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Last Updated: Jul 20, 2008 - 5:52:08 AM |
He announced that the Bush administration would seek congressional
approval to bail out Fannie Mae and Freddie Mac, the government created
but privately owned, profit-making housing finance companies that hold
or guarantee nearly half of the U.S. mortgage market—some $5 trillion
in debt. Paulson seeks and will get an unlimited line of credit to
guarantee their debt, as well as authority to purchase their shares to
supplement their capital base. The Federal Reserve announced it was
ready to provide lending while waiting for Congress to act. Paulson
said the new subsidies were designed to sustain the two institutions in
"their current form."
Perfect. The two institutions have always been more fowl than fish.
Created by the government in the 1930s to help lubricate the U.S.
mortgage market by buying mortgages from the banks so they would have
the cash to make more mortgages, Fannie and Freddie were able to borrow
money at a discount because of a widely shared assumption that the
government would stand behind their debts if push came to shove. Their
operations were regulated, limited by laws detailing what mortgages
they could assume. (They were essentially prohibited from diving
directly into the subprime muck.)
But as they grew and profited, their executives pocketed lavish
salaries and bonuses—giving them an incentive to grow even more (and as
we discovered earlier this decade, to cook the books). Last year, for
example, the Chair of Freddie Mac took home a cool $18,289,575. Fannie
Mae CEO Daniel Mudd reaped a 7 percent rise in pay to $13.4 million in
2007 while the company lost $2.1 billion and its shares fell 33
percent. Nice work if you can get it.
Now with the bursting of the housing bubble, push surely has come to
shove. Foreclosures are soaring, the two institutions have sustained
billions in losses, their shares have plummeted, and, according to
former St. Louis Federal Reserve President William Poole, one and
possibly both would be bankrupt if their assets were marked down to
their current market value.
So now the Bush administration proposes to make the federal guarantee
explicit and even to offer taxpayer money to help recapitalize the two
banks if needed. Everything has been nationalized—except the profits
and the pay scales of the bank's executives.
That's right. If the guarantees work, private speculators, having
driven the stock down, will clean up on the upside. And the bank's CEOs
will continue to pocket the multimillion dollar salaries that are de
rigueur on Wall Street. Call it Wall Street socialism. Their losses are
socialized; their profits are pocketed. You and I will pay for their
failures. And if conservatives have their way, their families will
pocket their successes, without even having to pay a tax for the
transfer of the estates we've helped to create.
These enterprises are operating on our tab now—completely. Why not just
nationalize them, as even that font of economic convention, Sabastian
Mallaby suggested yesterday in The Washington Post? Sure, we'd have to
add the $5 trillion in debt to the federal balance sheet, but we could
add the assets also. And after Paulson's announcement, global investors
are already toting up their debts onto the federal balance sheet.
Why pay dividends to shareholders when they are essentially playing
with our money? Why pay managers of public enterprises the bloated pay
packages of Wall Street speculators? Why allow them to finance
lobbyists to shield them from accountability? The fiction of their
separate existence has been exploded; let's save the dough and run them
efficiently.
The bailout of Fannie Mae and Freddie Mac is only the most recent and
extreme version of Wall Street socialism. The Bush administration has
done essentially the same for private providers of college loans. The
Federal Reserve has made taxpayers the guarantor not simply of the
banks that it regulates, but the shadow banking system of hedge funds
and investment houses that it doesn't regulate. After the bailout of
Bear Sterns, they basically are gambling with our money. The Federal
Reserve has now traded more than $500 billion in federal bonds for the
toxic paper of private banks and investment houses, some $200 billion
of it in mortgage-backed securities, worth dimes on the dollar. This
massive subsidy—justified as necessary to keep the banking system
afloat—is not accompanied by limits on what gambles the speculators can
make, how much debt they can take on, what rewards they can pocket.
They are playing with house money—not exactly an incentive for prudence.
Republicans seem ideologically committed to these kinds of
arrangements. In Medicare for example, conservatives have demanded that
the government subsidize private insurance companies to compete with
public Medicare, even though Medicare provides health care much less
expensively. When Bush and the Tom DeLay Congress drove through the
prescription drug bill, they included a provision that prohibits
Medicare from negotiating cheaper prices for drugs, effectively turning
the bill from a benefit to seniors to a multibillion-dollar subsidy to
private drug companies (not surprisingly, after Wall Street, the drug
companies finance one of the most lavish and powerful lobbies in
Washington).
Now it makes sense to me for the government to subsidize housing
mortgages and college loans. Encouraging home ownership and higher
education are central to sustaining the broad middle class that is
America's triumph. But I can't imagine why we need to let bankers and
investors pocket the upside, when they are playing with our money and
we're covering their losses. Public enterprise may be staid and
bureaucratic, but it's a lot cheaper and more efficient than the perils
of Wall Street socialism.
Source:Ocnus.net 2008
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