She's Clueless, He's Worse

Ignorance is bliss, which perhaps explains Gov. Sarah Palin being so confidently wrong about the root cause of the federalization of most of the nation's mortgage market. But what is Sen. John McCain's excuse? Both act as if the financial meltdown of the U.S. economy has nothing to do with the policies of the political party they represent -- but she at least may not know any better.

Distracted momentarily from her campaign revelries of maverick opposition to the "bridge to nowhere," which she had supported until it became a public relations debacle, and congressional earmarks for which she, as a small-town mayor, had hustled piggishly at the federal trough, Palin made the mistake of dealing with an unscripted subject.

Referring to the government's bailout of Fannie Mae and Freddie Mac, Palin opined that the two had "gotten too big and too expensive to the taxpayers," displaying abysmal ignorance of the fact that only now will those privately owned banks become a huge taxpayer obligation, as the federal government takes them over. Nor can the meltdown of home values be traced to those two beleaguered institutions, because they did not make the original subprime mortgage commitments.

The housing bubble was the result of the Ponzi-scheme antics of those other financial entities: commercial banks, stockbrokers and hedge funds, which were allowed in a GOP-deregulated market to get into the "swap" business. Through the rampant reselling of loans, the obligation to collect on a loan was divorced from the act of selling it in the first place, so who cared if the recipient of the loan was not at all qualified or the appraisal of the property value was inflated, as long as the paper was traded away, or insured, before the moment of foreclosure?

As with any Ponzi scheme, the perps, who included the legislators as well as the bankers who exploited the loopholes they provided, expected to bail long before the bubble burst. The role of the legislators, Republican-led but with far too many Democratic running dogs, was critical to the success of the scam.

The mortgage swaps distancing the originator of the loan from the ultimate collector were made legal only as a result of the Commodity Futures Modernization Act, which former Sen. Phil Gramm, R-Texas, pushed through Congress just hours before the 2000 Christmas recess. Gramm, until recently co-chair of the McCain campaign, also had co-authored the Gramm-Leach-Bliley Act, which became law in 1999 with President Bill Clinton's signature. That gem, which Gramm had pushed for years with massive financial industry lobbying, destroyed the Depression-era barrier to the merger of stockbrokers, banks and insurance companies. Those two acts effectively ended significant regulation of the financial community, and no wonder we have witnessed an even more rapid and severe meltdown in housing values than during the Great Depression.

Not surprisingly, Gramm was rewarded for his service upon retirement as a senator and as head of the Senate Banking Committee with a top position at the Swiss-based UBS bank, which is close to drowning in the subprime mortgage nightmare he helped create. These folks have no shame, as was evidenced when the senator's wife, Wendy, was named a director of Enron, whose roiling of the energy market had been made possible only through yet another provision of Gramm's Commodity Futures Modernization Act.

While neophyte Palin can claim ignorance of such matters, that would be particularly difficult for McCain, who as a senator consistently lined up with Gramm in his deregulation crusade. Clearly McCain had not learned much from his previous involvement with the savings-and-loan debacle about the risks to consumers in unregulated banking.

McCain served as chair of Gramm's abortive 1996 presidential campaign, and Gramm returned the favor, providing critical support for McCain with the hard-line Republican base, including the editorial board of the Wall Street Journal. It was assumed in the business press that Gramm was the front-runner to be Treasury secretary in a McCain administration. Gramm left his role as the top economic person near McCain only after he made an embarrassing statement blaming the current economic downturn on "whiners," an awkward reference to the victims of his disastrous legislation.

Amazingly, the turmoil in the housing market, which has led to the socializing of the nation's revered homeownership market in a massive expansion of the role of big government, has apparently not troubled McCain's conservative supporters. As I said, ignorance is bliss, and evidently not just for the newbie Palin.

Robert Scheer is author of a new book, "The Pornography of Power: How Defense Hawks Hijacked 9/11 and Weakened America."

Comments

[krocklin]

I used to listen to you on the Berkeley campus during the 60s. You frequently spoke. I remember Phil Ochs and Richie Havens.
You had the most reasoned approach of all the speakers and you have kept it up.

