Blaming the poor for the financial crisis

There's a good article in The American Prospect, "Did Liberals Cause the Sub-prime Crisis?" which takes on the falsehoods being peddled by the right-wing that we can basically blame poor people and minorities for the current crisis. Don't buy the lies.

The fact of the matter is that Fannie and Freddie have had the same standards of lending for poor people since 1977, when the Community Reinvestment Act was passed, but we obviously didn't see the housing bubble even begin forming until around 2001. How can you blame a 25-year old policy for something that just started? Scapegoating black people, of course!

The problem with this argument is that CRA didn't even apply to 50% of subprime lending, and applied very little to another 30%! That's because CRA still had regulatory structure and transparency in lending, while the mess we have now is due to lack of standards and the shadiness of transactions involving mortgage-backed securities. So long as banks were on the hook if a mortgage failed, they had a vested interest in abiding by the standards of CRA. It was only in finding a way to magically pass on risk to others that predatory lending took off and the bubble was born. How did this happen? Fancy shuffling on Wall Street.

The fundamental issue is this: in 2000, a de-regulation bill called the Commodity Futures Modernization Act passed by McCain's right-hand man, Phil Gramm allowed for new fancy ways for banks to get around risk containment with mortgages, best summarized by the image of a bunch of fat cats with chainsaws tearing up regulatory law. In 2004, Bush and the GOP Congress pulled even more lenders out from under the regulatory structure of the CRA! Thus Gramm's "credit default swaps" legislation fueled the bubble and led to the free-for-all on Wall Street that we're paying for now. Paul Krugman explains that financial institutions were allowed to gamble with trillions of dollars with little to no regulation, and when risk became "spread" through the ability to bundle and sell mortgage-backed securities and investment vehicles, people went a little beserk by ignoring the serious risk that still existed and pretended that house prices would soar indefinitely. Financial institutions were allowed to play like banks, without the regulation that banks must submit to, and now are being bailed out like banks.

As Nouriel Roubini says, this is GOP welfare: privatize profits and socialize losses.

Don't buy the spin that this is the fault of liberals who wanted poor people and minorities to have houses. There were still rigorous standards of who could be lent money and at what rates, and transparency as to the creditworthiness of mortgage-related securities at that time. It was in 2000 that this changed, and it was directly thereafter that Wall Street began its party.

Setting expectations

I'm going in the opposite direction of the Obama campaign: setting the bar high for McCain bothers me. After blinking in a game of chicken, tonight is supposed to be McCain's "home field advantage" as everyone in the media tells me that McCain's "strength" is his foreign policy expertise. Well, I find that troubling...for many reasons:

McCain has made some serious errors in judgment in foreign policy, as well as some relatively minor confusions on the facts. Why then should he get the label "expert" in foreign policy?

This is, after all, the guy who confused the basic facts about the "Surge Policy" that he has claimed so much credit for.

The guy who won't meet with our ally - Spain?

The guy who is confused about his own position on the Iraq War, and whether or not he opposed it, and when, and whether or not he thought it would be "an easy victory"?

The guy who was confused about the need to go into Iraq way back in Jan 2002?

There's more:

Let's also not lose sight of the broader pattern. McCain thinks the recent conflict between Russia and Georgia was "the first probably serious crisis internationally since the end of the Cold War." He thinks Iraq and Pakistan share a border. He believes Czechoslovakia is still a country. He's been confused about the difference between Sudan and Somalia. He's been confused about whether he wants more U.S. troops in Afghanistan, more NATO troops in Afghanistan, or both. He's been confused about how many U.S. troops are in Iraq. He's been confused about whether the U.S. can maintain a long-term presence in Iraq. He's been confused about Iran's relationship with al Qaeda. He's been confused about the difference between Sunni and Shi'ia. McCain, following a recent trip to Germany, even referred to "President Putin of Germany." All of this incoherence on his signature issue.

Indeed.

Seth is here!

Seth Elliott Morgan was naturally born this Sunday morning at 4:58 am (9/21/08). [surprise!]

