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Capitalists created Wall Street mess
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Also by Paul Pryse:
- Capitalists created Wall Street mess (September 24, 2008)
- Marxism to break country's chains (September 10, 2008)
- 4,000 dead but Bush apathetic (March 28, 2008)
- Mr. Obama, you are not Dr. King (January 21, 2008)
- Chavez proves critics, U.S. media wrong (December 13, 2007)
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It is a bit shocking to watch the Masters of the Universe become overwhelmed by their own system. Last week, to prevent an economic catastrophe, the Federal Reserve paid $85 billion for effective ownership of AIG. House Majority Leader Harry Reid defended Congress going on recess during a financial meltdown because “no one knows what to do.” Once again, the system is out of control, and all the painfully predictable jokes about “Wall Street socialism” will not be the worst of it.
Congress is preparing to pass a law allowing Treasury Secretary Henry Paulson to spend $700 billion to buy off banks’ rotten debt. The bailout is quite ironic coming from the U.S. government, which for years has preached self-reliance to the poor. Apparently, giving unemployed workers a handout is rewarding bad behavior, but propping up the yahoos who crashed the economy is not. Truly, the rich are different than you and me.
Although the banks are getting help, the credit crunch means that a recession is still to come. The question is who will pay for it. The Wall Street Journal is already praising the capitalists’ “impressive resilience,” noting “to the discomfort of workers — companies are quicker to adjust wages, hiring and work hours when the economy softens.” In English, that means companies are going to stick it to their workers.
There is another way to pay for the crisis. The Pentagon is spending $2 billion a week to pulverize Iraq. Stopping the war and slashing military spending would free up the money necessary to bail out homeowners who have defaulted on their mortgages. As for the banks, if they are ultimately backed by our taxes, there is no reason why they should not be publicly owned.
Sadly, neither political party would ever consider this option. The Democrats have made some noise about protecting “Main Street Americans” (heaven forbid a Democrat ever utter the words “working class”). If history is any guide, all this talk will mostly amount to election season posturing. To save our futures, we are going to need our own program for solving this crisis. Here’s a start: Stop the war. Tax the rich.
To understand how we got to this point, we have to see this crisis in the context of neoliberalism. For 30 years, the capitalist class has waged an economic attack on the working class. Deregulation, privatization and falling wages have been the hallmarks of the neoliberal era. Since 1973, the U.S. economy nearly tripled in size, but real wages fell. In other words, free-market policies created massive wealth but the working class did not see a dime.
One of the most fateful deregulation measures was the Gramm-Leach-Bliley Financial Services Modernization Act, signed by Bill Clinton, which unleashed the growth of the “shadow banking system.” One of the law’s architects is former Sen. Phil Gramm, erstwhile top economic advisor to the McCain campaign who resigned after calling America “a nation of whiners” and blaming the crisis he helped create on a “mental recession”. Former Treasury Secretary and current Obama advisor Robert Rubin lobbied for the law. This legislation allowed commercial banks to sell people’s mortgages to investment banks, which turned the debt into bonds and sold them to investors.
In the neoliberal era, one safeguard workers had against losing their standard of living was the rising value of their homes. Workers could refinance their mortgages at lower interest rates and use the savings to buy a car, a college education or health insurance. This is what conservative pundits mean when they refer to “Americans’ irresponsible borrowing.” It’s working Americans trying to stay out of poverty.
Low interest rates kept housing prices up until summer of 2006. When prices began falling, people who had taken out loans with the expectation of selling their house for a higher price were now stuck with insurmountable debt. The extent of the bad debt in the shadow bank system means that bonds thought to be worth trillions are worth much less. Moreover, now that home prices are falling, workers are cut off from a key supplement to their incomes, one that provided $800 billion a year to the working class from 2004 to mid-2007. The coming recession will squeeze a working class already suffering from 30 years of capitalist attack.