Your book on military expenditures is brilliant and addresses an issue Democrats never can address except through the back door IF they get elected.
Obviously these costs represent the most entrenched special interests of all.
The good news is that our present course is unsustainable. There are limits to American power and hopefully more doubts about the effectiveness of military invasions and occupations.
The resources aren't there anymore, and if the downturn in the economy gets more severe, reality will impose itself further.
Occupation of Afghanistan is a mistake, but at least would be undertaken in conjunction with NATO.

[bugdog]

Of course Palin is ignorant. She's just one of millions and millions of ignorant Americans, very ordinary. Most of them don't even get your point.

[WIpatriot]

Spot on.

[dve2z]

"socializing of the nation's revered homeownership market in a massive expansion of the role of big government"

the housing crisis is probably the most glaring example that purely market forces won't do, and government needs to interfere, regulate, support, etc.
This is the Democratic view.

purely market forces do not prevent bubbles. yes, eventually, the bubble burst and the market settles on the more efficient mode, but in the process a lot of people suffer.

a really wise government should sometimes proactively burst the bubbles even though it may be politically unpopular. That's what makes a great visionary leader. I will never believe populist McCain can be such a leader.

[worldtraveller]

Ponzi scheme yes but you left out the biggest culprit, the buyers who thought they could flip for huge profits...

[BBackSoon]

So out of all of the people that got loans for homes, how many were looking to flip the house, maybe 5 or 10 percent?

I for one bought within my means, in fact the mortgage company cleared me to borrow 50% more. I opted for a fixed rate loan. That was 8 years ago, now my Property Taxes have doubled, Home Insurance has more than doubled. I pay as much to my escrow account as to my loan. Now let’s add in everything else that has gotten more expensive, which is everything. I am hurting and I bought smart.

You can’t blame this bubble on the flippers. They had an affect but they are not the cause.

[wolfgangmo]

Follow the money.

Who has gained the most? It ain't the small time flippers who are a margin of the picture at best.

[Jetling]

The biggest culprits will be the ones who profited. The flippers got drawn in because the loopholes were created to suck them in.

[dadw5boys]

MANY OF THE LOANS THEY ARE FINDING WERE FOR HOMES THAT WERE NEVER BUILT!!!!!

HOME BUILDER GOT HUGE LOANS AFTER BUILDING ONE OR TWO.

THEN USE VACANT LOT TO GET MULTI MILLION DOLLAR LOANS AND NEVER BUILT THE HOUSES !!!!!!!!

[icechaos]

The guy left out the Federal Reserve keeping rates too low for to long. He also left out the democrats in government and so-called community activists that put pressure on lending institutions to increase loans to minority groups. There is enough blame to go around but really this was a liberal scheme for a social good that has backfired but really I wonder if it really has backfired. Now we are in for a wealth transfer from a shrinking middle class to a growing underclass. Welcome to the wet dream of socialists here in the states.

[MysticInd]

BS

[dagm]

One last post from me - did anyone notice this on another blog on Huff post - Daine Francis refering to deposit insurance.
"The Fed has 150 banks on its watch list, in addition to the 11 that have already gone bust. If all go under, the Mother of Bailouts will be necessary."

This would be a dramatic development, because Deposit Insurance was one of the major reforms to emerge out of the Great Depression - it was created to prevent run on the banks. If that goes ... well we will be in uncharted territory!

[wayoutleft]

i read anything you and frankp37 have to say. i'll watch for you. thanks for an informed point of view.

[wayoutleft]

i heard on some kind of cable news analysis that watch list status isn't a red alert for failure and doesn't mean a terminal condition for a bank's viability. of course it has to imply some deterioration of its position- of some kind...

[sheila]

i have heard rumblings that this whole socialization is not just to bail out Big Bankers (although that's a happy bonus to the Base), but rather to bail out the overseas investors who finance Cheney's Perpetual War Machine. it appears they had a word with Paulson and basically said "bail us out or we will stop bankrolling your wars for the military/i­ndustrial/­big oil complex."

this makes a lot of sense, since, no matter how many hundreds of thousands of innocents are murdered, no matter how many american families are bankrupted, while the planet dies and the top 1% get astronomically richer, the War Machine Must March On.

anyone else hearing this kind of talk?