He weighed 6 lbs, 12.4 oz, was 19.75 in from head to toe, and is in excellent health.

Mom and baby are doing great!

View some pics of Seth and family here:

http://picasaweb.google.com/s.daniel.morgan/Seth

They'll be updated frequently.

Seth is on the way

For those few of you who read my site, my son Seth Elliott Morgan will be born by c-section Monday morning around 7:30 am.

He didn't turn until very late into the pregnancy (8 months) and still hasn't descended into the birth canal, despite his due date being 9/22/08. Thus, the doctor advised taking him now, rather than waiting until she starts labor on her own and having to do an emergency c-section.

My parents and Amber's parents will be in town, I have interim grades and comments due by Mon at 8 am, and it will be a crazy week. It may be a long time...perhaps a very long time, before I'm regularly writing anything of note here on this site. I will be posting pics soon, of course.

Thanks for reading. Thanks for caring. Wish us luck!

Democrats v. Republicans on the economy

Americans will be hearing a lot from the media in the next few days about the underlying causes of the financials market freeze-up, but they won't be hearing the hard facts:

1. When Bush and the GOP Congress started out this decade, they projected a $5.6 trillion surplus from 2002-2011. Instead, we will have a $3.8 trillion deficit. Thanks, GOP, for pissing away $9.4 trillion.
2. The "credit swaps" legislation passed by McCain's economic adviser Phil "nation of whiners" Gramm directly contributed to the current crisis. Thanks, GOP.
   
3. We've enjoyed stronger "fundamentals" under Democratic presidents than Republicans (I mentioned one of these fundamentals a while back -- income inequality)
4. Republicans are all for "capitalism"...so long as that means letting really really wealthy people make billions, then bailing them out: privatized profits & socialized losses. When the really wealthy power brokers of the GOP are getting hurt, it's time to step in with nationalized finance...but not when people like you and I are.
5. McCain and the GOP have no clue on health care, the leading cause of bankruptcy in America, causing 1.9 M / yr.
6. McCain's strong de-regulation emphasis goes all the way back to the Keating 5 scandal, and he has been shown to have been a major player in the S&L crisis that resulted.
7. On that note, McCain is advised by a bunch of financial lobbyists, while Obama is endorsed by economists 2:1 over McCain.
   

Rothkopf and Krugman on regulating financials

In response to the laissez-faire-style GOP economics of the past two decades or so, I offer this:

“We are at the end of an era — the end of ‘leave it to the markets’ and of the great cop-out that less government is always better government,” argues David Rothkopf, a former Commerce Department official in the Clinton administration and author of a book about the world’s financial leaders who brought about this crisis: “Superclass: The Global Power Elite and the World They Are Making.” “I think, however, it is important to stress the difference between smart government and simply more government.

“We do not need a regulatory ‘surge’ on Wall Street,” he added. “We need a complete rethinking of how we make global financial markets more transparent and how we ensure that the risks within those markets — .many of which are new and many of which are not well understood even by the experts — are managed and monitored properly.”

As always, Paul Krugman (MIT-trained Princeton prof. of economics) is the go-to guy for concise explanations on how and why the financial crisis happened and what to do about it.

In this post from March 21, he explains what is happening:

Contrary to popular belief, the stock market crash of 1929 wasn’t the defining moment of the Great Depression. What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931.

This banking crisis of the 1930s showed that unregulated, unsupervised financial markets can all too easily suffer catastrophic failure.

As the decades passed, however, that lesson was forgotten — and now we’re relearning it, the hard way.

To grasp the problem, you need to understand what banks do.

Banks exist because they help reconcile the conflicting desires of savers and borrowers. Savers want freedom — access to their money on short notice. Borrowers want commitment: they don’t want to risk facing sudden demands for repayment.

Normally, banks satisfy both desires: depositors have access to their funds whenever they want, yet most of the money placed in a bank’s care is used to make long-term loans. The reason this works is that withdrawals are usually more or less matched by new deposits, so that a bank only needs a modest cash reserve to make good on its promises.