If your head is spinning from the absurdity of the situation, you’re not alone. What kind of system goes into crisis from building too many houses, when there are over a million homeless children in this country? What kind of system forces austerity on the working class but rewards traders for shuffling money around? What kind of system has billions for war and pennies for health care? Most importantly, is it any kind of system we want to live in?
Paul Pryse is a member of the UW-Madison branch of the International Socialist Organization.
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All this mess was created by the Community Reinvestment Act which forced banks to give risky loans to people just because they are minorities. If banks weren’t forced to give high risk loans to people, Fannie Mae and Freddie Mack would not be in the hole they are right now, and the American people wouldn’t have to pay the bill.
SOCIALISM SUCKS.
I wonder if a little more regulation would have been a way to prevent this?
America, it’s time to wake up, the Republican party produces horrible executives. The last 5: corrupt, clumsy, senile, weak, and dumb.
You make a lot of valid points, Paul, but it’s going to take much more than just a resounding “NO!” to Paulson’s bailout plan. We taxpayers didn’t create that mess. Why should we be the ones to clean it up? Isn’t the federal government too far into debt already?
I think it’s time we pulled the plug on Uncle Sam once and for all. Next filing season we should start paying our federal taxes to our home states. We can keep our own wheels turning at home while those morons in Washington fend for themselves. All politicians of every stripe need to be put on notice-no exceptions. We’re tired of the same BS every time.
We’re so brave and courageous when it’s time to pummel another country, but when our own government is the enemy we get scared and do nothing. They’re just a bunch of preppy frat boys. Stop being afraid of them! If we don’t do anything about the jerks that got us into one mess after another then we’ll deserve whatever happens.
In 1977 President Jimmy Carter signed the Community Redevelopment Act (or CRA) into law. As a result of “national grassroots pressure for affordable housing”, it forced banks to underwrite risky mortgage loans in order to meet the needs of “the entire community.”
In 1995 the Clinton administration strengthened the regulations of the Community Redevelopment Act. The CRA enabled consumers to secure mortgages with “no verification of income or assets; little consideration of the applicant’s ability to make payments; [and] no down payment.” As the mortgage industry grew, Fannie Mae and Freddie Mac (government-sponsored entities, or GSEs) became a kind of “jobs program for out-of-work Democrats”.
Clinton administration friends and staffers managed the GSEs including Franklin Raines, Jim Johnson, Jamie Gorelick and Rahm Emmanual. This small group of executives paid themselves nearly $200 million in only six years’ time.
The Democratic executives kept journalists and Republicans at bay by spending “close to $150 million on lobbying” in ten years.
Chris Dodd (head of the Senate Banking Committee), Barack Obama and John Kerry were the top three recipients of Fannie’s money, together collecting around $360,000.
Can America really afford another Clinton or Carter presidency?
I have to ask, did you learn your twisted economic ideas at this college, or where you all screwed up before you got there?
I ask because my daughter will begin looking at colleges next year, and if this is what passes for education at this school, this one isn’t even going to make it onto the “well, maybe as a last resort” list.
“We taxpayers didn’t create that mess.”
Not so fast. The sub-prime mortgages were paying for someone’s house, right?
Granted, banks should have been more restrictive on approving ridiculous loan requests, but keeping up with the Jones has finally blown up in our face. Stay away from credit, kids.
Don’t feel like registering, but i am not going to call you out anonymously.
William Merrick.
SOCIALISM CAUSED THIS YOU COMMIE IDIOT.
The financial structure of the US is NOT based on free markets you dumbass.
WE HAVE FRACTIONAL RESERVE (legal embezzlement)
WE HAVE A CENTRAL BANK (legal counterfeiter)
THESE ARE INSTRUMENTS OF A CENTRAL GOVERNMENT NOT A FREE MARKET DUH!
If the central bank had not artificially lowered the interest rate, initiating a boom bust cycle due to malinvestment, then this mess would not have happened in the first place. “What is malinvestment?” you ask? Well, your econ 101 class probably didn’t tell you because the Commie big government loving shills that wrote the book don’t want to have a debate over the fact that Keynesian economics is FLAWED. WE ARE TAUGHT FALSE CONCEPTS.
