If you doubt that the big lies are sticking, look at the latest Washington Post/ABC News poll. Half of voters now believe in the daily McCain refrain that Obama will raise their taxes. In fact, Obama proposes raising taxes only on the 1.9 percent of households that make more than $250,000 a year and cutting them for nearly everyone else.
You know the press is impotent at unmasking this truthiness when the hardest-hitting interrogation McCain has yet faced on television came on “The View.” Barbara Walters and Joy Behar called him on several falsehoods, including his endlessly repeated fantasy that Palin opposed earmarks for Alaska. Behar used the word “lies” to his face. The McCains are so used to deference from “the filter” that Cindy McCain later complained that “The View” picked “our bones clean.” In our news culture, Behar, a stand-up comic by profession, looms as the new Edward R. Murrow.
Network news, with its dwindling handful of investigative reporters, has barely mentioned, let alone advanced, major new print revelations about Cindy McCain’s drug-addiction history (in The Washington Post) and the rampant cronyism and secrecy in Palin’s governance of Alaska (in last Sunday’s New York Times). At least the networks repeatedly fact-check the low-hanging fruit among the countless Palin lies, but John McCain’s past usually remains off limits.
That’s strange since the indisputable historical antecedent for our current crisis is the Lincoln Savings and Loan scandal of the go-go 1980s. When Charles Keating’s bank went belly up because of risky, unregulated investments, it wiped out its depositors’ savings and cost taxpayers more than $3 billion. More than 1,000 other S.&L. institutions capsized nationwide.
It was ugly for the McCains. He had received more than $100,000 in Keating campaign contributions, and both McCains had repeatedly hopped on Keating’s corporate jet. Cindy McCain and her beer-magnate father had invested nearly $360,000 in a Keating shopping center a year before her husband joined four senators in inappropriate meetings with regulators charged with S.&L. oversight.
After Congressional hearings, McCain was reprimanded for “poor judgment.” He had committed no crime and had not intervened to protect Keating from ruin. Yet he, like many deregulators in his party, was guilty of bankrupt policy-making before disaster struck. He was among the sponsors of a House resolution calling for the delay of regulations intended to deter risky investments just like those that brought down Lincoln and its ilk….
For all his fiery calls last week for a Wall Street crackdown, McCain opposed the very regulations that might have helped avert the current catastrophe. In 1999, he supported a law co-authored by Gramm (and ultimately signed by Bill Clinton) that revoked the New Deal reforms intended to prevent commercial banks, insurance companies and investment banks from mingling their businesses. Equally laughable is the McCain-Palin ticket’s born-again outrage over the greed of Wall Street C.E.O.’s. When McCain’s chief financial surrogate, Fiorina, was fired as Hewlett-Packard’s chief executive after a 50 percent drop in shareholders’ value and 20,000 pink slips, she took home a package worth $42 million….
The twin-pronged strategy of truculence and propaganda that sold Bush and his war could yet work for McCain. Even now his campaign has kept the “filter” from learning the very basics about his fitness to serve as president — his finances and his health. The McCain multihousehold’s multimillion-dollar mother lode is buried in Cindy McCain’s still-unreleased complete tax returns. John McCain’s full medical records, our sole index to the odds of an imminent Palin presidency, also remain locked away. The McCain campaign instead invited 20 chosen reporters to speed-read through 1,173 pages of medical history for a mere three hours on the Friday before Memorial Day weekend. No photocopying was permitted.
This is the same tactic of selective document release that the Bush White House used to bamboozle Congress and the press about Saddam’s nonexistent W.M.D. As truthiness repeats itself, so may history, and not as farce.
