Sen. John McCain is on national television telling one lie after another to the American people, and trying to spin the massive rescue package, without which the American economy would currently be hurtling toward the abyss, and for which he voted, as a sinister attempt by Democrats to give billions to big banks. John McCain is a politician who once stood on principle and who has consciously chosen to put aside every shred of basic integrity or human dignity in order to poison the minds of voters, because basically, he doesn't understand enough about what's happening to be convincing.
He once said he isn't all that interested in the fine points of economics. That would appear to be true, because he seems to have no knowledge at all of what Fannie Mae and Freddie Mac do in our economy. He alleges they are somehow responsible for promoting predatory lending and for tricking people into buying homes they can't afford. The fact is, since the Great Depression, we have had policies designed to help most working Americans find shelter and ideally, own a home.
Mass homelessness is a scourge on all of society, and unsustainable rent-levels are a drain on working people, sometimes forcing families into poverty. Home equity is a key to many aspects of our economic landscape, without which tens of millions of people would be marginalized, locked out and ultimately a drag on our economic output. Fannie Mae and Freddie Mac exist to help facilitate the long-term viability of home-loans. They do not lend directly, but help support the viability of loans given out by commercial banks.
The predatory lending practices and the irresponsible credit derivatives and potentially fraudulent financially unsupported "credit default swaps" that have brought this massive crisis to our nation, were the province of commercial financial institutions which were unwilling to make viable loans to those less able to pay, and which sought to extract usury-level rates of interest from those least able to pay them, for their own profit and with no mind whatsoever to the long-term health of those accounts or of the market generally.
Fannie Mae and Freddie Mac, with tacit government support, accelerated the pace of their buying up of problem loans, not in order to stimulate irresponsible lending, but in order to prevent or buy planning time for the looming credit crisis. As early as the summer of 2005, The Economist magazine warned that a global real estate collapse was coming, that would affect all industrialized nations, except perhaps those like Japan which had been struggling with the problem for more than a decade already by that point.
When Sen. Obama wrote to Treasury Secretary Paulson, warning of the problem of subprime mortgages and the potential catastrophic fallout from predatory lending practices —a problem he was working to tackle as early as 2001, in the bipartisan Illinois effort to counter predatory lending—, his effort was aimed at the real problem: the viability of credit derivatives that were being misused to prop up institutions whose portfolios were being poisoned by toxic inviable mortage-backed securities.
When Sen. McCain joined with other Republicans in attacking Fannie Mae, the concern was strictly ideological, and the move itself demonstrated a total misunderstanding of financial markets. The Republicans who fought to reduce the size of Fannie Mae wanted to do two things: 1) to force the assets of government-chartered firms like Fannie and Freddie onto the open market, at bargain prices; 2) to make it more difficult for individuals to leverage their buying power against major financial institutions.
The reasons? The move to force Fannie and Freddie to reduce their mortgage holdings was not an effort to shore up the economy, it was an effort to ignore the problem and avoid regulation of the financial sector. They wanted to help prop up private investment banks and financial institutions by allowing them to get cheap buys on mortgage-backed financial instruments, then count these as assets at market value, essentially, a veiled public buyout of private debt. Cover the financial institutions' rotting portfolio foundations with what look like suddenly rosy numbers.
The problem? Fannie and Freddie were already playing that role. That's what they do. They intervene in home-loan markets to help maximize the viability of loans to consumers, who are not as stabilized against sudden hardship as major financial institutions are. Fannie Mae's website clearly explains:
Fannie Mae is a government-sponsored enterprise (GSE) chartered by Congress with a mission to provide liquidity and stability to the U.S. housing and mortgage markets. Fannie Mae operates in the U.S. secondary mortgage market. Rather than making home loans directly with consumers, we work with mortgage bankers, brokers, and other primary mortgage market partners to help ensure they have funds to lend to home buyers at affordable rates.
Fannie Mae is a government-sponsored enterprise (GSE) chartered by Congress with a mission to provide liquidity and stability to the U.S. housing and mortgage markets.
Fannie Mae operates in the U.S. secondary mortgage market. Rather than making home loans directly with consumers, we work with mortgage bankers, brokers, and other primary mortgage market partners to help ensure they have funds to lend to home buyers at affordable rates.
Originally chartered by the US government in 1938:
The impetus for creation of Fannie Mae was twofold: the national commitment to housing and the inability or unwillingness of private lenders to ensure a reliable supply of mortgage credit throughout the country.
So, the misuse of that economic lever is the fault of the financial sector itself. Real decisions were made that distorted the nature of affordable-rate home loans, attempting to bend them by force into some sort of massively profitable adjustable-rate mortgages, which were designed to be misleading and which were sold over and over again, real estate flipping-style, in a kind of pyramid scheme where the last entity to hold the loan would eventually lose out.
The move to make it more difficult for individuals to leverage their buying power against major financial institutions (which could force down commercial interest rates), was part of a concerted effort by Congressional Republicans to reform credit and bankruptcy laws to shift bargaining power to big banks. Why? Because they needed help with their decaying solvency. The 2005 bankruptcy bill made it more difficult for individuals to escape debt repayment by declaring bankruptcy, but easier for major firms or even banks to do so.
The only possible reason for doing this was to help banks cover up the fact that they had inviable loans on their books. By now allowing individuals to escape repayment, in some cases even after losing their homes, the banks were able to continue counting those future repayments of failed loans as "assets", which were increasingly bundled together and resold as credible "financial instruments", when in fact they were essentially junk bonds in sheeps' clothing.
Sen. McCain's attack on Fannie and Freddie misplaces blame for this crisis in order to craft an entirely alternate history, which he then intends to use to blame Sen. Obama for a crisis that Sen. McCain actively worked to worsen, either from disinterest, confusion or worse. At the very least, it is clear that Sen. McCain's ranting on the subject bears virtually no connection to reality, and this is what we need people to understand.
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