Events continue to unfold since my last post. The latest AIG revelations and the response by some show just how out of touch some people are. The LA Times had an article about five days ago about wall streeters whining about government meddling, how they are being unfairly maligned, etc., etc. And the latest AIG bonus revelations are like the bully who takes advantage of you and then has to rub it in your face and taunt you. My biggest criticism of Obama is that his main economic advisors, Treasury Secretary Geithner and chief advisor Larry Summers are part of the old boy network who got us into this mess in the first place. Summers, in particular, was one of those in the Clinton Administration pushing for deregulation, which is one reason Clinton signed the deregulation bills sponsored by Phil Gramm. Geithner and Summers seem more concerned about not upsetting Wall Street than undertaking the real, structural reform that is necesary.
One of the things which may save the country is that the greed, corruption and excesses of these captains of finance and their defenders are just so blatant and outrageous that it is forcing the politicians to take more progressive positions so as to not fall too far behind the growing populist anger that is, rightly, rising in this country. Comedian Rush Limbaugh, I heard, actually defended the AIG bonuses the other day. If you haven't even seen the movie A Face in the Crowd, starring Andy Griffith, I recommend it highly, especially as it is so relevant for our times. It shows how a demagogue ends up destroying himself by overreaching. I think you are seeing that very same thing again. The right wing is destroying any shred of creditibility which it retained, doing it much better and more completely than anything the left could do.
Hopefully, events will force the administration to take up where the two Roosevelts left off. Teddy railed against the "malefactors of great wealth" (one of my favorite terms) while FDR attacked the "economic royalists"who destroyed the economy in the 30's. This is just one example why those who attack Obama for being a socialist are so off the mark. He's not even as progressive as FDR; he is basically a status quo supporter of the economy who is being pushed farther to the left than he really wants to go.
I had originally intended to use this part of this post to just say that my previous posts are merely a basic introduction to help those who don't understand what happened or why. Nor did I get into a whole lot of areas that could and should be covered in depth, such as remedies. Nor do I pretend to have all or even most of the answers. I am sure that in the future there will be hundreds of books written about this economic crisis and some academnic will probably someday write a multi-volume history/analysis of this time. However, I do hope that this previous explanation and what is to follow is helpful to someone.
(Mostly Conservative) Myths About the Economic Crisis
I have seen and/or heard a number of false statements about our present situation and want to address them as follows.
1. This was all started because the Community Reinvestment Act forced banks to make risky loans. The Community Reinvestment Act(CRA) was first passed in 1977 to combat redlining, which is discrimination in the awarding of loans for purchasing homes. The Act was amended in 1995. Here are some things you should know. The act appllies only to federally chartered banks or S&L's, not state chartered institutions or mortgage brokers. Thus, only 25% of the subprime loans were even made by banks that were subject to the CRA (Wikipedia). Also, 50% of subprime loans were refinances, not new mortgages (PBS Frontline). If the CRA were the culprit, why did it take 12 years after the amendment of the act in 1995 before problems started showing up? A Republican Florida congressman raised this above charge in an oversight committee meeting and asked the committee's witnesses if this was true. The witnesses, Alan Greenspan, Ben Bernancke (former Fed Charman and current Fed chairman) and Christopher Cox, chair of the SEC all said no, the CRA was not responsible. The act itself says that loans should be made in a safe and sound manner. Next, what is the punishment for banks that violate the CRA? If they want to merge, acquire another bank, or wish to expand such that Federal approval is required, then regulators may take into consideration their CRA related activities. It doesn't say that violation of the CRA will stop banks from undertaking these activies (merging, etc.), only that it will be taken into account when regulators review the bank's request. And if you have a right wing, no regulation administration, then the act is toothless. Finally, here is some instructive and revealing information about Washington Mutual, the largest bank to fail in U.S. history. A New York Times syndicated article, printed in the Riverside Press-Enterprise on December 28, 2008, reports on accounts from former employees who are witnesses in a class action suit being brought against Washington Mutual. In one egregious example, a mariachi singer claimed a six figure income with no documentation, so the loan processor had a picture of the guy taken in his mariachi outfit and that was enough for the guy to get his loan approved. To quote from the article, "WaMu pressed sales agents to pump out loans while disregarding borrowers' incomes and assets". . . to " set up what insiders described as a system of dubious legality that enabled real estate agtents to collect fees of more than $10,000 for bringing in borrowers. . . WaMu gave mortgage brokers handsome commissions for selling the riskiest loans, which carried higher fees, bolstering profits and ultimately the compensation of the bank's executifves." (emphasis added)This is the real reason for the problem of bad loans, not CRA.
