Well, okay, first things first. This is a problem, a very real one; I suppose you could even call it a crisis, although I shy away from that because the word gets so overused. But when there is a big enough credit crunch that banks are getting antsy about extending loans to each other, yes, we do have a situation on our hands.
It's a cliche to say our economy runs on credit, but sayings only get used often enough to become cliches by expressing some truth. (Have you ever seen a wet hen? They really are pretty pissed.) I'm not even talking here about mortgages and individual credit card debt, it goes deeper than that to the overnight loans and other such instruments that banks and investment houses are constantly taking in, paying out, advancing and collecting. Those shut down and banks, needing capital to cover their own outstanding obligations, start issuing consumer credit under the most stringent conditions - if they do it at all.
That, in turn, affects not only things like the housing market but car sales, major appliances, travel, any sort of purchase, even ordinary ones, where cash up front is not the usual means of payment. Declining sales lead to retrenchment leads to unemployment leads to recession and maybe worse. So yes and contrary to some voices I've heard, this does affect us.
Ultimately, this will require some sort of bailout. The real question is what sort and, more importantly, of who.
The roots of this whole mess lie in one place: the greed of the financial industry. An industry built entirely on greed, on go for the big bucks, on you're either a player or a loser and being "just" a millionaire makes you the latter, has reaped the results of its own tunnel vision.
What happened in a nutshell is that in their world, everything seemed to be going up. Even as most struggled, they prospered. Even as bankruptcies grew, they were safe - and when they grew to be too many, they simply got Congress to change the rules in their favor. So - just like in the 1920s, it seems almost banal to note - they started acting under the assumption that it would always be that way. That things would always go up for them. Significantly, they assumed the housing market would always go up in the long term. It might stall temporarily, but ultimately it was a profit machine.
That was why the subprime market, giving mortgages to people with less-than-sterling credit, took off: The thinking was that even if you have to foreclose, you can resell the house for more than enough to cover yourself. It was a huge potential market for new mortgages with little, if any, risk.
Or so it seemed. But of course it wasn't and the housing boom went bust, foreclosures climbed, and because of the bad market the foreclosed homes didn't prove to be the hidden gems they had been assumed to be. And guess what: You've got a "liquidity crisis."
Something to be dealt with right here is the right-wing attempt to push the blame off the greedheads of Wall Street and onto the backs of liberals - particularly, it seems, Barney Frank. The argument, if you can call it that, is that Frank and others lead the effort against "redlining," the practice where banks would refuse to extend credit to people living in certain - almost exclusively minority - neighborhoods. Those advocates supposedly "forced" the banks to make loans to "underserving" people.
But of course the complaint about redlining had nothing to do with not loaning money to people who couldn't afford to pay it back. It was about not loaning to people because of where they lived - their creditworthiness didn't even enter the picture. Only their address did. It was a blatantly racist practice. Contrary to the bullshit being tossed out now, the Community Reinvestment Act of 1977 outlawed redlining but did not require making risky loans, in fact it required "sound practice."
Still, the rightists persist in trying to blame an act for racial and economic justice for our current troubles. Some, such as wingnut columnist Jeff Jacoby, even specifically linked the old practice with the new claims, saying in a recent column that
[t]he pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless.That is, minorities equal "weak credit histories" equal minorities. It doesn't get more direct than that.
However - and getting back to the main thread - that doesn't mean there isn't a problem here. It was the stupidity of the financial industry born of its institutional culture of greed that is the cause. More fundamentally, it was the failure to realize that the "business cycle" has not "been repealed" and in a capitalist economy where "more" is not only an economic philosophy, its a moral imperative, this kind of stuff is going to happen. The only reason it hasn't happened more and worse is not because of the so-called "self-correcting market" but because we do not have a "free market," our economy is partly socialized, helping to ease both the highs and the lows and reduce the pain of the latter.
Which means first the answer now is not less control, less regulation, but more control and more regulation - especially since, as noted in a link above, something over 80% of the problematic loans were not made by banks subject to FDIC oversight under the Community Reinvestment Act but by "financial institutions that operated with little or no federal regulatory oversight." (Original emphasis.) It was neither the CRA nor regulation that caused the problem, it was the lack of regulation.