•
Ten years ago, there was a strange competition in the United States to see who could be more arrogant. Neoconservatives argued that the rest of the world should hurry up and embrace the American political way or prepare to be bombed into the democratic age. But equally smug were the neoliberal economists, who argued that the rest of the world should hurry up and embrace the so-called Washington consensus of expanding trade, attacking inflation and encouraging foreign investment, or prepare to be sold short. One lot derided the political failure of the Muslim world; the other lot heaped scorn on Asian “crony capitalism,” supposedly the root cause of the 1997-98 Asian financial crisis.
The neocons got their comeuppance in Iraq, where American forces were not, after all, ultimately embraced as liberators. The neolibs got theirs this month, as a Republican Treasury Department, headed by the former CEO of Goldman Sachs, effectively nationalized first the country’s biggest mortgage lenders and then its biggest insurance company. As the presidential candidates, in rare unison, heap opprobrium on Wall Street gamblers and slumbering regulators, the stage seems set for the demise of “market fundamentalism,” in George Soros’s phrase….
We are living through the end of a phenomenon that Moritz Schularick of Berlin’s Free University and I christened “Chimerica.” In this view, the most important thing to understand about the world economy over the past 10 years has been the relationship between China and America. If you think of it as one economy called Chimerica, that relationship accounts for around 13 percent of the world’s land surface, a quarter of its population, about a third of its gross domestic product and somewhere more than half of global economic growth in the past six years.
For a time, this symbiotic relationship seemed almost perfect: One half did the saving, and the other half did the spending. Comparing net national savings as a proportion of gross national income, U.S. savings declined from more than 5 percent in the mid-1990s to virtually zero by 2005, while Chinese savings surged from less than 30 percent to nearly 45 percent in the same time frame. This divergence in savings allowed a tremendous explosion of debt in the United States, because the Asian “savings glut” made it much cheaper for households to borrow money. Meanwhile, cheap Chinese labor helped hold down inflation.
Needless to say, it was not just the United States that was borrowing, and it was not just the Chinese who were lending. All over the English-speaking world, as well as in countries such as Spain, household indebtedness increased, and conventional forms of saving were abandoned in favor of leveraged plays on real estate markets. Meanwhile, not only China but other Asian economies adopted currency pegs and accumulated international reserves, thereby financing Western current-account deficits, as well as keeping their exports affordable. Energy exporters in the Middle East and elsewhere also found themselves running surpluses and recycling petrodollars to the Anglosphere and its satellites. But Chimerica was the real engine of the world economy.
As this tremendous expansion in borrowing — and lending — was taking place, some economists tried to rationalize what was going on. Some argued that this was “Bretton Woods II,” a system of international exchange-rate management akin to the one that linked Western Europe to the United States after World War II. Others called it a “stable disequilibrium” that could be counted on to continue for some time. But then a wave of defaults in the subprime-mortgage market revealed just how unstable Chimerica was.
In essence, the rest of the world’s savings had helped inflate a real estate bubble in the United States. Easy money was (as is nearly always the case in asset bubbles) accompanied by lax lending standards and downright fraud. Euphoria eventually gave way to distress and then to panic. The trouble began in the subprime market because it was there that defaults were most likely to happen. But it soon became clear that the entire U.S. property market was going to be affected. Not since the Great Depression have we seen house prices declining at annual rates of more than 10 percent.
This has had three distinct consequences. First, it has exposed the weaker banks (particularly the investment banks, which cannot fall back on the cushion of savers’ deposits) to savage and self-perpetuating share-price declines. Second, the failure of financial firms has triggered a further crisis in the vast but opaque market for derivatives — especially credit-default swaps. Third and most important, the contraction of bank balance sheets almost certainly condemns the rest of the U.S. economy to a recession. Main Street is only now beginning to feel the pain that will be caused by Wall Street’s credit crunch.
•
Looking for someone to blame for the shambles in U.S. financial markets? As someone who owns both an investment bank and commercial banks, and also runs a hedge fund, I have sat front and center and watched as this mess unfolded. And in my view, there’s no need to look beyond Wall Street — and the halls of power in Washington. The former has created the nightmare by chasing obscene profits, and the latter have allowed it to spread by not practicing the oversight that is the federal government’s responsibility.