[worldtraveller]

sheila.. you can bet with certainty that those conversations occurred... Tough to be in someone elses pocket. No different though than a 3rd world country borrowing from the IMF and being told what to do.

[Aaror]

Specifically China, and it is not just the war machine, it is our entire economy. Welcome to the USA, a wholly owned subsidiary of China.

[frankp37]

This article is even more confused than what Palin said. Several columnist have mixed this up today, including Dowd at NYT. What you're saying about swaps may be true enough, but it's a different issue from the GSEs. Freddie and Fannie did lower their standards and pick up bad loans in recent years. They took over as much as 80% of the market in mortgages. They became a massive threat because they're so huge they hold something like $5 tillion in debt. The real problem is these mortgages became too complicated but to criticize Palin when you don't understand it yourself is frankly typical of liberals. The reason you don't like her is she's conservative otherwise you'd be happy to have her on your ticket.

[wayoutleft]

no. what's typical is someone seizes on some divergence of small detail to unsuccessfully invalidate the main, overarching theme. i understand that these mortgages were packaged in different ways. i also understand that ppl made real money- lots of it- moving ultimately worthless paper; and that the federal treasury will restore assets to fannie and freddie with tax revenue of some kind. there are always one or two commentators like yourself relatively knowledgeable on any political issue who deserve respect. yet seldom are any of their comments definitive. if they were- there would be no issue. i respect your better understanding and accept any correction of fact; but you must respect differing overall political conclusions.
i totally acknowledge palin is a conservative political superstar. great respects to palin and the gop public relations machine. awesome. that's something liberals don't yet understand. no question.

[worldtraveller]

way out.. you have class!

[wolfgangmo]

Yes, the privatizing of administration that happened at Freddie and Fannie obviously caused many of these problems.

On Caribou Barbie tho', you are dead wrong. The republican party [a non conservative organization at this point - corporate as all hell tho'] can keep her.

[argent1]

Where are you now Neil Bush?

[wayoutleft]

"and there you have it." they got away with the money, just like they did in mccain's s&l keating 5 scandal. they got out with all the money. resorting to force attendant to revolution recommends itself as an antidote. our institutions are insufficent to prevent the coerced, governmentally enforced, alienation of earnings into ultimately private hands. they can't be stopped within the dynamics of our current american governmental institutions. it's just a question of the next megascam the pols will aid and abet. do you start by confronting the cynical fatalism of the american public? or official dereliction in oversight? is the recurrent scam pattern inevitable? should we- in our too short time on this earth- be bound up with such endemic intractables? i have respected your lifelong heart for the good for a long time now. certainly the struggle is rewarded with wisdom and clarity. for instance, this is the first time i've seen palin referred to in a rational context as a public official.

[kasinca]

Robert. I haven't purchased a LAT since the day they replaced you with Max Boot and that Jonah Goldberg. You are the best.

[texastrixie]

As a Texan, I am sorry that so often we send the nation leaders who always choose "bidness" over the common man. What we need to do to fix this mess is:
> unhook the banking/st­ockbroker/­hedge funds so that these can only be free-standing entities
> outlaw any form of incremental mortage - if you can't afford the fixed rate mortgage offered you, you can't afford to buy the house

My question is exactly what would have happened if we had not "saved" Fannie/Freddie. On some business programs/columns it is implied that we would have sunk almost instantly into a financial depression. Other pundits say it would have been bad, etc., but that we would have gotten over it in a year or two. Okay, HuffPo financial gurus - could someone explain to the rest of us the scenerios for these two views? Its a done deal, but each side of this thinks they are right and it would be helpful to understand upon what basis they made these claims.

