Freethought San Marcos: A column
by LAMAR W. HANKINS
After spending the past year trying to understand the financial crisis, I thought there wasn’t much more important information to know. I had concluded that the deregulation of the financial industry that started under President Clinton (spearheaded by former Sen. Phil Gramm) and continued under President Bush was mostly responsible for bringing us within a hair’s breadth of a second Great Depression. While I don’t want to forget the contributions of Ronald Reagan and George H. W. Bush to the crisis, the steamroller of deregulation gained warp speed during Bill Clinton’s presidency.
The deregulation allowed the financial part of our economy to become interconnected, inbred, and incestuous to the point that there were few distinctions between the different financial institutions. They stopped providing useful services, such as lending a family money to buy a house with a reasonable down-payment and under reasonable terms. Instead, they began engaging in speculation, using mortgages as leverage to make their company more money, rather than providing a needed service. The deregulation had allowed them to do nearly anything they wanted, only to be bailed out by the taxpayers when their schemes started failing.
Then I discovered U. S. Rep. Marcy Kaptur from Toledo, Ohio, thanks to Michael Moore’s new film “Capitalism: A Love Story.” I always was amused by Moore’s films, seeing them as a bit too self-indulgent for my tastes, but crediting them with making some good points. That was until “Sicko” came out. Moore seemed to get the condition of the health insurance marketplace just right. Now, with his new film about capitalism, he has found the soft underbelly of the greed-driven corporatists and introduced America to Marcy Kaptur, someone whose name I knew, but about whom I knew little.
What I have learned from her is that not all politicians have to be feckless lapdogs of corporate America and their lobbyists. It has been a refreshing experience. Over a year ago, on September 22, 2008, when Hank Paulson and President Bush claimed to be saving the country from economic failure, Rep. Marcy Kaptur spoke up plainly and directly on the floor of the House about the scheme that was being proposed:
“Mr. Speaker, here is the latest reality game. Let’s play Wall Street Bailout.” She went on to complain of the unnecessary rush to legislate. She warned of the fear mongering that was once again being used to move the Congress and the country to spend trillions of dollars based on questionable assumptions, much as the Iraq War was sold; the warnings “that the entire global financial system will collapse and the world will fall into another Great Depression” served also to “control the media enough to ensure that the public will not notice this.”
Kaptur warned that the “bailout will indebt (the American people) for generations, taking from them trillions of dollars they earned and deserve to keep.” She complained that the entire scheme was hiding “from the public and most of the Congress just who is arranging this deal.” There was limited public communication and few “open congressional hearings.” The Congress was manipulated by the financial system’s wise men who treated “members of Congress condescendingly, telling them that the matter is so complex that they must rely on those few insiders who really do know what’s gong on.”
She further explained that one of the methods used to pass this unwarranted, self-serving bailout on behalf of the financial rulers was to “(d)ivert attention and keep people confused. Manage the news cycle so Congress and the public have no time to examine who destroyed the prudent banking system that served America so well for 60 years after the financial meltdown of the 1920s.”
Finally Marcy Kaptur explained the game plan: “Always keep in mind the goal is to privatize gains to a few and socialize loss to the many. For 30 years, in one financial scandal after another, Wall Street game masters have kept billions of dollars of their gain and shifted their losses to American taxpayers. Once this bailout is in place, the greed game will begin again.”
Kaptur went on to explain that America doesn’t need to bail out Wall Street, it needs to bail out the average American. America “needs to secure the real assets and property, not (Wall Street’s) paper, that means the homes and properties of hardworking Americans who are about to lose their homes because of your mortgage greed. There should be a new job for regional Federal Reserve Banks. We want no home foreclosed if a serious work-out agreement can be put into place.” A work-out agreement is a restructuring of mortgages so that they are affordable, do not gouge families, and give mortgage companies a reasonable return on their investment, an investment fully backed by the full faith and credit of the American government.
