Beast of the Month - April 2008
Henry Paulson, Treasury Secretary
"I yam an anti-Christ... "
John Lydon (aka Johnny Rotten) of The Sex Pistols, "Anarchy in the UK"
"I have a message for every homeowner worried about rising mortgage payments: The best you can do for your family is to call 1-800-995-HOPE."
George W. Bush, giving the wrong number (it's an 888 prefix) for his "solution" to the subprime crisis last December
Since moving Konformist headquarters from across the Ambassador Hotel in Los Angeles to across the UNLV college campus in Las Vegas last April, The Konformist editorial staff have rediscovered the joys of drinking games. Here's one new favorite we particularly recommend: The "Since the Great Depression" Drinking Game. Here's how you play: talk about current economic and financial conditions, and every time somebody uses the phrase "since the Great Depression" in the discussion, everyone needs to take a swig. Trust us, you'll get drunk off your ass real quick.
The big financial story in recent months has been the subprime crisis, which is the Godzilla of the 2008 economic crisis. Eight million homeowners are overwhelmed by subprime loans - ones with low introductory interest rates for prospective homeowners that often pay only interest initially, but later have higher interest rates and huge increases in monthly payment after the introductory period - with two million in or headed to foreclosure. Meanwhile, 10 percent of homes are worth less than their mortgage. All in all, the last two housing market crisis this big in the USA were the S&L scandal of the late eighties and, of course, The Great Depression. (Gulp gulp gulp...)
The Great Depression comparisons are no mere hype: as Robert Shiller, Professor of Economics at Yale University, told the London Times last December: “American real estate values have already lost around $1 trillion. That could easily increase threefold over the next few years." The New York Times has put the figure at up to $4 trillion. In retrospect, it shouldn't be a surprise: while the Bush Team's debacle in Iraq and its attack on civil liberties have been the main focus of Shrubian criticism in recent years, it is the destructive economic policies to benefit the rich at the expense of everyone else that is the hallmark of the Dubya years.
As news of the subprime crisis first began to be reported, a right-wing spin (echoed more than partially in the "establishment" media) circulated as the explanation: it was the fault of the millions of families who, in stupidity, bought homes they couldn't afford with loans that were doomed to swallow them. And, to be fair to these talking points, there were many (including those in The Konformist editorial staff) who realized that subprime loans were definitely a bad idea.
But then in February, New York Governor (and former hard-nosed Attorney General) Eliot Spitzer gave another explanation for the subprime crisis in The Washington Post: the loans should've been illegal as predatory lending. As Spitzer noted: "Some were misrepresenting the terms of loans, making loans without regard to consumers' ability to repay, making loans with deceptive 'teaser' rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks." Tellingly, 73% of high-income Black and Hispanic borrowers (repeat, that is high-income, not low-income) were given sub-prime loans versus only 17% of similar-income Whites.
So why were these loans not stopped? They were legitimized by the Bush Administration. More specifically, the Treasury Department (currently led by Henry Paulson, The Konformist Beast of the Month) not only stopped federal enforcement to regulate and stop these loans, they selectively used obscure laws and created new rules to block states from enforcing their own predatory lending and consumer protection laws against national banks. This was so unprecedented and outrageous, all 50 state attorneys general and banking superintendents fought the Treasury, but were stonewalled by the Bush minions like it was a 9/11 investigation. The end result: millions of working-class and middle-class Americans (a high percentage, coincidentally, of racial minority status) were forced by criminal market collusion sanctioned by Bush to either accept highly risky subprimes or give up the apparently foolish fantasy of owning their own home.
(Also coincidentally, less than a month after his WaPo expose, Spitzer was forced to resign in disgrace after being exposed as a customer for an expensive Big Apple prostitution ring. So far, none of the other johns have been exposed by Feds, and it appears the target of the DOJ investigation begins and ends with Mr. Spitzer.)