I have to go to class soon, so i will be brief.
Do you even know WHAT capitalism IS????
Think for a second…
Areas of the market where there is little to no governemt involvement (computing, cell phones, most things you find at Best Buy) the prices have gone DOWN
Areas where you’re mother government is involved (Health care, College, Energy, etc.) PRICES HAVE GONE UP
Capitalism has brought you everything good in your life from the food you eat to the car you drive to the cell phone and computer you use to spread commie propaganda.
Government services that help people come from their voluntary community (roads, schools, etc.) NOT a central authority.
Go to Mises.org to learn more
out
It’s the Tax Eaters against the Tax Payers and you can see who’s winning.
Do you really think you can convince anybody that “Capitalism” is the reason that people got loans that no sane person could ever expect them to pay back?
Great article. As to how capitalism created the mortgage crisis, it’s rather simple. Under capitalism, different firms compete with each other for investment. Firms like countrywide found they could attract massive investment by offering sub-prime mortgages, and then selling them as securities. From their point of view, it was a completely rational way to increase their companies’ bottom line - the only responsibility a firm has under capitalism.
For me the ironic thing about this crisis is that it shows the “tragedy of the commons” doesn’t prove the impossibility of socialism, but rather of stable capitalism.
Paul,
You got this all wrong. I am a liberal but I can see that hands-on government has created a problem that a free market never would have let happen. By incentivizing property ownership as opposed to renting through our tax system we have created an incentive for people to obtain mortgages that they cannot pay back.
The fault lies in that system and in the irresponsible “Main Street” Americans who were too idiotic to realize that they would never be able to pay back loans they took out on their houses. The American people blindly assumed that housing prices would continue to skyrocket which in turn would allow them to pay off astronomical mortgages. Well, the housing market leveled off and then plummeted, leaving irresponsible people with unpaid mortgages. These people in turn left their keys in the mailbox and left the banks (and now our government) with a huge problem.
Granted the banks hold a large responsibility for giving out too many mortgages, the government by incentivizing this and the American people for being irresponsible are at fault too.
10:35, I was waiting for the b-b-but Clinton arguement. Ha! you’re guy’s still batting .1000, congratulations on a brilliant presidency. (Damn, those economic cycles, though)
10:35, Does Keating Five ring a bell? I wonder if an S&L scandal has any sort of link to today’s situation? Any presidential hopeful who had a hand in a previous “crisis”?
11:52, what about us renters? Are we to blame? Ha! Didn’t think so.
The CRA? Really? So something passed in 1977 caused an economic crisis 31 years later, that no one predicted or assumed was going to happen then or half way through? Yeaaah have a hard time believing that the Wall Street Journal or the National Review NEVER commented on this even once in that time frame. Numerous economists have pointed out the odd fact that most of the defaults have been in upper middle class and upper class communities where the homes have higher value, and not in poorer communities where the values are lower…
It’s not hard to see why, when President Bush sought to counter Fannie and Freddie’s government created incentives for recklessness, he was fought by Democrats at every turn. According to the White House, 17 attempts at reform were blocked by democrats. Government’s inability, thanks to Democratic cronyism, to replace the market checks which it destroyed by demanding reckless behavior on the one hand, and subsidizing risk with an implied guarantee on the other, provided the perfect financial storm for disaster.
One would think it would be difficult for those on the left to so easily absolve themselves of any responsibility, while simultaneously blaming those who attempted to stop them from creating this disaster, but that is exactly what they’ve done. Phil Gramm, who sought to relax the Democratic created requirements that banks issue risky subprime loans, has been tagged a “deregulator,” which is, in their view, automatic proof of guilt. Barack Obama blames the problem, as he does everything, on “Bush-McCain,” even as he found room in his campaign for those actually responsible and belongs to a party which protected Fannie and Freddie from reform. In short, the left is trying to rewrite history even as it’s being made. The ink hasn’t yet dried on the reporting of their government sponsored mess, and already they are blaming those who believe in freedom and oppose their interventionist programs. They think the failures of government should justify yet more government. They are wrong and their lies shouldn’t be allowed to disguise this fact.
idiotarian sneered: “hard time believing that the Wall Street Journal or the National Review NEVER commented on this even once in that time frame.”