But sometimes — often based on nothing more than a rumor — banks face runs, in which many people try to withdraw their money at the same time. And a bank that faces a run by depositors, lacking the cash to meet their demands, may go bust even if the rumor was false.

Worse yet, bank runs can be contagious. If depositors at one bank lose their money, depositors at other banks are likely to get nervous, too, setting off a chain reaction. And there can be wider economic effects: as the surviving banks try to raise cash by calling in loans, there can be a vicious circle in which bank runs cause a credit crunch, which leads to more business failures, which leads to more financial troubles at banks, and so on.

That, in brief, is what happened in 1930-1931, making the Great Depression the disaster it was. So Congress tried to make sure it would never happen again by creating a system of regulations and guarantees that provided a safety net for the financial system.

And we all lived happily for a while — but not for ever after.

Wall Street chafed at regulations that limited risk, but also limited potential profits. And little by little it wriggled free — partly by persuading politicians to relax the rules, but mainly by creating a “shadow banking system” that relied on complex financial arrangements to bypass regulations designed to ensure that banking was safe.

For example, in the old system, savers had federally insured deposits in tightly regulated savings banks, and banks used that money to make home loans. Over time, however, this was partly replaced by a system in which savers put their money in funds that bought asset-backed commercial paper from special investment vehicles that bought collateralized debt obligations created from securitized mortgages — with nary a regulator in sight.

As the years went by, the shadow banking system took over more and more of the banking business, because the unregulated players in this system seemed to offer better deals than conventional banks. Meanwhile, those who worried about the fact that this brave new world of finance lacked a safety net were dismissed as hopelessly old-fashioned.

In fact, however, we were partying like it was 1929 — and now it’s 1930.

The financial crisis currently under way is basically an updated version of the wave of bank runs that swept the nation three generations ago. People aren’t pulling cash out of banks to put it in their mattresses — but they’re doing the modern equivalent, pulling their money out of the shadow banking system and putting it into Treasury bills. And the result, now as then, is a vicious circle of financial contraction.

Mr. Bernanke and his colleagues at the Fed are doing all they can to end that vicious circle. We can only hope that they succeed. Otherwise, the next few years will be very unpleasant — not another Great Depression, hopefully, but surely the worst slump we’ve seen in decades.

Even if Mr. Bernanke pulls it off, however, this is no way to run an economy. It’s time to relearn the lessons of the 1930s, and get the financial system back under control.

So now the question is -- what lessons do we learn and what do we change?

In this post from March 24, Krugman makes the essential argument that must be made to prevent the toxic mixture of "hand-off" government and greedy banks from happening again:

America came out of the Great Depression with a pretty effective financial safety net, based on a fundamental quid pro quo: the government stood ready to rescue banks if they got in trouble, but only on the condition that those banks accept regulation of the risks they were allowed to take.

Over time, however, many of the roles traditionally filled by regulated banks were taken over by unregulated institutions — the “shadow banking system,” which relied on complex financial arrangements to bypass those safety regulations.

Now, the shadow banking system is facing the 21st-century equivalent of the wave of bank runs that swept America in the early 1930s. And the government is rushing in to help, with hundreds of billions from the Federal Reserve, and hundreds of billions more from government-sponsored institutions like Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

Given the risks to the economy if the financial system melts down, this rescue mission is justified. But you don’t have to be an economic radical, or even a vocal reformer like Representative Barney Frank, the chairman of the House Financial Services Committee, to see that what’s happening now is the quid without the quo.

Last week Robert Rubin, the former Treasury secretary, declared that Mr. Frank is right about the need for expanded regulation. Mr. Rubin put it clearly: If Wall Street companies can count on being rescued like banks, then they need to be regulated like banks.

But will that logic prevail politically?

Well it certainly hasn't with the Bush Administration.

