Wednesday, September 10, 2008

Bailing Out Right-Wing Economics

Bailing Out Right-Wing Economics

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Last weekend, the Bush administration took the necessary step of bailing out Fannie Mae and Freddie Mac, the two congressionally chartered, but privately held, troubled mortgage giants whose missions include "boosting homeownership and funding apartment construction for low- and moderate-income families." The two firms "guarantee or own roughly half of all the $12 trillion US mortgage market" and, as such, their bailout "represented one of the most sweeping interventions in financial markets since the Depression," according to the Wall Street Journal. Under the Bush administration plan, the two companies have been placed "under 'conservatorship,' a legal status akin to Chapter 11 bankruptcy" and the government "replaced the companies' chief executives and shifted management control to their regulator, the Federal Housing Finance Agency." The two firms recently suffered billions in losses due to the unprecedented number of defaults and foreclosures in the U.S. housing market. Earlier this summer, the U.S. Treasury began to fear the firms' liabilities were in danger of exceeding their assets and asked Congress to allow a federal bailout, should the need arise. The bailout is reminiscent of the Bush administration's $30 billion rescue of Bear Stearns in March, a move that President Bush and his conservative allies called "the right decision." Dispensing with regulatory oversight, only to embrace dramatic and expensive subsequent bailouts, has become the hallmark of years of failed right-wing stewardship over the economy.

'PRIMARY CONTRIBUTORS': In an op-ed in yesterday's Wall Street Journal, Sen. John McCain (R-AZ) and Gov. Sarah Palin (R-AK) reluctantly endorsed the federal takeover of Fannie Mae and Freddie Mac, arguing that the two institutions' lobbyists are the "primary contributors to this great debacle." McCain and Palin wrote that, should they be elected, their administration would "no longer use taxpayer backing to serve lobbyists, management, boards and shareholders." Fannie Mae and Freddie Mac "spent a combined $170 million" over the past 10 years on lobbying activities aimed at creating "a sort of regulation-free zone around their businesses." Although McCain and Palin are correct in naming lobbyists as "primary contributors" to the current crisis, their feigned outrage rings hollow because "at least 20 McCain fundraisers have lobbied on behalf of Fannie Mae and Freddie Mac" in recent years. In all, these 20 fundraisers earned "at least $12.3 million in fees" from the two institutions. More troubling, however, is the fact McCain's campaign manager, Rick Davis, "served as president of an advocacy group led by Fannie Mae and Freddie Mac" that worked to cripple regulatory initiatives in Congress. Fannie Mae and Freddie Mac founded the lobbying organization because they feared that "congressional meddling would lower their healthy profits." During his tenure, Davis moved to challenge even the smallest measures to make sure that Fannie Mae and Freddie Mac are be held more accountable for their actions. In July 2003, for example, Davis "wrote to the American Banker, taking issue with an opinion piece...arguing that Fannie and Freddie should operate with greater transparency." Such transparency and greater regulatory controls could have helped avert the current crisis.

MORE THAN SIZE: The Bush administration argued that the interventions were needed not because federal regulators had been "asleep at the switch" as Fannie Mae and Freddie Mac deepened their involvement in the subprime lending market, but because Congress failed to act as the two institutions grew "too big to fail." The remedy, the Bush administration suggests, is simply downsizing their held portfolios at a rate of 10 percent per year, presumably until the two firms are no longer "too big to fail." But as Center for American Progress Senior Fellow David Abromowitz explains, the problem is that "the intertwined nature of global financial markets today requires" federal intervention "even in the case of smaller financial players...when regulators fail to do their jobs." Abromowitz asks, "How small would [Fannie Mae and Freddie Mac] have to get to matter little if they failed but still be able to benefit consumers?" U.S Treasury Secretary Henry Paulson believes such questions are beside the point, arguing on Monday that the two institutions "should not have existed" at all. Similarly, Alan Greenspan has argued that the two firms "should be broken up, made smaller and fully privatized, without even a whiff of government support." Such statements however, ignore the very real benefits that Fannie Mae and Freddie Mac deliver: keeping "the supply of money widely available and at a lower cost" and ultimately expanding access to homeownership. As Abromowitz writes, "If one concludes that the current housing crisis results heavily from laissez-faire ideology trumping common sense protection of safety, soundness, and consumers, then the logical remedy would be to require more effective regulation" -- not piecemeal privatization.

MORE OF THE SAME: McCain's endorsement of the bailout of Fannie Mae and Freddie Mac is the second major federal intervention that he has supported in recent months. In March, he backed the Federal Reserve's decision to extend a $30 billion credit line to finance the takeover of Bear Stearns by JP Morgan. The strange dissonance between McCain's free-market, pro-deregulation rhetoric and his repeated support for sweeping government interventions suggests that a McCain administration would depart little from the Bush administration's status quo. One example of just how close McCain and Bush are to one another with regard to financial policy is the Bush administration's appointment of Herbert Allison to head Fannie Mae in the wake of the government bailout. Allison is a close McCain ally who during McCain's 2000 campaign was considered the "best bet" to become McCain's Treasury Secretary. McCain himself argued yesterday that the U.S. Treasury "had broadly followed the McCain plan" for the Fannie Mae and Freddie Mac bailout. McCain and Palin lament that "Fannie and Freddie's lobbyists succeeded and Congress failed" and claim that "under our administration this will not happen again." However, their pattern of endorsing dramatic and expensive federal bailouts, while shunning the regulatory measures needed to prevent them, suggests otherwise.

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