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.
Thank goodness the rescue package failed. Let us hope it keeps failing until it gets to the top and bottom ends of the problem rather than taking the expedient, and expensive, route of pouring good money after bad.
The current crisis has two causes: the common people (you) being unable to afford your mortgages and the rich people being too greedy, as a result the banks are running out of money.
Before getting to a solution lets kill a myth – there’s a lot of fretting about house prices and share prices. House prices are irrelevant, unless you’re selling or buying. Even then it only matters to the extent that you need to be able to afford your mortgage repayments. If you brought at house at $250k, have a $200k mortgage and today your house is worth only $175k it doesn’t matter so long as you can afford the mortgage because at some point house prices will pick-up. Similarly with share prices it only matters if you’re selling, no doubt if you know what you are doing you can pick-up some bargains, otherwise if sit tight until the market recovers. For many firms their share price currently has no relation to the strength of the company because at the moment prices are being driven by panic rather than a rational assessment of corporate vitality.
So, what’s the solution?
(i) The Government pays off a portion of everyone’s mortgage subject to an upper limit on the total mortgage and the mortgage companies reschedule every mortgage so that the remaining balance becomes the new mortgage value with repayments assessed against this.
The benefit of this approach is that it reduces the stress on the typical family by reducing mortgage payments whilst putting money into the banks to keep them solvent. It will also reduce negative equity (i.e. the difference between house value and mortgage). With reduced mortgage payments many people will find themselves with slightly increased cash in the pocket, which they will inevitably spend thus stimulating the economy. The great advantage of spending by the average people like you and I is that it goes on goods and services that in turn keep other people employed rather than clever investments favoured by the rich that keep few employed and have caused this crisis in the first place. The upper limit on mortgages (which may have to be State by State) ensures that the common people benefit and not the rich in their luxury homes, plus there should be a restriction of one mortgage per family to rule out investment property.
(ii) Impose new rules for financial dealings starting with a complete ban on short-trading that relies upon share prices falling so that someone can make a profit and place restrictions on hedge funds to reduce speculation. Follow this up with restrictions on loans so that people are not lured into debt and make sure that if a bank has to repossess your home that’s it your debt is paid. And, throw in some rules on salaries and bonuses for directors and key staff so that their rewards are based upon long-term gains.
There are some principles at stake here that this proposal seeks to address. Firstly, profits should only come from adding value not reducing it, therefore short-trading cannot be allowed and serves no beneficial purpose in the real economy. Secondly, if a company makes a loan it should accept the risk that the loan may not be paid back, this principle will make loan companies take more care in assessing who they loan to and how much (with exceptions for fraud of course). Note that the proposal that banks should insure themselves is a fallacy, this will just transfer the risk not change irresponsible behaviour. Thirdly, successful companies are in business for the long-term, therefore rewards to directors and key staff should be based-upon longetivity rather than vast short-term profits.
As a final act someone should simplify the income tax system. Fewer exemptions that favour the rich, higher taxes for the rich and redistribution to the less well-off through lower taxes and/or improved Government services such as health and education will make most people feel better if not better off and stimulate the economy.
Now is the time to think outside the box and show vision (which is not the same as being the maverick the other guy wants to be) – Go Obama, be brave let’s take a different approach to the economic crisis!