I find it hard to stomach the fact that investment banks that caused this financial crisis immediately ran to the government asking for assistance, which Bear Stearns received and Lehman Brothers, thankfully, did not. This is one of many eerie parallels that the current meltdown bears to the Great Depression, when Washington and the taxpayers had to step up and take unprecedented action to stabilize the financial markets and the economy. Unfortunately, the government today has already put enormous taxpayer resources at risk — bailing out investment firm Bear Stearns, mortgage giants Fannie Mae and Freddie Mac and insurer AIG, and proposing to buy risky assets from the banking system — to stop the economy from plummeting into another depression. But these events only underscore the toxic relationship between Washington and Wall Street that has brought us to this point….
It wasn’t uncommon for Wall Street firms to invest tens of millions of dollars in “anything.com” before taking it public, charge a multimillion-dollar fee for the public offering and then watch their investment multiply within a matter of months.
Main Street investors, meanwhile, did not realize that the investment banks had essentially thrown away their underwriting guidelines, which had been in place since the Depression, to take companies public. Among these guidelines were rules requiring that a company be in business for more than five years, be profitable for two or three consecutive years and have certain levels of revenue and profitability. The business models of many of the companies that went public simply weren’t viable. Once the Internet bubble burst and the dust settled, America’s corporate landscape was littered with bankruptcies and mass layoffs, and investor losses have been estimated at more than $1 trillion.
In an effort to offset the economic strain from these losses, the Fed once again rapidly increased the money supply and slashed short-term interest rates to 1 percent — a level that hadn’t been seen in more than 45 years. This enormous monetary stimulus (along with significant federal spending) energized the overall economy, but it also led to the greatest housing boom — and possible bust — this country has ever encountered. From 2002 to 2006, housing values appreciated at an astounding rate of 16 percent per year. It became impossible for the typical American family to buy an average-priced house using a conventional 30-year fixed-rate mortgage. Wall Street found another perfect opportunity to propel and take advantage of another forming bubble.
The result was the explosion of toxic new mortgage products that enticed homebuyers into supporting escalating housing prices while eliminating the need for the traditional 20 percent down payment. Whether it was interest-only loans, low- or no-doc “liar loans,” or piggyback home-equity loans, the mortgage and banking industries found a way to place almost anyone with — or even without — a credit score into a home. Wall Street played its part by packaging those mortgages into complex financial products and selling them to other investors, many of whom had no idea of what they were buying or the associated risks.
Once again, the investment banks raked in billions of dollars in fees, giving them incentive to keep lowering underwriting standards, allowing mortgage companies to originate and sell even the most unscrupulous home loans, which Wall Street then dumped onto the investment community. Wall Street never once questioned the ethics of these activities; it too was focused on the enormous rewards that allowed its firms to pay out an unfathomable $62 billion in bonuses in 2006 alone. Without Wall Street, the housing bubble would have ended shortly after the Fed started to raise interest rates in 2004, because no lenders would have originated these toxic mortgages if they had to keep the loans on their own balance sheets.
The price of all this greed? Sadly, because of the actions of the investment banks, the mortgage industry and the rating agencies, the investment community has now incurred an estimated $1 trillion and more in losses. Even more troubling, housing prices have dropped 20 percent from their July 2006 highs, with the very real likelihood that housing could contract another 15 to 20 percent — essentially wiping out more than $4 trillion in housing values. This would be the biggest hit since the Depression to Americans’ most important asset.
What is even more remarkable is that at the same time, firms such as Goldman Sachs and Lehman not only made billions of dollars packaging and selling these toxic loans, they also wagered with their own capital that the values of these investments would decline, further raising their profits. If any other industries engaged in such knowingly unscrupulous activities, there would be an immediate federal investigation.
