This is an absolute must-read for every American citizen, a wonderful snapshot – a partisan and partial picture — of the dynamics that have brought America to one of the most severe crises in out history. A collusion between both parties, the finance industry, and the real estate industry. They made uncounted millions on this public-private partnership, for which we will pay dearly in many ways.
The author does not mention the repeated warnings and attempts to reform this out-of-control juggernaut. Greenspan, the US Treasury, and others made many attempts – all defeated by a powerful and explicitly political coalition. We were often and publicly warned, but chose to do nothing. As described in this post: “Idiots Fiddle While Rome Burns” – comforting and facile rhetoric“.
“The Fannie Mae Gang“, Paul A. Gigot, op-ed in the Wall Street Journal, 23 July 2008 — Excerpt:
I recount all this now because it illustrates the perverse nature of Fannie and Freddie that has made them such a relentless and untouchable political force. Their unique clout derives from a combination of liberal ideology and private profit. Fannie has been able to purchase political immunity for decades by disguising its vast profit-making machine in the cloak of “affordable housing.” To be more precise, Fan and Fred have been protected by an alliance of Capitol Hill and Wall Street, of Barney Frank and Angelo Mozilo.
I know this because for more than six years I’ve been one of their antagonists. Any editor worth his expense account makes enemies, and complaints from CEOs, politicians and World Bank presidents are common. But Fannie Mae and Freddie Mac are unique in their thuggery, and their response to critics may help readers appreciate why taxpayers are now explicitly on the hook to rescue companies that some of us have spent years warning about.
Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
For more information about this subject
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A brief note on the US Dollar. Is this like August 1914? (8 November 2007) — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
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The post-WWII geopolitical regime is dying. Chapter One (21 November 2007) — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
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We have been warned. Death of the post-WWII geopolitical regime, Chapter II (28 November 2007) — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
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Diagnosing the eagle, chapter I — the housing bust (6 December 2007)
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Death of the post-WWII geopolitical regime, III – death by debt (8 January 2008) – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
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Geopolitical implications of the current economic downturn (24 January 2008) – How will this recession end? With re-balancing of the global economy, so that the US goods and services are again competitive. No more trade deficit, and we can pay out debts.
- A happy ending to the current economic recession (12 February 2008) – The political actions which might end this downturn, and their long-term implications.
- What will America look like after this recession? (18 March 208) — More forecasts. The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
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The most important story in this week’s newspapers (22 May 2008) — How solvent is the US government? They report the facts to us every year.
To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.
Ironists seeking to discuss this matter will find the word, “creative,” to be useful.
According to How Not to Say What You Mean: A Dictionary of Euphemisms
creative: disputatious or dishonest
Thus for churchmen creative conflict is a bitter doctrinal argument. For a businessman creative accounting is false bookkeeping.
“They give you a lot of crap about ‘creative freedom’ but what they’re really talking about is ‘creative bookkeeping.’
Creative tension means a violent disagreement.
He denied that…relations were strained…but there had been ‘creative tension’ two able executives. — their company had been accused of unethical behaviour.
Note also that the closely related “creature” is also interesting:
creature (the) spirituous intoxicant
creature of sale a prostitute
Hence, we might say, “With Fanny Mae and Freddie Mac, it is not the conflict that has been creative but the tension.” or “The mortgage crisis has been the very creature of their bookkeeping.”
Not just for Fanny and Freddie, but all the klepto financials:
How about a 95% net-worth tax on all the officers and board members of these firms getting bailouts.
It should include a 10-year reach-back to recover any assets given way to friends, or family or disposed of by any method – just like states do to nursing home patients who require public funds to cover their care expenses.
And just as with indigent nursing home residents we can allow these malefactors of great wealth a $50 a month “crazy money” stipend for denture adhesive and hearing aid batteries.
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Fabius Maximus replies: Yes, let’s trample the rule of law in our quest for vengence against these corporate managers and politicos.
We ignored many warnings by important people and agencies — slothfully defying even common sense which warned this would all end badly. But this is 21st century America, where “It is not my fault” has become the national motto. These laws would nicely demonstrate that assuming responsibility for the Republic is beyond our capacity, as is self-discipline and proactive political action.
Reading American history, or for that matter, any history, shows that politics and business have been sleeping together to the enrichment of each other for a long time. That is why the Constitution included an independent and impartial legal system to provide fairness. But when all three branches of government are in cahoots with business, that is a recipe for revolution.
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Fabius Maximus replies: And how do present conditions differ from those faced by Teddy Roosevelt and others of the Progressive Era? Somehow they managed to pass legislation to break up trusts, promote unions, and ensure some basic legislation about food safety and such.
I find it astonishing how easily folks give up, as represented by comments on this site. These challenges just have to be met; calculating the odds (and whether we should give up) is IMO unworthy of our past and our inheritance.
“Fabius Maximus replies: And how do present conditions differ from those faced by Teddy Roosevelt and others of the Progressive Era?”
I’m not particularly knowledgable about the Progressive era but as I recall Rooseveldt represented a very strong, well-organized minority within the Republican party and was made the Vice Presidential candidate because the Republicans couldn’t win without him. This caused enormous concern with the pro-business wing of the Republican party because they knew that he’d get into power if the President died (which is exactly what happened) and they had no hold on him. When he got into power he allied his progressive Republicans with an effective Democratic party that favored change to get the job done.
Rooseveldt had added advantages that the US economy was strong during his term in office and he was riding Manifest Destiny and a muscular foreign policy that was popular with the general population.
