October 18, 2008
Molly Ivins Told Everyone So
With the collapse of Fannie Mae and Freddie Mac, the global banking system and the stock market, and the ensuing $700 billion tax payer bailout, it reminded me of a column Molly IvinsWith the collapse of Fannie Mae and Freddie Mac, the global banking system and the stock market, and the ensuing $700 billion tax payer bailout, it reminded me of a column Molly Ivins wrote years ago. So I did a search and found two of them where she not only warned of the consequences of deregulating the banking industry, but also predicted its downfall.
Since she's not here to pat herself on the back by linking to these columns - and telling the world "I told you so" - I thought I will.
February, 2004
Deregulation threatens to turn the ballooning debt of Fannie Mae and Freddie Mac into another S&L nightmare.And five-and-a-half years earlier...
Freddie Mac and Fannie Mae have gone and gotten themselves in big trouble. For those of you who do not follow the business pages, I only wish we were talking about pregnant teen-agers. Fannie and Freddie are the two government-sponsored mortgage companies that help most of us buy homes. Trouble is, they've run themselves into big-time debt -- they've doubled the amount they owe in just the last five years. When I say big-time, try $2 trillion. And guess who's on the hook if these things go under? Congratulations, taxpayers.
This week, Alan Greenspan, the Great Pooh-Bah of the financial world, opined in his usual Delphic style before the Senate Banking Committee, "To fend off possible future systemic difficulties, which we assess as likely if the expansion continues unabated, preventive actions are required sooner rather than later." The Wall Street Journal helpfully translates this as, "Act quickly." Hard to tell with Greenspan: I yield to the Journal's long experience in Greenspan translation, but it could also mean, "Push the panic button now!"
What we have here is the same thing that happened after the famous S&L deregulation in the 1980s -- privatized profit and socialized risk. You may recall that little adventure in deregulation -- the universal panacea according to the right -- cost the taxpayers half a trillion dollars.
Fannie and Freddie were created by Congress as private companies to encourage home ownership and -- in theory, on paper -- the taxpayers aren't responsible if they go bust ... but they're literally too big to fail. Unfortunately, the markets have always assumed Fannie and Freddie's debt was guaranteed by the U.S. government. Should they go under and the government not pay, it would be as though the United States government were defaulting on a sort of low-level debt. All that would do is cause financial collapse and chaos and probably worldwide depression, but try not to think about it too long.
On the other hand, the people responsible for all this have already been thinking about it too long. For over a year now, Fannie and Freddie's pickle has been obvious, and the experts on the financial pages have been writing, "Do something," for ages.
The fiscal irresponsibility of this so-called CEO-administration is a source of constant wonder. This potential financial crisis is racing toward us like a tidal wave, gaining strength as it comes. Are they actually going to stand there like Alfred E. Neuman, saying, "What, me worry?"
Of course, the conservatives think the thing to do is privatize the companies, and the liberals think the thing to do is regulate them. I don't see where privatizing gets us any further. Oh, to be sure, in the long run, market discipline would work like a charm, but one reason I'm a Keynesian is the old boy's observation, "In the long run, we'll all be dead." And dead broke, too, if these things default.
Seems to me Fannie and Freddie's mess is the perfect argument for government regulation, and not just of the two giant mortgage companies. These GSE's (gobbledygook for "government-sponsored entities") have been hedging their debt risks through hedge funds, which are in turn almost entirely unregulated. Greenspan warns that Fannie and Freddie's debt could soon be larger than the federal government's. Think about it. Remember what happened when one large hedge fund, Long-Term Capital Management, started to go under? Ooops.
You know, when a bleeding heart liberal like me has to sit around lecturing a Republican administration on fiscal responsibility, we're in a sorry pass. I watch the entire corporate and financial structure of this country running around raising money like crazy for the re-election of George W. Bush, and I am reminded once more that capitalism will destroy itself if you let it.
Congress has already failed in its oversight responsibilities by letting the companies get into this mess. The Center for Responsive Politics reports Fannie and Freddie contributed $6.5 million to federal campaigns in 2002. Fannie has hired 14 lobbying firms, and Freddie 26. They spent $9.7 million on lobbying in the first six months of last year. According to Ralph Nader (always a reliable source in these matters, no matter what his political judgment), "The board of directors on staff of Fannie and Freddie have always been populated by former officials and political activists from both the Republican and Democratic parties who are given huge pay packages."