Okay, big surprise. A destructive economic agenda to help the rich at the expense of everyone else was hatched by the Bush Team. Tell us something we don't know. The question then becomes what to do about the mess. Unsurprisingly, the Bush Administration has thus far only offered "voluntary" deals they have encouraged between bankers and mortgage debtors who are delinquent on payments. Even this minimal plan has helped less than eight percent of all subprime borrowers. But anything beyond a voluntary deal worked out between debtors and the banks is decried by right-wing mouthpieces as a "moral hazard" which will encourage future individuals to recklessly enter dangerous loans with the supposed expectation of a bailout.
Oddly, this concern over a "moral hazard" doesn't seem to apply to big boys involved in the mess. Already the subprime crisis has wreaked havoc on the financial establishment, causing the near collapse of venerable investment bank giant Bear Stearns and the liquidation of Carlyle Capital, the mortgage investment fund off-shoot of the notorious Carlyle Group. (Which leads to some Konformist konspiracy theorizing: Bear Stearns was widely despised in the Wall Street establishment as a banking maverick, and the sweetheart deal leading to a JPMorgan Chase & Co. takeover of the firm appears to be a vengeful payback against a lone wolf. Meanwhile, though Carlyle Capital has indeed gone belly up, its parent Carlyle Group - the private equity group whose partners have included George H. W. Bush and the bin Laden family, and whose founder, perhaps not-so-symbolically, bought the original copy of the Magna Carta for $20 million - has only been marginally damaged by the liquidation, as Carlyle Capital was an spin-off of mortgage securities. Did Carlyle suspect the mortgage market was doomed to sink over toxic subprime loans and thus create the spin-off, the first in its history, to dump a loser on sucker investors?) Moral hazards and laissez-faire philosophy be damned: the Federal Reserve decided to give $400 billion in loan packages to Wall Street banks and financial institutions to help them weather the storm. (And that was in just one decisive action: all told, the Fed has offered nearly a trillion bucks in discounted loans to the fat cats who pushed for this mess.) Before the Senate Banking Committee, Fed Chairman Ben Bernanke conceded: “If you want to say we bailed out markets in general, I guess that’s true.”
Which led The Konformist to do a little mathematics. Just taking the $400 billion figure alone, divide it by 2 million, the number of families at the brink of foreclosure due to predatory subprime loans. That comes to $200K per family. Do you think giving 2 million working-class and middle-class families $200 grand each in financial aid backed by their property couldn't solve the current crisis?
Of course, the Fed is merely the scapegoat here of the Bush Administration's failings, just as George Tenet and the CIA became the scapegoat of the Bush lies leading to the Iraq War. (It's a sad indictment of the Bush Team that they could make The Konformist feel sympathy for the CIA and Federal Reserve.) The fact is the Fed was acting in the capacity it had available to aid ailing markets, while helping the average American is the job of Bush, Paulson and co. So far there's been a grand total of zero.
That's fine with John McCain, the almost certain Republican nominee for the 2008 presidential race. In one speech, McCain declared: “It is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.” But talking out the other side of his mouth, he would add: "Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy." So helping out subprime debtors is rewarding the irresponsible, but helping out bankers is okay to defend the financial system.
Here's another quote: "There's no sense in which you're rewarding someone for taking too big a risk. If you lied about your income in order to get a bigger mortgage, then you're not qualified. Do you really want to give a subsidy to the guy who wasn't prudent?" Nice right-wing talking points, that the subprime crisis is the fault of lying debtors. But the quote doesn't come from Bush, Paulson or McCain, but rather a Barack Obama economic advisor. As it turns out, Obama has echoed these same right-wing talking points on the campaign trail. This should be little surprise: for all his charming talk of "hope" and "unity" this campaign, Obama - who has a bizarre media cheerleading behind his campaign similar to what Bush had in 2000 - has been pushing right-wing economics in his content-free mantras. To be fair, Obama has offered a $20 billion fund plan to help struggling borrowers, but that still is a pittance of what has already been given to Wall Street. It's hardly how we imagine MLK (or even JFK, the pair Obama salesmen are pitching him as a combination of) would respond to the crisis.
