Let’s start by recognizing what the $700 billion bailout of the financial system is and is not. As advertised, it’s an emergency package calculated to stem economic panic and uncertainty, but not on Main Street. Rather, the administration and Congress are intent on reassuring Wall Street and “the market,” the very forces that got us into the current mess. Most especially, they’re focused on calming big institutional investors, here and abroad, the people who acquired the debt of our hemorrhaging financial sector.
Subprime mortgagees can be sacrificed, and they are by the hundreds of thousands—no multi-billion-dollar bailout for them - - but those who purchased and marketed their mortgages in the form of securitized debts must be saved at all costs. Their wavering confidence in free-market capitalism must be restored and their worthless paper bought up by the US Treasury, so that business as usual, leading to trickle-down prosperity, can once again flourish. That, at least, is the theory. Of course, the wealth never did trickle down, even in the best of times, and there’s no guarantee that Uncle Sam’s $700 billion bribe will cause the money changers to reopen the temple and loosen the credit strings.
Nevertheless, Washington is determined to try, because failing to do so would cause stocks to continue their downward slide, imperiling (most importantly) the profits of the investor class, and threatening (secondarily) the value of the 401(k)s and other retirement vehicles that millions of Americans have been forced into by the termination of defined-benefit pensions. Those fortunate enough not to be in the stock market in any manner, shape, or form remain relatively insulated from the gyrations of Wall Street unless their jobs are indirectly affected, but their tax dollars will still go towards the bailout. Furthermore, the political promises made to them in the presidential campaign will be off the table; the money is already spent.
So this is where we stand after a generation-long romance with laissez-faire economics and the orgy of greed that accompanied it. The ideological deregulators and privatizers of the past 30 years have been proven false prophets. The supposed prosperity they created was an empty prosperity based on financial legerdemain; it was all about moving money around, buying and selling existing assets, or (worse) creating imaginary assets. In the process, a real economy of tangible manufacturing and production was dismantled in favor of an ethereal one built entirely on debt. Now, everyone will pay the piper.
We’d all like to assign personal blame for this state of affairs, and there are some scapegoats out there. But the truth is America arrived at this pass through dozens, perhaps hundreds, of individual decisions over recent decades in which both political parties are implicated. At least two key moments can be pinpointed along the yellow brick road to disaster. The first was in 1968, long before the conservative revolution, when the Federal National Mortgage Association, or Fannie Mae, the primary player in today’s mortgage crisis, was privatized by the Johnson administration in order to remove it from a federal budget under pressure from Vietnam War spending. Prior to that time, Fannie Mae was a standard government agency created in 1938 during the Roosevelt New Deal to expand credit in the depressed housing sector by buying up existing home mortgages and providing bank lenders with the wherewithal to issue additional ones.
Fannie Mae functioned effectively in its role as a so-called secondary mortgage market until the imperatives of privatization changed its orientation from public service to entrepreneurial risk-taking. In the high-flying 1990s, this largely unregulated GSE (government-sponsored private enterprise), not satisfied with the modest profits gleaned from financing a quarter of America’s home mortgages, set about further enriching itself by entering the debt-securities market, reselling packaged mortgages, and operating increasingly with borrowed money. By the new millennium, Fannie Mae and its alter ego Freddie Mac were heavily into subprime, adjustable-rate home loans, purchasing a half-trillion-dollars’ worth between 2003 and 2006. And when the Treasury was forced to assume their debts and nationalize them at a cost of $200 billion in September to prevent a collapse of the housing market, Fannie and its fellow GSE Freddie Mac (created in 1971 to service the savings and loan industry) were on the verge of insolvency.
That’s lesson one in the meaning of a deregulated financial market: A publicly owned home-mortgage monopoly can work, a privatized, unregulated one can’t. Lesson two is an outgrowth of the events of 1999, the second key date on the financial-disaster continuum. That was the year the Republican-inspired Gramm-Leach-Bliley Act, written by John McCain’s former economic advisor Phil (“You’re all whiners”) Gramm, lobbied for by Clinton Treasury Secretary Robert Rubin, and signed by President Clinton as a going-away present to the American people, passed into law. It repealed the Depression-era Glass-Steagall Act, which had kept commercial banks, investment banks, and insurance companies from dabbling in each others’ business; in effect, it completed the deregulation of the banking system.
One of the short-term beneficiaries (before it, too, required a September rescue by the government to prevent a catastrophic bankruptcy) was insurance giant American International Group (AIG). Although predominantly an insurer, AIG derived one-quarter of its profits from its financial-products division, essentially an investment bank that by last spring had written nearly $450 billion worth of esoteric derivatives contracts (the now-infamous credit-default swaps), much of it tied to worthless subprime securities. By August, the firm had already lost $20 billion through an activity that before the repeal of Glass-Steagall would have been completely illegal, thereby qualifying it for an $85 billion, taxpayer-funded line of credit and partial nationalization.
The desirability of the $700 billion appropriation Congress has just enacted to buy Wall Street’s toxic mortgages can be endlessly debated. On the one hand, it may indeed be necessary to avoid a general economic collapse; on the other, it obviously rewards stupid, avaricious behavior and rescues people who don’t deserve it. This much can’t be questioned, however: The $285 billion already spent on the Fannie Mae and AIG preliminaries could have been saved had the former not been privatized and the latter not been deregulated. That’s a worthwhile lesson for Americans, albeit an expensive one.
Wayne O’Leary is a writer in Orono, Maine.
From The Progressive Populist, November 15, 2008
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