So with that classic capitalist combination of short-sightedness and hubris, the institutions took idiotic risks that didn't look risky to them and when it all fell apart they came crying to the public to save them from the effects of their own greed-driven stupidity. Which leads directly to my single biggest gripe about the bailout: It proposes to have the public buy the bad mortgage debts of the lenders, thus giving them the public teat at which to suckle and taking them off the hook for collecting those debts while leaving the mortgagees, the people trying to hold onto their homes, on the hook for paying them. Indeed, one of the arguments used in the bailout's defense is that the $700 billion (or whatever the actual figure would be, no one claims to know) would not be the net cost to taxpayers because some of that outlay would be recovered when the feds subsequently sell the debts to other institutions, which will of course go about collecting them.
(Which means, parenthetically, that the deal is "we're going to spend a huge amount of money but we don't know how much or just who it's going to, some of which we might get back but we don't know when, how much, or over what period of time. Sign here.")
Screw that. Screw it right down to the ground. And screw the claims like that of Barack Obama (who, it appears, had been "actively whipping" the bill in the Senate) that "if we only had time we could do better, but we don't" so members of Congress must, he said, "step up to the plate." We don't need "more time," there are better ideas out there already. One example:
A group of liberal Democrats, backed by unions, proposed an alternative measure calling for more oversight by the Securities and Exchange Commission over Wall Street and a $61 billion stimulus package to aid working families.
Representatives John Tierney and William Delahunt, both Democrats from Massachusetts who helped defeat the [bailout] package, said yesterday they want to give bankruptcy courts the power to help people facing foreclosure by rewriting their mortgages.
There's also the "No BAILOUTS Act" sponsored by Peter DeFazio.
[T]the measure would impose a securities tax equivalent to one quarter of one percent of profits and empower the Federal Deposit Insurance Corporation to deal more effectively with bank failures.The plan is based on a proposal made last week by former FDIC chair William Isaac, who recalled that in the 1980s Congress enacted a "net worth certificate" program – which allowed the federal agency to shore up the capital of weak banks to give them more time to resolve their problems – and the FDIC resolved a $100 billion insolvency in savings banks for a total cost of less than $2 billion.
Another: Ian Welsh at Firedoglake proposes to give Treasury Secretary Henry Paulson $150 billion now (since he never said the 700 big ones would be needed all at once) and tell him "come back in January with a real plan." He also lists several facets of what he considers a better plan, too long to quickly summarize here.
For me, there are three things I think should be part of any package. One, repeal that evil bankruptcy bill.
Two, as other have suggested, instead of giving the money to Wall Street, give it to the homeowners to pay off their mortgages. Or at the very least take up the suggestion of former Federal Reserve vice-chair Alan Blinder, and others, to re-create something like the Depression-era's Home Owners’ Loan Corporation to renegotiate troubled mortgages on owner-occupied homes at sharply lower rates, with the intent of heading off as many foreclosures as possible.
And three and the biggie in my mind, in order to get their part of any bailout money, a firm has to agree that by buying up these bad debts that the government is buying that much equity in the company. Which means that wherever the debt is big enough, the firm will essentially be nationalized.
And once that happens, the government keeps those firms. It doesn't resell them at a loss to some other outfit of greedheads looking to gain by our self-sacrificing, self-flagellating, devotion to the mythical "free market," instead it operates those firms under new management on a non-profit basis to serve any and all communities underserved by the financial markets. Oh, those lenders and their wingnut sycophants will whine and squeal that it's "unfair competition," but the reply should be "you have always claimed that government couldn't do anything right and the market was inherently superior. Here's your chance to prove it. So shut up."
You want a bumper sticker version of the principle involved? How about "We deserve an economy built on need, not greed." The rest follows from that.
There's a story, perhaps apocryphal, that the Chinese character for "crisis" combines the characters for "danger" (or "risk") and "opportunity." If that is true, the word "crisis" does fit here. We face a danger but we do have an opportunity for a - well, I can't say a just economy but I can say a less unjust economy. It's too bad that with "leaders" like Barack Obama we won't take it.
Footnote: The fact that the CRA outlawed redlining does not mean the practice has stopped. It hasn't. It merely has changed forms.
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