In this post, he argues that the Administration's response is not real regulation and change, but re-shuffling deck chairs on the Titanic:

To reverse course now, and seek expanded regulation, the administration would have to back down on its free-market ideology — and it would also have to face up to the fact that it was wrong. And this administration never, ever, admits that it made a mistake.

Thus, in a draft of a speech to be delivered on Monday, Henry Paulson, the Treasury secretary, declares, “I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil.”

And sure enough, according to the executive summary of the new administration plan, regulation will be limited to institutions that receive explicit federal guarantees — that is, institutions that are already regulated, and have not been the source of today’s problems. As for the rest, it blithely declares that “market discipline is the most effective tool to limit systemic risk.”

The administration, then, has learned nothing from the current crisis. Yet it needs, as a political matter, to pretend to be doing something.

Way back in March, Obama offered six specific reforms (video, transcript) to an audience at Cooper Union aimed at regulating "shadow banks" like real banks and preventing a rerun of the ugly show we're watching today. Two days ago, McCain said that, "the fundamentals of our economy are strong," and has desperately backpedaled since, offering rhetoric about how what he really meant was the American worker is strong. And McCain has to pretend he hasn't been against regulation for 26 years. Are the American people listening?

Politics stuff

This is your GOP government in action:

Keep an eye on the TED spread to see how bad things will get. It is basically a quick snapshot of the liquidity crisis. It shot up to 2.01 within a few hours yesterday from near 1.0. That's a bad sign.


A few points:

• The collapse on Wall Street can be laid squarely at the feet of people like Phil Gramm, who inserted deregulation language covertly into finance bills:

  If McCain wants to hold someone accountable for the failure in transparency and accountability that led to the current calamity, he should turn to his good friend and adviser, Phil Gramm.
  
  As Mother Jones reported in June, eight years ago, Gramm, then a Republican senator chairing the Senate banking committee, slipped a 262-page bill into a gargantuan, must-pass spending measure. Gramm's legislation, written with the help of financial industry lobbyists, essentially removed newfangled financial products called swaps from any regulation. Credit default swaps are basically insurance policies that cover the losses on investments, and they have been at the heart of the subprime meltdown because they have enabled large financial institutions to turn risky loans into risky securities that could be packaged and sold to other institutions.
  
  Lehman's collapse threatens the financial markets because of swaps.

  Don't forget McCain's role in the Keating 5 scandal was basically to deregulate the market, which ended up costing taxpayers about $165 B total in the S&L scandals. And don't forget how people like McCain cheered as bankers took chainsaws to the regulation laws that King W and congressional Republicans did away with. Their libertarian philosophy tells them, "all regulation bad," but reality tells a different story, doesn't it?
  


• The DNC has a great "Count the Lies" site up documenting McCain's mendacity. As others have noted, he's basically trying to reinvent himself, going from "honorable man who happens to be a politician" to "sleazy dishonorable politician who will fulfill W's 3rd term"...


• Even David Brooks thinks Palin is not the woman for the job:

  Sarah Palin has many virtues. If you wanted someone to destroy a corrupt establishment, she’d be your woman. But the constructive act of governance is another matter. She has not been engaged in national issues, does not have a repertoire of historic patterns and, like President Bush, she seems to compensate for her lack of experience with brashness and excessive decisiveness.
  
  The idea that “the people” will take on and destroy “the establishment” is a utopian fantasy that corrupted the left before it corrupted the right. Surely the response to the current crisis of authority is not to throw away standards of experience and prudence, but to select leaders who have those qualities but not the smug condescension that has so marked the reaction to the Palin nomination in the first place.

  Preach it brother.


• Bob Herbert's column on McCain's disastrous health care "plan" is worth reading in its entirety. Here's a snippet:

  Talk about a shock to the system. Has anyone bothered to notice the radical changes that John McCain and Sarah Palin are planning for the nation’s health insurance system?
  
  These are changes that will set in motion nothing less than the dismantling of the employer-based coverage that protects most American families.
  