Kaptur goes on to call for a rebuilding of America’s major infrastructure. This alone would put most out-of-work Americans back to work. She calls for a return to the regulatory framework of the Glass-Steagall Act and similar regulatory measures that require the separation of bank types according to their business (commercial and investment banking), so that conflicts of interest are prevented. Allowing one financial institution both to give credit (lend) and to use credit (invest) led to abuses that originally produced the Act in 1932 and its subsequent amendments and companion regulation. Because institutions that take our deposits possess enormous financial power through their control of other people’s money, they must be limited to ensure the safety of the deposits and assure competition for both loans and investments.
No one has to be told today that securities activities can be risky, leading to enormous losses. Because the government insures deposits and could be required to pay large sums if depository institutions collapse, the government–the people–have a vested interest in making sure that these institutions do not operate without some controls. It was the lack of controls that allowed the trillions of dollars of speculative investments, based on bundled mortgages, that led to our current situation.
A year later, Rep. Marcy Kaptur again addressed the failure ot our government to correct the circumstances that led to the near-collapse of our financial system.
Mr. Speaker, today marks the 1-year anniversary of the fall of Lehman Brothers. Just prior to that, former Treasury Secretary and former Goldman Sachs executive Hank Paulson; Fed Chairman Ben Bernanke; and then-President of the Federal Reserve Bank of New York and now Treasury Secretary, Tim Geithner, bailed out Fannie Mae, Freddie Mac and orchestrated the first of multiple tranches of taxpayer money to AIG.
Some mark the fall of Lehman as the start of our financial crisis, but it started long before. It started on Wall Street. … Wall Street has responsibility for the greed they bred, for ripping off American taxpayers and taking exorbitant profits, destroying anything and anyone in its path, and then taking more bonuses and continuing to live their high life.
Wall Street will never willingly and openly accept its responsibility for their role in our financial system’s downfall. It’s our responsibility to hold them accountable. It is too late to ask Wall Street to play nice and make reforms. They had their chance, and they blew it. You can be sure they are going to pay millions to lobbyists and PACs to protect their bonuses, loopholes, their safety nets, and the current structure of banking in this country.
It’s time to face down Wall Street and stand up for Main Street. The time spent waiting for Wall Street’s willingness to change is over. The results of the taxpayer bailout are clear: More profits for Wall Street, plus massive bonuses, while foreclosures skyrocket across this country. Wall Street had its chance to open credit lines to business, as well as to direct funds they got from the taxpayers to help millions of families facing foreclosure work out those loans, but instead they took the money for themselves and racked up huge profits in the last quarter. Wall Street had its chance to be responsible as stewards of the tax dollars they got. They failed. They didn’t even try. Wall Street banks cannot even tell us where the TARP dollars, that is, the taxpayer dollars, went. …
Will America allow itself once again to be bought out by Wall Street? Or will we stand together thoughtfully, deliberately to empower regulators and to reform this system with a new banking system that respects communities, encourages savings, assures sound credit? Will we break up the megabank trusts or continue to allow the concentration of financial power in the few greedy hands that are holding it today? Will we move forward with a stronger, more creative, more prudent, more sound community-orientated financial system again?
… (W)e must shift the balance of credit power from Wall Street back to Main Street and the American people. The challenge is crystal clear. The question: Do we have the will to do it here — to create a financial regulatory system again for the betterment of all people in our Nation, to strengthen community lending and sound and prudent credit practices at the local level and, in turn, the world’s financial system? The jury is out.
I thank Michael Moore for giving Marcy Kaptur a broader forum so that all Americans have a chance to learn about and hear the wisdom of her ideas.
The one mistake Moore makes in “Capitalism: A Love Story,” is that he doesn’t call the kind of capitalism we have in this country by its proper name. It is not capitalism in its original meaning, but corporate capitalism or state capitalism or lemon capitalism or corporate socialism. It is the kind of capitalism that takes over the state and uses public resources to be successful–it privatizes profit and socializes the risks and misconduct. What Moore does do is point to state capitalism’s failures–its lies, its abuses, its betrayals. And it is America’s families who are paying the price for state capitalism in the loss of their homes, their jobs, their savings, and even their families.