Why is Washington so complicit in this intricate and lucrative affair? First, the Fed laid the groundwork for both these asset bubbles by lowering interest rates to historic lows. In an attempt to protect his legacy after the Internet-bubble collapse, Greenspan provided unprecedented stimulus to re-inflate the economy and maintain his popularity with Wall Street. (Remember the “Greenspan put”?) But in doing so, he spawned the largest debt and asset bubble in U.S. history.
At the same time, federal regulatory agencies such as the SEC stood idly by as Wall Street took advantage of the investment public during both the Internet and the housing bubbles. The SEC took almost no action against Wall Street after the dot-com implosion. And in the midst of the housing bubble, in 2006, only the Office of the Comptroller of the Currency pushed for any level of regulation to address subprime lending.
•
What does all of this mean? Well, according to the Deputy Assistant Treasury Secretary for Economic Policy under Bush I, it means the board has been wiped clean and the presidential candidates have to start all over, all their promises having been overridden by this economic catastrophe.
Yeah, they’d like us to think that. They’d like us to believe it will take long, complicated investigations to affix blame. In all regards they’d like us to think like they’re thinking we should think because when the facts all abandon you, all you have left is wishful thinking.
Sebastian Mallaby sees things a bit differently.
With truly extraordinary speed, opinion has swung behind the radical idea that the government should commit hundreds of billions in taxpayer money to purchasing dud loans from banks that aren’t actually insolvent. As recently as a week ago, no public official had even mentioned this option. Now the Treasury, the Fed and congressional leaders are promising its enactment within days. The scheme has gone from invisibility to inevitability in the blink of an eye. This is extremely dangerous.
The plan is being marketed under false pretenses. Supporters have invoked the shining success of the Resolution Trust Corporation as justification and precedent. But the RTC, which was created in 1989 to clean up the wreckage of the savings-and-loan crisis, bears little resemblance to what is being contemplated now. The RTC collected and eventually sold off loans made by thrifts that had gone bust. The administration proposes to buy up bad loans before the lenders go bust. This difference raises several questions.
The first is whether the bailout is necessary. In 1989, there was no choice. The federal government insured the thrifts, so when they failed, the feds were left holding their loans; the RTC’s job was simply to get rid of them. But in buying bad loans before banks fail, the Bush administration would be signing up for a financial war of choice. It would spend billions of dollars on the theory that preemption will avert the mass destruction of banks. There are cheaper ways to stabilize the system.
In the 1980s, the government did not need a strategy to decide which bad loans to take over; it dealt with anything that fell into its lap as a result of a thrift bankruptcy. But under the current proposal, the government would go out and shop for bad loans. These come in all shapes and sizes, so the government would have to judge what type of loans it wants. They are illiquid, so it’s hard to know how to value them. Bad loans are weighing down the financial system precisely because private-sector experts can’t determine their worth. The government would have no better handle on the problem….
Within hours of the Treasury announcement Friday, economists had proposed preferable alternatives. Their core insight is that it is better to boost the banking system by increasing its capital than by reducing its loans. Given a fatter capital cushion, banks would have time to dispose of the bad loans in an orderly fashion. Taxpayers would be spared the experience of wandering into a bad-loan bazaar and being ripped off by every merchant.
Raghuram Rajan and Luigi Zingales of the University of Chicago suggest ways to force the banks to raise capital without tapping the taxpayers. First, the government should tell banks to cancel all dividend payments. Banks don’t do that on their own because it would signal weakness; if everyone knows the dividend has been canceled because of a government rule, the signaling issue would be removed. Second, the government should tell all healthy banks to issue new equity. Again, banks resist doing this because they don’t want to signal weakness and they don’t want to dilute existing shareholders. A government order could cut through these obstacles.