  A study coming out Tuesday from scholars at Columbia, Harvard, Purdue and Michigan projects that 20 million Americans who have employment-based health insurance would lose it under the McCain plan.
  
  There is nothing secret about Senator McCain’s far-reaching proposals, but they haven’t gotten much attention because the chatter in this campaign has mostly been about nonsense — lipstick, celebrities and “Drill, baby, drill!”
  
  For starters, the McCain health plan would treat employer-paid health benefits as income that employees would have to pay taxes on.
  
  “It means your employer is going to have to make an estimate on how much the employer is paying for health insurance on your behalf, and you are going to have to pay taxes on that money,” said Sherry Glied, an economist who chairs the Department of Health Policy and Management at Columbia University’s Mailman School of Public Health.
  
  Ms. Glied is one of the four scholars who have just completed an independent joint study of the plan. Their findings are being published on the Web site of the policy journal, Health Affairs.
  
  According to the study: “The McCain plan will force millions of Americans into the weakest segment of the private insurance system — the nongroup market — where cost-sharing is high, covered services are limited and people will lose access to benefits they have now.”
  
  The net effect of the plan, the study said, “almost certainly will be to increase family costs for medical care.”
  
  Under the McCain plan (now the McCain-Palin plan) employees who continue to receive employer-paid health benefits would look at their pay stubs each week or each month and find that additional money had been withheld to cover the taxes on the value of their benefits.
  
  While there might be less money in the paycheck, that would not be anything to worry about, according to Senator McCain. That’s because the government would be offering all taxpayers a refundable tax credit — $2,500 for a single worker and $5,000 per family — to be used “to help pay for your health care.”
  
  You may think this is a good move or a bad one — but it’s a monumental change in the way health coverage would be provided to scores of millions of Americans. Why not more attention?
  
  The whole idea of the McCain plan is to get families out of employer-paid health coverage and into the health insurance marketplace, where naked competition is supposed to take care of all ills. (We’re seeing in the Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers and Merrill Lynch fiascos just how well the unfettered marketplace has been working.)
  
  Taxing employer-paid health benefits is the first step in this transition, the equivalent of injecting poison into the system. It’s the beginning of the end.
  
  When younger, healthier workers start seeing additional taxes taken out of their paychecks, some (perhaps many) will opt out of the employer-based plans — either to buy cheaper insurance on their own or to go without coverage.
  
  That will leave employers with a pool of older, less healthy workers to cover. That coverage will necessarily be more expensive, which will encourage more and more employers to give up on the idea of providing coverage at all.
  
  The upshot is that many more Americans — millions more — will find themselves on their own in the bewildering and often treacherous health insurance marketplace. As Senator McCain has said: “I believe the key to real reform is to restore control over our health care system to the patients themselves.”
  
  Yet another radical element of McCain’s plan is his proposal to undermine state health insurance regulations by allowing consumers to buy insurance from sellers anywhere in the country. So a requirement in one state that insurers cover, for example, vaccinations, or annual physicals, or breast examinations, would essentially be meaningless...

  How's this even a close race? Do people care about the issues? Sadly, I'm starting to conclude, "No."

The "Out Campaign" for freethinkers

Here's my proposal: give freethinkers an "out campaign" just like the atheists have.

(graphic source)

Palin is empty and McCain is a liar

Watching Sarah Palin's part two tonight was painful: an exercise in vague platitudes and duplicity.

Watching the erosion of McCain's character as he continues to tell lie after lie about Barack Obama is more painful. He lies about Barack's bill to protect kindergartners from sex predators and he lies about Barack's tax CUT for those making under $250K / yr and basically everything else:

It's time to vote for someone whose campaign doesn't point towards Bush III.

Palin's dangerous ignorance on foreign policy

Sitting at home watching this, I knew that Charlie referred to the justification given by Bush for pre-emption. Sarah Palin didn't. I know more about key foreign policy stances than her. Perhaps I should run for VP?

She doesn't know what pre-emption is and is willing to start World War 3 with Russia if they invade Georgia. How awesome! Let's put her in the WH!