Moore’s focus on “dead peasants” insurance, the life insurance policies bought by big corporations like Wal-mart and AT&T, on the lives of their employees, is a welcome exposure of an insidious practice that improves the bottom lines of some of America’s largest corporations. When a “dead peasant” (insured employee) dies, the company collects the value of the insurance policy, thereby profiting from the employee’s death, sometimes in amounts over a million dollars. And the employees don’t even know about the insurance policies.
Perhaps the most interesting part of Moore’s movie is the mostly-forgotten film and audio footage of President Roosevelt from January 11, 1944, announcing his intention to have passed a second bill of rights that would give every American the following:
“The right to a useful and remunerative job…The right to earn enough to provide adequate food and clothing and recreation…The right of every family to a decent home…The right to adequate medical care… The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment… (and) the right to a good education.”
What could be more advantageous to a just and prosperous society than an adequate job, a decent home, adequate medical care, a good education, and protection from the “economic fears of old age, sickness, accident, and unemployment?” A government “of the people, by the people, and for the people” should provide no less. And you can call such a system whatever you want. If it’s socialism for the people, I’d much rather have that than socialism for the corporations, where small businesses, along with the rest of America’s people, get controlled, manipulated, and shafted by big business.
© Freethought San Marcos, Lamar W. HankinsEmail | Print
It is refreshing that Mr. Hankins unabashedly advocates for socialism. Most disguise such beliefs because they are untenable upon examination. The right to anything you want on the public dime; wouldn’t it be wonderful? Maybe; except it is unsustainable and has failed every time it has been tried. Need supplies initiative which is the lubricant for productivity which is monetized to fill the need. If you remove need, the circular system will collapse onto itself.
Capitalism wasn’t the culprit of the collapse, and it is the only way out of the mess. Consumers were overleveraged such that a hiccup in the economy brought a wave of foreclosure which spiraled a business cycle recession into the Great Recession. Now, we have to unwind and deleverage and taking money out of the economy hurts those without a cushion to soften the fall. Luckily, our capitalist system has a social safety net, and we have avoided the bread lines and mass violence that mark less accomplished countries trists with economic downturn. The system should be praised, not ridiculed, for the grace with which it has handled economic pain.
Greetings from a former Texan!
I haven’t seen Michael Moore’s movie. I refuse to patronize the corporate chain cinema at the regional mall where it is playing. A friend from the Bay area, who saw it at a Berkeley neighborhood theatre, gave me a pretty good run down.
I have read all of Michael’s books and seen most of his movies. He does excellent work.
In light of the tone of the Moore/Kaptur opinion piece, I would like to take this opportunity to present my proposal for reforming the economic/financial system:
Concerning the Restructuring of the Global Financial/Economic System and Recent Discussions Concerning Nationalizing “Banking” Interests…
With regards to “nationalizing” Banks and other “investor owned” Institutions, we must be realistic concerning the inter-national composition of the investing institutions, corporations, and individuals.
Writing from a libertarian socialist point of view, I think it is necessary to clarify the objectives of any comprehensive program to re-dedicate private resources to a quasi-public mission and to consolidate equity and assets for the purposes of sharing the former and writing off the economically paralytic inflationary cost aspects of the latter.
In lieu of an economic system based on credit and equity trading, whose motivation is the underwriting of speculative ventures, we need to transform our fundamentally inflationary financial/economic system to one that is based on equity sharing and meeting the needs of people in the form of community betterment.
Such a financial system would be the right hand, the resource allocation facilitating function and services of an ambidextrous ecological, democratic, economic “plan and implement” economy that would respect and favor the sovereignty of villages/neighborhoods, educate-foster-facilitate-inculcate inter-community and inter-regional equality, unity and cooperation based on the basic principles of inclusion, equity, humanity, mutualism, altruism, quality of life (in lieu of standard of living), environmental/public health and wellness, sustainability, and peace.
Such a system would seek to establish a more just balance between competitive advantage and comparative advantage with the concerns of those indigenous to a community being paramount.