Meanwhile, Charles Calomiris of Columbia University and Douglas Elmendorf of the Brookings Institution have offered versions of another idea. The government should help not by buying banks’ bad loans but by buying equity stakes in the banks themselves. Whereas it’s horribly complicated to value bad loans, banks have share prices you can look up in seconds, so government could inject capital into banks quickly and at a fair level. The share prices of banks that recovered would rise, compensating taxpayers for losses on their stakes in the banks that eventually went under.
Congress and the administration may not like the sound of these ideas. Taking bad loans off the shoulders of the banks seems like a merciful rescue; ordering banks to raise capital or buying equity stakes in them sounds like big-government meddling. But we are in the midst of a crisis, and it shouldn’t matter how things sound. The Treasury plan outlined on Friday involves vast risks to taxpayers, huge complexity and no guarantee of success. There are better ways forward.
Obama could assert some real leadership here. The question is, will Bob Ruben let him? The media, given half a chance, will insist that assigning blame is complicated even as major newspaper editorials point their fingers squarely at Wall Street.
They say this bailout is necessary, but what’s wrong with taking equity in exchange for the bailout? Here’s what bloggers and politicians are saying:
Thers: NO BLANK CHECKS
Atrios: “Obviously the administration proposal, whatever the need for some sort of government intervention, is basically insane and no lawmakers should support it.”
Bernie Sanders: “The people who can best afford to pay and the people who have benefited most from Bush’s economic policies are the people who should provide the funds for the bailout. It would be immoral to ask the middle class, the people whose standard of living has declined under Bush, to pay for this bailout while the rich, once again, avoid their responsibilities. Further, if the government is going to save companies from bankruptcy, the taxpayers of this country should be rewarded for assuming the risk by sharing in the gains that result from this government bailout.”
Dean Baker: “[H]ow will paying market price for near worthless assets prevent the collapse of zombie institutions like Bear Stearns, Lehman Brothers and AIG?”
Kevin Drum: “The purpose of the bailout, then, isn’t to recapitalize the banks, it’s to put a firm value on the toxic sludge once and for all.”
Robert Reich: “[W]atch your wallets.”
Digby expects the worst from Congress
Devilstower reminds us of the Garn-St. Germain Depository Institutions Act
Josh Marshall: “[I]f I’m understanding this deal, the taxpayers are going to pony up close to a trillion dollars to take bad debts off the hands of financial institutions who were foolish enough to make the deals in the first place. And in exchange, I think the tax payers get nothing?”
•
Meanwhile, in Dayton, 51,000 are still without a power a week after the storm Ike sent their way. Even the cable tv company has done a better job of repairing lines than DP&L. Buddy Vick continues to chronicle life among the powerless….
Wow. Seven days without electricity? That totally shatters my old record of three days without in the wake of an ice storm that downed power lines in central Iowa. Seven days? Dayton Power & Light must be the worst power company ever.
•
Franken fundraising at Daily Kos.
•
It took a while, but payback for the unadulterated shitstorm over the Rev. Jeremiah Wright is at hand, and Mrs. Robinson is conducting the retributional tutorial. If you don’t know about Joel’s Army, you need to click that link.
Sarah Palin is part of something way scarier than her problems with her oxycontin-addicted latchkey kids, or even this new campaign poster.
•
As part of his valiant ongoing war against unwanted Yellow Pages books, Ed Kohler finds a chart that explains how the Yellow Pages industry is doing lately:
If you hate the Yellow Pages, you’ll love this post.
•
WINston SmITh on voter suppression in Wisconsin (courtesy of their nutjob wingnut Attorney General).
Democrats work hard to get as many people to vote as possible. We think high turnouts are a good thing, and represent the vitality of a democracy.
Republicans work to discourage people from voting, and would like to see low turnout.
Who believes in democracy, and who’s just in it for the power trip?
1 Comment(s)
Comments RSS TrackBack Identifier URI
Leave a comment
[...] engaging and enjoyable and the ideas and interaction is quick. It’s as I once discussed with Robert Reich (briefly in 2004, and it was the thesis of his book after all), but that America’s strength in [...]