[dagm]

Good question ... ultimately we don't know,.The essential concern was that there would be a run on the banks, meaning that the bond holders would not rollover the debt. Fannie/Freddie hold half the US mortgage debt – that is a staggering number. There are huge budget and trade deficits - meaning that foreigners hold a lot of US dollars. Without the bailout, Fannie/Freddie go under, every one dumps their US dollars, causing a meltdown in US markets and turmoil everywhere. The music stops and there are only so many chairs. People can’t get money out the banks and takes a long time for confidence to return meaning that the financial depression would become an economic depression.
The other scenerio would assume that the market sorts this out. The Chinese who hold over a trillion dollars in US dollars are very pragmatic and would likely act in accord with others to stabilize the situation. The resulting outcome would be more stable, so the argument would go.
My guess is that the government intervention only delays the necessary shift to a new financial regime where the US dollar is no longer the main world currency. Many have long assumed that the government was going to have to step in as a first step in an inevitable change. What is not clear is what that new regime looks like, so act now and we will figure it out from there.

[icechaos]

World Wide Depression.

[TheIndependenceParty]

Fannie and Freddie were run into a ditch by the same sleazy racketeers that have killed banks and Thrifts (Read "Keating Five") and the investment banks who find themselves on the ropes now.

The money and properties they traded in were never theirs! The fraud perpetrated on the markets, ... borrowers and lenders, and investors need to be pursued by the next DOJ! Just one more reason not to elect McCain and Moose-alini!

Bring Fannie Mae, Freddie Mac, and the USPS back into US ownership! It is not "nationalization" to reclaim property abused by privateers!

Those who advocate for privatization should take note. These are catastrophic results you have wreaked upon the American People. If we bail these corporations out, ... we, The People, should own them going forward. Period.

[wolfgangmo]

That makes a LOT of sense.

Are you sure that you are an American?

[ld]

You're still the best, Robert!

Hopefully people will start seeing that the morons behind McCain are as responsible as anyone for the current economic mess. Please keep putting the message out.

[ROBERTLMORGAN]

The best way to get away with fooling the public is by fooling them into thinking you are clueless. Americans for some reason distrust people they think are smart and thus prefer to elect a man they could have a beer with. I suppose its because Americans feel a smart guy will somehow trick them where as with a clueless person they can falsely feel that they are one step ahead of them and so can feel more comfortable with their decision. Palin may be smarter then any of us know or the people around and supporting her may be more diabolical and cunning then we can imagine

[DCX2]

Yes! Finally, someone understands why the Subprime Meltdown happened. Because of the Gramm-Leach-Bliley Act (SIGNED INTO LAW BY CLINTON!) the Glass-Steagal Act was repealed, deregulating financial markets and permitting this kind of atrocity to occur.

The destruction of American economic prosperity was bi-partisan.

And kudos for calling McCain out on not learning that deregulation is a bad thing!

[dagm]

Bi partisan yes ... but I would not be too quick to blame.. Forgive me if this sounds repetitive from previous posts, but this is just an extreme manifestation of the problems inherent in our financial system and the modern economy, which is connected to the need for growth in credit. Banks, insurance companies, pension funds, etc need to lend to make money, to generate returns to satisfy their stakeholders. There is a constant game of musical chairs and the key is not to have the music stop. I suspect that Alan Greenspan's reputation will suffer in the coming years because he was in a position to understand this and curb some of the excesses associated with the housing bubble. But even the FED chair's power and authority are limited. We are in uncharted territory ...

[wayoutleft]

what remains unclear is the lack of any dissenting voices- at least at the bonehead, sunday talk show level. can we take on it's face that nobody in touch with the informed public had any doubts or questions at all? people sat in front of greenspan and lapped everything up without any questions. were people just wrong- or were they staying out of the way of the ppl who eventually wound up with the money...

[icechaos]

Greenspawn was instrumental in what has happened.


http://www.counterpunch.org/gowani09012008.html

[beingrepubwontmakeurich]

it is perfectly truthful and honest to claim that it was a bipartisan effort back in 1999.
but isn't the relevant exercise here to pinpoint who has learned from the mistake and who continues to benefit from it?
personally i find it repugnant that Phil Gramm (of Gramm-Leach-Bliley Act fame) - while currently squirreled away so as not to remind us of his "whiner/mental recession" commentary - is still responsible for mccain's economic policy and i don't doubt continues to be a close economic advisor.

[wolfgangmo]

If you look at Canada, they consider that they mortgage market is going to suffer from a subprime meltdown.

Of course, because they are in a regulated market what that means is less than 5% of their total mortgage market.

Less than 5%. That is the difference that rational regulation makes to a market.