The Bushies want to put regulation of the GSEs in the Treasury Department and abolish the Office of Federal Housing Enterprise Oversight, the independent agency whose sole responsibility is monitoring the GSEs. Moving regulation to Treasury would make the GSEs even more political and even more apparently creatures of government. In typical Republican fashion, the small agency now handling the job has been starved for funds.
This is the great Gingrich ploy -- don't give a regulatory agency enough money to do its job, and then when things come unstuck, announce that regulation doesn't work.
September, 1998
Watch the House pass a bad bill. Watch the Senate make it worse. Watch the banking industry dig its own grave. Watch supposedly smart people set up a financial disaster. Can we see President Clinton veto this mess? Veto, Clinton, veto.Great job, Molly.
Not since Congress passed the Garn-St. Germain bill in 1981 — the one that deregulated the S&Ls and unleashed a half-a-trillion-dollar disaster, which the taxpayers of this country wound up paying for — has there been a move to match this for pure folly.
In May, the House passed (by one vote) a bill to eliminate barriers between banks, brokerage firms and insurance companies. This sets up financial holding companies that can offer all three types of services simultaneously. The most obvious risk is that a blunder in the insurance or brokerage end of the business could bring down a bank, putting insured deposits at risk. The taxpayers, of course, then wind up with the tab — as we did with the savings-and-loan mess.
The bill contains some requirements to mitigate this risk; each branch of a financial holding company will have to maintain a separate cushion against losses, which cannot be used to shore up the other branches. Although this provision somewhat lessens the risk, it does not eliminate it.
The purpose of this bill, long sought by the financial industry, is to legalize such mergers as the proposed Citicorp-Travelers Insurance mega-merger. Many experts believe the effect will be the emergence of nine or 10 enormous institutions after the consolidation of hundreds of insurance companies, banks and brokerage firms.
Even before this consequence comes to pass, it is apparent that the bill will harm consumers. Last week — on a straight party-line vote of 12 to 10 in the Senate Banking Committee, all the Republicans against all the Democrats — consumer protections were stripped out of the bill.
The Senate version does not require the new holding companies to offer low-cost basic banking accounts. According to the Consumers Union, an estimated 12 million households currently have no bank accounts at all, and 48 million households — almost half of American families — keep a balance of less than $1,000 in their accounts. Banks now charge substantial fees to anyone who does not maintain a minimum balance, and banks constantly raise the minimum balance required.
Consumer Reports found that minimum balances required for the average checking account increased by 40 percent between 1966 and 1994. Citibank in New York now requires a minimum balance of $6,000 to avoid fees.
The Senate committee also voted against an amendment by Chris Dodd of Connecticut that would have required banks to get a customer's permission before giving out confidential information about the customer. The committee weakened House-version provisions to, first, ensure that customers are informed when financial products are not FDIC-insured or they are subject to risk and, second, to require some clear separation of insured-deposit activities from non-insured-deposit activities. And the Senate created more exemptions from securities laws that help guard investors.
In addition, Sen. Phil Gramm of Texas is on a jihad against the Community Reinvestment Act, which is designed to make more loans available to low-income borrowers. He's trying to strip those provisions out of the bill.
Now, see if you can follow this bouncing ball of news, because it's a triple carom shot that sets up the aforementioned financial nightmare. According to a report released Friday by federal banking regulators, banks are lowering commercial lending standards, even though the risk that business borrowers will default on a loan is rising.
According to The Washington Post, "The four-year trend is causing concern among regulators that the nation's banks will be hit by a wave of sour domestic loans over the next 18 months." The Office of the Comptroller of the Currency reported: "Projecting risk over the next 12 months, credit risk is expected to further increase in all commercial portfolios. Banks are leaving themselves with fewer options to control the risks associated with commercial lending should the economy falter."
Next step: Will the economy falter? According to reporting in Friday's Christian Science Monitor, to cite just one of many such warning articles: "Concern is growing in the top echelons of Wall Street and Washington that cheap exports from overseas may drive down the American economy. The R word — recession — is now being heard more often."
So what we have here is an increasing likelihood of recession dead ahead, banks already looking at serious trouble because of stupid lending policies and a bill that effectively further deregulates the banks and hurts consumers, making it even more likely that banks will get themselves into serious trouble. And we're telling other countries how to fix their banking systems?
Veto, veto, veto.
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