Unfortunately we do not have the same circumstances now. The Republicans are emphasizing loyalty to the party line at the expense of all else. The Democrats are weak and divided against themselves. Our economy, as you’ve documented at length, is heading for the toilet and our current foreign and energy policies are a shambles but have managed to continue to exist primarily because of a crippled legislature. Finally there is no candidate on the horizon that combines Rooseveldt’s energy and experience. Obama shows signs of being able to channel Teddy but not consistently or for any length of time.
Fabius: I find it astonishing how easily folks give up, as represented by comments on this site. These challenges just have to be met; calculating the odds (and whether we should give up) is IMO unworthy of our past and our inheritance.
It’s not a matter of giving up. It’s a recognition that tasks you are setting before us (pulling the country out of its self-imposed senility, reversing our current disasterous economic policies, re-establishing the Constitution against the wishes of Congress and perhaps a majority of the people) are simply beyond the capabilities of the people who blog here. The passengers on the Titantic had very little ability to save the ship after the ship had hit the iceberg. Our ship of state has not only hit the iceberg but has intentionally rammed it several more times (presumably to show it who’s boss). Doesn’t it seem logical to check out the lifeboats now?
A last note on our past and our inheritance, this is a nation of immigrants. We are the descendants of people who looked at their current situation and made the momentous decision to abandon it, their neighbors, most of their families, their culture, and (for most of them) their language to establish themselves in a rugged new land. A lot of them died in considerable discomfort and penniless because of their decision but, from my readings, I can find very few seem to have regretted it. Americans are descendents of opportunists who recognized the trends as they occurred and did their best to live with them. Can you ask anything less of us now?
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Fabius Maximus replies: This seems pretty ad hoc as explanation, “just so” stories.
“Rooseveldt had added advantages that the US economy was strong during his term in office”
Much of the progressive legislation we’re discussing came to full development under FDR. So a “strong economy” does not seem to be a relevant factor.
“The Republicans are emphasizing loyalty to the party line at the expense of all else. The Democrats are weak and divided against themselves.”
Perhaps, but I doubt it. I suspect that the Republicans will get trashed in this election, and (unless President Obama screws up big-time) will be reduced to an insignificant minority (as in the 1930’s) in the next few cycles.
“It’s a recognition that tasks you are setting before us … are simply beyond the capabilities of the people who blog here.”
Since you are pre-emptively giving up, who will ever know? I suspect that history is not made by such traits, nor are folks who surrender so easily capable of self-government.
“Can you ask anything less of us now?”
I do not understand what you are saying. Those people took on tremendous odds, gambling everything. Through hard work they succeeded? Are you comparing pre-emptive surrender with their daring?
Fab, “the rule of law” includes accepting that Congress can change taxation laws. I certainly think that 5 or 10 year claw-back taxes on “windfall bonuses” is fully appropriate, and would increase the reality of self-regulation. Such claw-back taxes / liabilities should have been imposed on failed S&Ls, and on Long Term Cap. Mgmt’s bailout, and on every prior bailout. Plus there should be a “bailout” insurance premium on all companies that are “too big to fail”.
A big advantage of vengence today for wrongs of the recent past is as an actual deterrant against wrongs of the future. Human nature really does work that way — and a LACK of vengence means those who profitted from their wrong behavior, will inspire others to try to profit in similar ways.
Alternatively, allow Fan & Fred to “fail” and prepare a new 100% gov’t institution, with Civil servants (without bonuses), to minimize aftershocks of the failure, with equity investors getting nothing, and all the current employees getting fired — like Enron and Anderson Consulting.
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Fabius Maximus replies: Ex post facto laws are prohibited in Federal law by Article I, section 9 of the U.S. Constitution and in state law by section 10.
But we did it in “good faith,” we should be exempt.
Fabius Maximus replies: Ex post facto laws are prohibited in Federal law by Article I, section 9 of the U.S. Constitution and in state law by section 10.
The prohibition against ex post facto laws applies only to criminal and not to civil laws, as has been recognized in the very early case Calder v. Bull. Retroactive tax laws. United States v. Carlton held that retroactive tax laws were constitutional.
However, Eastern Enterprises v. Apfel held that retroactive taxation can amount to an unconstitutional takings. This was a split decision, but one cited test was “”When, however, that solution singles out certain employers to bear a burden that is substantial in amount, based on the employers’ conduct far in the past, and unrelated to any commitment that the employers made or to any injury they caused, the governmental action implicates fundamental principles of fairness underlying the Takings Clause””
If we were to apply this test (which may not be the ruling one )to the present debate over whether we could tax the Fannie Mae Gang, much would turn on the “any injury they caused” language.
Note that I have only done a few Google searches with respect to this. Bottom line, the Takings Clause and not the Ex Post Facto Clause appears to the relevant Constitutional Section.
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Fabius Maximus replies: Thanks, this is helpful! Legistlation of the sort discussed seems to me more of a criminal than civil law, using the tax laws to punish actions rather than raise revenue. Not being an attorney, that might be wrong.
Fabius Maximus replies: Thanks, this is helpful! Legistlation of the sort discussed seems to me more of a criminal than civil law, using the tax laws to punish actions rather than raise revenue. Not being an attorney, that might be wrong.
An analogy we might use is the Superfund cleanup.
Essentially, we might classify these “complex financial instruments” as “economic waste” that needs to be cleaned up. This would be done at the expense of the owners of the contaminated property – much as Superfund cleanups are done.
Thanks Duncan — I specifically wanted civil tax laws not criminal.
unrelated to any commitment that the employers made or to any injury they caused, The whole point is that bonuses were directly paid to top decision makers, which encouraged the directly responsible risky behavior. I can imagine that “far in the past” might well apply to 10 or even more than 7 years, but certainly not the last couple. Following Tax Record keeping requirements, 7 years seems pretty reasonably relevant.
But even if such new clawback bonus laws were passed today, and didn’t refer to the past, such laws would increase the prudence in the future.