Such an economic system would recognize the necessity to embrace and implement conservation ethics for shorter term programs and projects of ecological economic redevelopment dedicated to survival pursuits and skills and its concomitant ubiquitous environmental improvement activities, and to the longer term programs and policies related to the legacy of the human race and its dominion (i.e. the recognition and respect of the resource limits imposed by a finite planet).
I call such a proposal an equity union and believe it to be a prudent and practical alternative to the extant economic/financial system. I believe such an economic rearrangement based on the fundamental mission of world unity and cooperation is the best hope for the purpose of entering an unprecedented era of peace and human progress and success.
Eugene, OR, USA
I’m always humored by the people who think that corporate capitalism in America is truly based on a free market system. They are truly living the American Dream.
I would like to point out, however, that it is Congress that makes the laws, not the executive branch. During the Clinton Administration, there was a Republican majority in Congress that pushed for de-regulation.
To Lila Knight:
You are correct about Congress making the laws, but the Clinton administration aided and abetted them and Bill Clinton signed the de-regulation measures as President. This was part of what some have called his neo-liberal agenda, an agenda as devastating as the neo-conservatism that drove us two wars of occupation during the Bush years, draining the treasury of as much money as the Wall Street bailout.
I find it interesting that you failed to mention the Community Reinvestment Act of 1977 at all in your article. In my humble opinion, it was not de-regulation that caused the housing market to collapse, but government regulation.
Rather than allow the market to dictate the percentage of home owners in America, the government decided it would drive up the percentage of home owners by forcing lenders to lend to unqualified borrowers. Essential, mortgage lending standards that had worked for decades were discarded to achieve this seemingly noble goal.
Whenever government regulates the free market to achieve what they determine to be just and fair, the market reacts and corrects itself. Because in the end, the free market knows best and most politicians are ignorant of economic theory and the history of successful economic policy. History will continue to support this fact.
We now have borrowers defaulting on mortgages they should have been denied. It was federal regulators that essentially forced the lenders to lend the money to these unqualified borrowers. Thus, the culprit is regulation, rather then de-regulation.
As a side note, this was foreseen by many economics and politicians. Heck, my father told me not to by a house in 2005 because he told me the market could not sustain the current housing prices. He is not some “genius” economist, but rather was listening to people such as Thomas Sowell, and even the infamous George W. Bush. Both these individuals warned of the coming crisis.
Aside from the housing issue, I don’t think American’s need a “bailout”. I think we need tax relief. Tax relief for the upper and middle class (because they are the only one’s really paying taxes) will spur growth and create jobs. The government cannot do that.
And one last point: It is strange when someone claims to attack Wall Street in defense of the American public. Let us not forget how many of us have our retirement, our savings, our future invested in Wall Street and the success of large corporations.
These are just my opinions and I am only a simple observer of economics and history. Therefore, I am sure that the left-leaning readers of Brad’s paper are going to tear into me. So be it. History is the great redeemer.
To Shane Scribner:
Wikipedia has a very thoroughly footnoted entry about the allegation that the Community Reinvestment Act of 1977 is responsible for the financial crisis. Bottom line is that there is no empirical evidence to support the charge. Citing Thomas Sowell is not evidence:
Relation to 2008 financial crisis
Some economists, politicians and other commentators have charged that the CRA contributed in part to the 2008 financial crisis by encouraging banks to make unsafe loans. Others however, including the economists from the Federal Reserve and the FDIC, dispute this contention. The Federal Reserve and the FDIC holds that empirical research has not validated any relationship between the CRA and the 2008 financial crisis.
Economist Stan Liebowitz wrote in the New York Post that a strengthening of the CRA in the 1990s encouraged a loosening of lending standards throughout the banking industry. He also charges the Federal Reserve with ignoring the negative impact of the CRA. In a commentary for CNN, Congressman Ron Paul, who serves on the United States House Committee on Financial Services, charged the CRA with “forcing banks to lend to people who normally would be rejected as bad credit risks.” In a Wall Street Journal opinion piece, Austrian school economist Russell Roberts wrote that the CRA subsidized low-income housing by pressuring banks to serve poor borrowers and poor regions of the country. Jeffrey A. Miron, a senior lecturer in economics at Harvard University, in an opinion piece for CNN, calls for “getting rid” of Fannie Mae and Freddie Mac, as well as policies like the Community Reinvestment Act that “pressure banks into subprime lending.”