How about Financial Times?
Financial Times (UK) July 1, 2003 Tuesday “Mortgage giants Fannie and Freddie look likely to escape deepest of reforms: The two have cultivated powerful friends on Capitol Hill”
When Freddie Mac, the US mortgage giant, was hitby an accounting scandal and a management shake-up last month, Richard Baker saw a great opportunity. The Republican congressan from Louisiana has, for a decade, campaigned for greater transparency, stricter regulation and an end to special government-chartered privileges for Freddie Mac and Fannie Mae, its “sister” institution.
Mr Baker, who heads the House of Representatives financial services subcommittee that directly oversees the government sponsored enterprises, or GSEs, even told the FT at the time that “any of a number” of House and Senate Democrats had offered supportive comments. “I haven’t had anyone say to me that we shouldn’t do anything,” he said, adding that he would take full advantage of the “window of op-portunity” that had been created.
But when Mr Baker introduced a bill last week to strengthen regulation, not one Democrat was named among its 20 co-sponsors. And at a recent subcommittee hearing, several Democratic members expressed strong reservations about any new legislation.
In anticipation of the difficulties of passing root-and-branch reform, Mr Baker has lowered his sights substantially. He and other free-market conservatives in the past advocated revoking the GSEs’ government charters, cutting off their lines of credit to the Treasury and ending their exemptions from financial disclosure.
But in this bill, his goal is to strengthen the mortgage regulator, to turn it into something Congress could go back to for more authoritative advice and more competent action. That falls far short of what some free-market conservatives want - and even under the most favourable circumstances it could take years.
Freddie and Fannie have cultivated a powerful circle of friends on Capitol Hill. Freddie Mac ranked 11th last year in campaign contributions to congressional office-runners. Fannie was 39th. The top recipients of Freddie money are all Democrats who sit on the most relevant committees in the House and Senate. The executive staffs of both organisations are dotted with well connected former staffers from Congress and the Clinton and both Bush administrations.
Freddie Mac’s board of directors includes William Powers, former chairman of the New York Republican party, and David Gribbin, long-time aide to Vice-President Dick Cheney. Franklin Raines, Fannie’s chief executive, was former president Bill Clinton’s budget director.
Fannie and Freddie’s perceived government backing and special exemptions allow them to borrow funds more cheaply, to invest in or guarantee home mortgages. The results are fatter profits for the GSEs and cheaper and more readily available mortgages for homeowners. But for years, officials have worried the two may have grown too quickly and become over-leveraged risks to the financial system and the government. Their publicly held outstanding debt, which has grown at double-digit rates over the past few years, rivals that of the US Treasury.
Andy Laperriere, a public policy analyst at ISI, a New York consultancy, says the GSEs’ strongest argument in the past was: “What’s the problem? We’re well managed, everything’s fine. Obviously, recent events call that into question.”
But in spite of their latest travails, the GSEs may not be hauled over the coals by Congress. Fannie has said that it expects the Senate to block any firm proposals that emerge from the House and it is unclear how much, if any, political capital the White House is willing to put at risk. The US Treasury has only said that it is “still reviewing” Mr Baker’s bill.
The US has historically singled out home ownership as a social good that merits special support. As Robert Mitchell, former president of the National Association of Homebuilders, said in 2000: “During many administration and many Congresses, our policymakers …have determined fostering homeownership is a very positive social and economic policy.”
The big question is whether the current arrangement is the best and safest way of providing it. There is more doubt now about this, but as a general rule, congressmen usually do not bite the hand that feeds them - and American democracy has a habit of putting off tough decisions.