Fannie Mae and Freddie Mac never originated a single loan. They certainly are participants in what went on here, but the problem was caused by this notion of, quote, “deregulation.”
And, of course, there is no such thing as deregulation. Everything has rules. Think about baseball, which is a trivial, a fun activity. Baseball regulates how many stitches are on the baseball. And all deregulation has meant for the last thirty years is new rules that favor those with the most money.
Well, the rules that were set up encouraged bad lending practices, and, most importantly, they separated risk from responsibility. You’re always hearing about risk and reward being tied together, but they separated risk from responsibility, because if you’re a bank and you make a loan and you have to hold that loan or some of your loans in your portfolio, you’re going to be very careful about vetting the borrower to make sure you’ll get back the principal and the interest. But if you can package a loan, securitize it and then sell it to places like the pension funds that you and I support with our tax dollars for public employees, then what do you care if the loan goes bad, especially if you get big fees and especially if the more toxic the loan is, the less likely it is to be repaid, the bigger your fees? That’s what deregulation has meant, and that’s what’s brought us to this pass.
We have an enormous problem that is not going to be solved by the government. What you’re seeing right now is politicians taking your money and redistributing it upward. And our whole national myth is that we take from those with a lot and give to those down below. That’s not what goes on. That’s from the official government data. This is a transfer of wealth and income: five percent of the year’s economy to essentially wealthy bankers and, to some degree, customers of theirs.
A study done just recently of thirty-seven—forty-two banking crises around the world over the last thirty-seven years show that these things don’t work. And the government is not big enough to solve this problem.
These assets that were artificially inflated—the selling of mortgages for 125 percent of the value of a house; the issuing of car loans, where someone walks in and wants to buy a $40,000 SUV, and they walk out with $25,000 in their pocket because they got a $65,000 loan—is at the core of this problem. We are going to have to sustain these losses. These assets are going to have to fall back down in price. It’s going to be an awful, painful process.
The senators’ idea here, by the way, is striking, because—both senators—because while they both talk about market capitalism, what they are describing is corporate socialism.
I’m not opposed to the bailout, per se. I’m not saying government shouldn’t do anything. But here’s the thing to ask yourself. We were told the problem is the credit markets are freezing up because those who have cash to place are not at all confident they will get their money back, even if it’s only loaned out for one night, so we approved this $700 billion bailout package. When are they going to start spending the money? After the elections. Now, what does that do about overnight lending and short-term lending? Absolutely nothing. That’s not what this was about. This was a Goldman Sachs plan by the former head of Goldman Sachs to, first and foremost, take care of the people on Wall Street.
There are other solutions. There’s a whole slew of economists who have proposed different solutions out there. One of them is we can create a temporary new section of the bankruptcy code. People can go into the bankruptcy court—bankruptcy courts are practical courts; they are interested in clearing the decks and moving people forward—and get a ruling. We’re going to rewrite your mortgage, or, too bad, you’re going to be foreclosed on. There’s no consideration, by the way, being given here to small landlords. A lot of mom-and-pop landlords got sucked into these loans. And if they are kept out of the process, it means renters are going to be evicted, renters who had nothing to do with this. We can inject liquidity into the system, what you’re seeing the government doing, and the implication of that is inflation.
We didn’t discuss options. That’s what troubles me, is Congress only heard from the advocates of this plan. They took no testimony from anybody else, only from the two principal advocates of this plan.
The media coverage of all of this is absolutely awful. And I have been at sites for journalists citing this. You had flat-out falsehoods open the CBS Evening News with Katie Couric and the Nightly News on NBC with Brian Williams Monday, a week ago, when the stock market fell. Both of them said it was the one—the biggest one-day decline ever in the stock market. It isn’t even the biggest in the last twenty-one years. It was the third. Now, it’s a big story, it’s important, but why would you not tell the truth about that? And it’s because they’ve bought into the hype.
The administration, just as it came up with a plan, to focus on using the herd mentality, the gullibility, the lack of skepticism among the Washington press corps and the way that most people there operate, which is on access to sources while ignoring a vibrant, rich public record of documents that will tell you what’s going on, have understood how to play this to a fairly well. And it’s just astonishing to see that—having been so badly burned and embarrassed on the run-up to the war in Iraq to the point where we now know that the government knew there were no weapons of mass destruction, you would have expected skepticism. After all, the first rule of journalism is check it out. And there was not checking here. There was advertising posing as news.
Was the subprime mortgage crisis here the root of the entire global meltdown that we’re seeing?
It was fundamental to it, but I think the root is something deeper. It is the artificial inflating of assets, driven by Wall Street, that is at the real core of this problem. What appears to have tipped the crisis was the decision by Secretary Paulson to let Lehman Brothers collapse, and that panicked everyone. But if we’re going to live in an interconnected global economy and everyone is going to follow the same bad practices, you’re going to get the same bad results. And the focus of our attention ought to be on sound banking practices, on sound economics.
The fact is that we have a government—we were promised in 1980 by Ronald Reagan: “Elect me, and I’ll get you very quickly to balanced budgets.” Instead, we have four times the amount of government debt that we had back in 1980.
The taxes that Americans have paid in advance for Social Security benefits in the future were spent, principally to finance tax cuts for the wealthiest Americans. Right now, with the bailout in effect next year, all of the tax—the equivalent of all the income taxes that you pay in January, February, March, April and a good chunk of May just go to pay interest on the national debt, and that money goes to China, foreign sovereign funds, wealthy individuals, insurance companies. It is a transfer from working people to those who are already wealthy.
The idea that we can cut our way out of this is just absurd. And let me give you a little example of this, Amy. I spent six weeks in Europe this year talking to ordinary people in twelve countries—rural Slovakia, Scandinavia, elsewhere—and about their economics and their finances. In Sweden, you are three times more likely to own a boat than you are in America. You’re much more likely to own a home free and clear. In fact, I walked up to a gaggle of bus drivers in Stockholm, and it turned out every one of them owned two houses—a city house or apartment and a country home—and every one of them owned them free and clear. What are the odds in the American economy that you could find a dozen bus drivers anywhere who owned one house free and clear?
There is a fundamental flaw in the economic theory that we have been operating on for years. And that theory doesn’t address the matters, what you spend your tax dollars on. We are not spending our tax dollars on greasing the wheels of commerce, building a stable society, educating people and removing the shocks from things like accidents and disease. We are spending it on income transfers to the rich, on war, on interest on the national debt. And it’s impoverishing us steadily. Neither one of these presidential candidates is addressing the need for fundamental reform to build a sound economy that will take us into the future.
Is healthcare in America a privilege, a right or a responsibility?
Wrong issue. The question should be, how do we get the most effective, least expensive healthcare system? And running healthcare as a profit-making business is not the way to do that. The rest of the modern world has figured out that there are more efficient, more effective ways to do this. Look at our auto industry. It’s moving from Michigan to Ontario. Healthcare—it is damaging our economy to treat this as a business. We need—you know, what if somebody proposed kindergarten insurance? Just examine the whole debate about healthcare and imagine that we were talking about kindergarten insurance.
Well, I don’t know that single-payer is the only answer. There are other systems in other countries. You can have a competitive system, but you don’t want to treat it as a profit- making business. You want to treat it as a public service, just as we do law enforcement, education and public health, rather than individual health.
David Cay Johnston, talking with Amy Goodman.
David Cay Johnston, former investigative journalist for the New York Times. He won a Pulitzer Prize in 2001 for his running investigation of the tax system. His latest book is titled Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill). He is also author of the bestselling book Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich—and Cheat Everybody Else.
– from democracynow