However, others dispute the involvement of the CRA in the subprime crisis. According to San Francisco Federal Reserve Bank Governor Randall Kroszner, the claim that “the law pushed banking institutions to undertake high-risk mortgage lending” was contrary to their experience, and that no empirical evidence had been presented to support the claim. In a Bank for International Settlements (BIS) working paper, economist Luci Ellis concluded that “there is no evidence that the Community Reinvestment Act was responsible for encouraging the subprime lending boom and subsequent housing bust,” relying partly on evidence that the housing bust has been a largely exurban event. Others have also concluded that the CRA did not contribute to the financial crisis, for example, FDIC Chairman Sheila Bair, Comptroller of the Currency John C. Dugan, Tim Westrich of the Center for American Progress, Robert Gordon of the American Prospect, Ellen Seidman of the New America Foundation, Daniel Gross of Slate, and Aaron Pressman from BusinessWeek.
Some legal and financial experts note that CRA regulated loans tend to be safe and profitable, and that subprime excesses came mainly from institutions not regulated by the CRA. In the February 2008 House hearing, law professor Michael S. Barr, a Treasury Department official under President Clinton, stated that a Federal Reserve survey showed that affected institutions considered CRA loans profitable and not overly risky. He noted that approximately 50% of the subprime loans were made by independent mortgage companies that were not regulated by the CRA, and another 25% to 30% came from only partially CRA regulated bank subsidiaries and affiliates. Barr noted that institutions fully regulated by CRA made “perhaps one in four” sub-prime loans, and that “the worst and most widespread abuses occurred in the institutions with the least federal oversight”. According to Janet L. Yellen, President of the Federal Reserve Bank of San Francisco, independent mortgage companies made risky “high-priced loans” at more than twice the rate of the banks and thrifts; most CRA loans were responsibly made, and were not the higher-priced loans that have contributed to the current crisis. A 2008 study by Traiger & Hinckley LLP, a law firm that counsels financial institutions on CRA compliance, found that CRA regulated institutions were less likely to make subprime loans, and when they did the interest rates were lower. CRA banks were also half as likely to resell the loans. Emre Ergungor of the Federal Reserve Bank of Cleveland found that there was no statistical difference in foreclosure rates between regulated and less-regulated banks, although a local bank presence resulted in fewer foreclosures.
During a 2008 House Committee on Oversight and Government Reform hearing on the role of Fannie Mae and Freddie Mac in the financial crisis, including in relation to the Community Reinvestment Act, asked if the CRA provided the “fuel” for increasing subprime loans, former Fannie Mae CEO Franklin Raines said it might have been a catalyst encouraging bad behavior, but it was difficult to know. Raines also cited information that only a small percentage of risky loans originated as a result of the CRA. Bob McTeer, president of the Dallas Federal Reserve Bank from 1991 to 2004, said “There was a lot of pressure from Congress and generally everywhere to make homeownership affordable for poor and low-income people. Some mortgages were made that would not have ordinarily been made.” He also said “When a bank made a decision to purchase mortgaged-backed securities, they would somehow determine if some of them were in zip codes covered by the CRA, and therefore they could get CRA credit.”
As you know, Thomas Sowell is not the only economist to come out and place some of the blame on the CRA. He just happens to be one of my favorite, so I dropped his name in there. As stated previously, I am only a simple observer, so I don’t think I really have anything to offer that will change your mind on the subject. However, I do feel compelled to respond in one way or another. And I find it a little difficult to believe many of the defenders of the CRA given that they championed the effort for a quarter of a century and would likely have been the last to come out and attack it. Why make yourself look wrong all this time?
