cuts have created and that while a war was being fought. FDR who knew he was fighting the right war was able to demand the higher tax rates because people understood the war effort was necessary and had to be financed Bush chose to fight an unnecessary war so he accumulated debt kept partying with everybody (especially with the rich kids) and quietly passed the bill via a huge deficit to the next generation. Thats what you call wildly successfull. In addition to that there is no good economic reason that these taxcuts were so strongly tilted towards the very richest part of our society (the keynesian stimulation effect gets weaker and an already worrying trend in distribution gets aggravated).

I think it is ironic that the republican way of running things, i.e. not overseeing all those weird contracts being made on the free market for housing mortgages, since regulation is sooo yuck… is what actually leads to massive nationalizations now. If anyone can succeed in turning the U.S. socialist its some more deregulating war starting republicans. Yeeehah

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Comment by Sander September 24, 2008 @ 9:50 pm
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Perhaps, Sander, you did not read my earlier piece on the history of this affair.

This is not a problem as Democrats like to claim (and they are desperate to attach the blame elsewhere) of not enough regulation, but of too much regulation of the wrong kind. Democrats wanted to help poor people to get into their own homes. It was well-meaning and well-intentioned legislation, but ill-conceived. They forced lenders to make loans that they would not have made under normal prudent banking standards, under pressure of law.

Democrats (led by Barney Frank and Chris Dodd) lowered the standards for home loans. Prudent banking standards have always required that people who want to buy a home have to come up with a fair-sized deposit, and have income that indicates that they can make their mortgage payments with something left over.

This Democrat Congress bailed out Fannie and Freddie once again, back in July, guaranteeing full government backing for their outsize management pay packages, massive political-contributions and lobbying practices and private portfolio hedge-fund activities. It gave them the power to pay more dividends to their shareholders without any caps on compensation.

At that point, budget assistance for homebuyers was already staggering. HUD spends $52 billion a year. The home mortgage interest deduction — about $80 billion a year, a local property tax deduction at $14 billion, and $28 billion capital-gains exclusion all adds up to $175 billion in annual assistance to the housing sector BEFORE the Fannie-Freddie bailout. This is in July.

McCain had taken a strong reform position then. He said Fannie and Freddie employees manipulated financial reports to line the pockets of senior executives. He called the GSEs a danger to financial markets. He was absolutely right. His adviser, Steve Forbes, wanted to break up Fannie and Freddie into 10 or 12 companies, completely severing their ties to government. Which sounds good to me, but I am no economist. I have to trust the economists who I have found to usually be correct.

I don’t know what the correct solution to the current crisis is. But Barney Frank is still insisting on more bailouts for people who took out mortgages that they could not afford. They want to add in money for ACORN, one of the most corrupt organizations in America, and continue all the regulations that got us here in the first place. Frank, Dodd, and Schumer (who caused a bank run earlier this year) should recuse themselves.

The underlying economy IS strong. This is a financial and housing problem. It affects construction and housing-related trades, and Wall Street. The deficit was on the way to be wiped out by 2015, until this stupid “stimulus plan” which did nothing for the economy (we told them so) and just increased the deficit.

Democrats play a cute little game, because they believe their supporters are ignorant. They have been saying “tax-cuts for the rich” ever since the tax cuts were proposed. Those at the top of the income pie — the top 10% — now pay over 70% of all taxes. The bottom 90% pay only about 28% of the taxes. 33% of filers had no tax liability at all. A fact that is little understood is that a large percentage of those in the top income bracket are not “the rich” but small businesses who file as individuals rather than as corporations. They are the engine that makes the economy grow, and where new jobs come from. Or have you ever been offered a job by a poor man?

We have enormous mobility in our economy. The poor in 1996 are not the same people who are the poor today. Nor are the rich the same people — of course, some are. In 2007 (the most recent figures) real median household income increased to $50,233, up $600 from 2006. Real median income for intact families — mother and father in the home — rose to $78,000, an all time high. In the 4 years after the 2003 tax cuts, tax receipts exploded by $785 billion. So again, the underlying economy is strong. The financial sector is in trouble.

McCain has been deeply involved in trying to fix this problem for many years, and in trying to protect the taxpayers and do what is best for the country. His returning to Washington to attempt to encourage a bi-partisan deal is the way he has always operated. It’s what he believes in.

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Comment by The Elephant's Child September 26, 2008 @ 1:12 pm
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