2. People who got these loans they couldn't afford are the problem and are responsible for their predicament so we shouldn't do anything to help the people who are facing foreclosure. While this may be true in part and can give one a good feeling, it is a bit of cutting off one's nose to spite your face. First, a lot of people who got these loans, it should be obvious now, were encouraged and probably even misled by those providing the loans. Second, a lot of people who got subprime loans (which would reset to higher loan rates than regular loans) qualified for regular loans but were steered into subprime loans because that meant higher profits for the loan processors. I can't find the article with the figure for what percent of subprime loans fell into that category, but Thom Hartman on his radio show March 18, 2009 said that 60% of subprime loans could have qualified as non-subprime loans. Next, I heard a good analogy about why it is a good idea to help those in foreclosure. Imagine you have a neighbor who starts a fire in his house next door because of his own negligence--wouldn't it be justice to not call the fire department and let the house burn down? However, what if you don't call the fire department and the fire jumps over to your house and causes it to burn? Widespread foreclosures lead to a decline in the value of everyone's property, increased unemployment and a rise in crime. If nothing is done we can get into a downward deflationary spiral, which has come close to happening now. Finally, because of the foreclosures and economic crisis more and more people are facing foreclosure not because they got an unaffordable loan but because they lost their jobs through no fault of their own.
3. What we need to do is reduce taxes, especially on business, balance the budget, get rid of regulations and let the business cycle take care of itself. A corollary to this is FDR's New Deal didn't solve the Great Depression and even lengthened it. I wish people would read more history. President Hoover from October, 1929, pretty much followed the above prescription(except he raised individual taxes in order to balance the budget) for the remainder of his term and the nation's gross domestic product(GDP) precipitously declined as a result. After FDR took over in 1933, the GDP rose steadily and after about two years was above pre-Depression levels. It levelled out only in 1937 when FDR thought we were doing well enough and he had a balanced budget for that year. Once he returned to deficit spending in 1938 the GDP started climbing again (courtesy of a graph on the Rachel Maddow Show). Because the government didn't collect stastics then like we do now, we have only estimates. Best estimates are that at its worst in 1932-1933 the unemployment rate was between 25% and 30%. Under FDR the rate retreated down to between 12 to 15% at the start of World War II. Most economists now agree that the problem with the New Deal was that it wasn't big enough.
4. The government doesn't create jobs, it only takes money from one place to another, stifling jobs in the private sector and shifting the money to jobs in the public sector. This is a favorite of conservatives and is one of the erronious claims made by Michael Medved in his book 10 Lies About America. The Federal government can do something no other entity can do (legally anyway): and that is print money. By creating money and spending it (deficit spending) without first collecting it, the government can stimulate the economy and create wealth. Thus, a public sector job can be created without affecting the private sector, excpet positively. When you have a deflationary spiral and/or credit freeze only the Federal government has the means to restore markets; this has been shown time and time again. Of course, this is inflationary and can cause problems if pursued during periods of high economic activity. When we are facing deflation, however, inflationary practices are the sine qua non of an economic recovery. Finally, this assertion overlooks that fact that diverting money from one sector of the economy to another may be beneficial. The government does this all the time with its tax policies in order to encourage certain economic activities over others. This is not to say that all tax policies are good ones, but rather that not all economic activity is beneficial and the free market does not insure that money accumulated and then spent is always done in either the most efficient or beneficial way. Is a billionaire using his money to put solid gold faucets in his mansion a better use of money than if the government taxed it and used to to put more teachers in schools or cops on the beat? I don't think so. Also, there is the whole issue of the multiplier effect which I won't get into now.
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