I wish I had time to relay the content of this article in my own words, but unfortunately, I am a very busy capitalist…making money so others can live a life of laziness off my hard earned tax dollars. Anyway, it’s from http://www.businessinsider.com/three-ways-the-cra-pushed-countrywide-to-lower-lending-standards-2009-6
“Regulations often touch those who are not directly regulated. Indeed, the regulation of one group in a marketplace will almost always wind up affecting other groups.
More concretely, there are three very specific ways in which the CRA nudged Countrywide and other mortgage companies to adopt lax lending standards.
1. The Creation Of Artificial Demand For Low-Income Mortgages. Banks that were regulated by the CRA often found it difficult to meet their obligations under the CRA directly. Long standing lending practices by local loan officers were a big problem. But as banks expanded their deposit bases and other businesses, they often found that they were at risk of regulators discovering they had fallen behind in making CRA loans.
One way of addressing this problem was buying the loans in the secondary market. Mortgage companies like Countrywide began to serve this entirely artificial demand for CRA loans. Countrywide marketed its loans directly to banks as a way for them to meet CRA obligations. “The result of these efforts is an enormous pipeline of mortgages to low- and moderate-income buyers. With this pipeline, Countrywide Securities Corporation (CSC) can potentially help you meet your Community Reinvestment Act (CRA) goals by offering both whole loan and mortgage-backed securities that are eligible for CRA credit,” a Countrywide advertisement on its website read.
2. The Threat Of Regulation Is Often As Good As Regulation. It is highly misleading to claim that just because mortgage companies were not technically under the CRA that they were not required by regulators to meet similar tests. In fact, regulators threatened that if the mortgage companies didn’t step up to the plate by relaxing lending standards they would be brought under the CRA umbrella and required to do so.
Here’s how City Journal explains the dynamic:
To meet their goals, the two mortgage giants enlisted large lenders—including nonbanks, which weren’t covered by the CRA—into the effort. Freddie Mac began an “alternative qualifying” program with the Sears Mortgage Corporation that let a borrower qualify for a loan with a monthly payment as high as 50 percent of his income, at a time when most private mortgage companies wouldn’t exceed 33 percent. The program also allowed borrowers with bad credit to get mortgages if they took credit-counseling classes administered by Acorn and other nonprofits. Subsequent research would show that such classes have little impact on default rates.
Pressuring nonbank lenders to make more loans to poor minorities didn’t stop with Sears. If it didn’t happen, Clinton officials warned, they’d seek to extend CRA regulations to all mortgage makers. In Congress, Representative Maxine Waters called Financial
firms not covered by the CRA “among the most egregious redliners.” To rebuff the criticism, the Mortgage Bankers Association (MBA) shocked the financial world by signing a 1994 agreement with the Department of Housing and Urban Development (HUD), pledging to increase lending to minorities and join in new efforts to rewrite lending standards. The first MBA member to sign up: Countrywide Financial, the mortgage firm that would be at the core of the subprime meltdown.
3. The CRA Distorted the Mortgage Market. With banks offering mortgages with high loan to value, delayed payment schedules and other enticing features, the mortgage companies would have quickly found themselves unable to compete if they didn’t offer similar loans. The requirement to offer risky loans from banks created a situation where other lenders found they had to offer similar products if they wanted to expand their business.”
On a side note, I did find your response very interesting and I genuinely appreciate the fact that you cited everything. Makes for a very compelling argument. But am I convinced by your argument, not in the least bit. Do you ever think that our country is so divided that we will seldom be able to convince the opposition that they are wrong?
If I may add one me thing, Lamar. Wiki, whether correct or not, is seldom the best site to cite. The site is notorious for misquoting, wrongfully attributing, and providing false facts about an array of subjects. Granted, your response does not solely rely on Wikipedia, but beginning a reply with “Wikipedia has a very thoroughly footnoted entry about,” will automatically turn off some readers. Just my humble opinion.
Correction: “me” should have been “more”. Obvious to most, but worth correcting.
I din’t see any mention of the bond rating agencies (Moody’s, Standard & Poor…) being in the pockets of the megabanks. These rating agencies were paid to see trash and call it treasure.