Ironically, it is the widely maligned and despised Hillary Clinton who has pushed the most to protect the real victims of the subprime crisis. Behind her shameless pandering and sometimes demagogic manipulations this campaign, there is a surprising level of economic populism to her pitch. She has pushed for a 90-day moratorium on foreclosures, a five-year rate freeze on subprime ARMs and backed legislation allowing bankruptcy judges to amend mortgage terms. She's also backed a total of $40 billion in aid to subprime debtors, twice what Obama has offered. Of course, even that is only a tenth of what the Fed gave Wall Street in its bailout.
Of course, The Konformist isn't saying that the US government lending $200K to every American family facing subprime foreclosure is the best way to solve the problem. And The Konformist isn't saying that propping up the financial market, even with $400 billion in Federal Reserve help, isn't a completely bad idea either. What we are saying is the frame of argument is clearly out of whack, even from the supposed "liberal" viewpoint of Obama and Hillary. And it isn't helped by pundits of the both "left" and "right" who silence and demonize criticism of this status quo as "engaging in class warfare."
Henry Paulson knows a thing about benefiting from class warfare. Like his predecessor John Snow, Paulson has been deservedly derided for his clueless figurehead status as Bush's economic point man. But he didn't get there by accident: after a stint as Nixon's Assistant Secretary of Defense, he parlayed his Pentagon connections into becoming Chairman and CEO of investment bank titan Goldman Sachs. (As The Konformist has previously noted, he's hardly the only CEO in the BushMob mix.) For his work at the behest of the defense industry and the financial community, he's been rewarded with a net worth of over $700 million.
This leads to the final class warfare punch line. If the 2 million families now in threat of losing their homes fall into foreclosure, the homes will go to the banks and investment houses that lended them the subprime loans. While that should mean some short term pain, they should be able to weather it thanks to the Federal Reserves aid. Eventually they will have at their disposal hundreds of billions in dollars of property to find new prospective buyers for. This could make the subprime crisis the greatest transfers of wealth to the rich in the history of the USA since, well, since the Bush Team's tax cuts of 2001 and 2003. Class warfare that.
In any case, we salute Henry Paulson as Beast of the Month. Congratulations, and keep up the great work, Hank!!!
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"Fed Staves Off Disaster, but That's Not Enough." San Jose Mercury News 20 March 2008 <http://www.mercurynews.com/opinion/ci_8635232>.
Fraser, Max. "Subprime Obama." The Nation 11 February 2008.
Grey, Barry. "Clinton, Obama, McCain Defer to Wall Street." World Socialist Web Site 29 March 2008 <http://www.wsws.org/articles/2008/mar2008/cand-m29.shtml>.
Jackson, Jesse. "Banks Bailed Out, Homeowners Sinking." Chicago Sun-Times 18 March 2008 <http://www.suntimes.com/news/jackson/847802,CST-EDT-jesse18.article>.
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Krugman, Paul. "Loans and Leadership." New York Times 28 March 2008.
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Prins, Nomi. "Obama vs. Clinton on the Top 10 Economic Policy Issues." Mother Jones 28 February 2008 <http://www.motherjones.com/news/update/2008/02/obama-vs-clinton-economic-policy.html>.
Spitzer, Eliot. "Predatory Lenders' Partner in Crime." Washington Post 14 February 2008.
Sterling, Robert. "Subprime Bailout & Shrubonomics: A Mathematical Analysis." Konformist Blog 20 March 2008 <http://robalini.blogspot.com/2008/03/subprime-bailout-shrubonomics.html>.
"Wall St. Unlikely to Bemoan Passing of Bear Stearns, Which Made Few Friends Over the Years." International Herald Tribune 18 March 2008 <http://www.iht.com/articles/ap/2008/03/18/business/NA-FIN-US-Bear-Stearns-Employees.php>.