Macbeth:
Macbeth Act 5, scene 5, 19–28
To-morrow, and to-morrow, and to-morrow,
Creeps in this petty pace from day to day,
To the last syllable of recorded time;
And all our yesterdays have lighted fools
The way to dusty death. Out, out, brief candle!
Life's but a walking shadow, a poor player,
That struts and frets his hour upon the stage,
And then is heard no more. It is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.Today's bailout is tomorrow's burden
Sunday, September 28, 2008
However self-absorbed the "Me Generation" may be, we can't possibly spend our money as fast as the Baby Boomers are spending it for us. Last week, Treasury Secretary Hank Paulson and the Democratic Congress proposed an unprecedented $700 billion bailout for firms on Wall Street.
What began with an $85 billion "bridge loan" to insurance giant American International Group and a bailout of $200 billion or more for mortgage backers Fannie Mae and Freddie Mac has now culminated in a $700 billion high-finance rescue plan, threatening to bring us to a grand total of nearly $1 trillion in new federal spending in a single week. When you factor in all the interest that we'll pay, it could be $2.5 trillion.
Barack Obama seems to have no problem with this, and neither does John McCain, but if you are under 40, you should.
The Government Printing Office estimates that the federal government spent more than 9 percent of its 2007 budget paying interest on debts. When you keep throwing around dollars you don't have, a trillion here and a trillion there, pretty soon you're talking about real money. And with a trillion-dollar war in Iraq and a trillion-dollar Medicare drug entitlement already in the mix, we're not exactly flush.
That's not to say the economy isn't in trouble. An army of intelligent economists claims the money markets are frozen because banks can't be sure the banks they're lending to aren't up to their necks in bad debts and won't end up defaulting. So, the logic goes, the federal government must become a buyer of last resort and scoop up these bad debts to inject some trust back into the system.
But how does the government know better than anyone else what the debts are actually worth? The doubt plaguing the market results from Wall Street firms making poor judgments, for which Paulson's plan now stands to reward them in spades. Couldn't the government resolve the liquidity crisis by lending to banks, rather than buying bad assets?
Some say we'll profit by the bailout - and if it actually comes to pass, we should all hope so - but even they base their predictions on calculations we can't check. "I estimate the average price of distressed mortgages that pass from 'troubled financial institutions' to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury," opines Stephen Gross of PIMCO, the largest bond mutual fund in the United States, in the Washington Post.
It's not unthinkable, but when no one can tell what these mortgages and other securities are worth, Gross sounds more certain than he should.
The kicker: "My estimate of double-digit returns," writes Gross, "assumes lengthy ownership of the assets."
In other words, what the government takes, it shouldn't plan to give back anytime soon.
The government may already become a 79.9 percent stakeholder in AIG as part of that bailout. If Paul Krugman and congressional Democrats get their way, the government will also become a controlling stakeholder in the banks it bails out. Has anyone begun to think through the consequences? How is a government that owns a piece of a company supposed to enforce the law against it or treat its competitors equally?
The malfeasance witnessed under Franklin Raines at Fannie Mae hardly suggests optimism.
"If the government directly controls major financial institutions, that would give the new administration extraordinary leverage over the national economy," former Atlantic Monthly blogger Matthew Yglesias delights. "Suppose the new CEO of AIG decided he didn't want to insure assets of companies whose executives make unseemly multiples of the national median income?
"There are all kinds of crazy things you could do. And of course not all of them would be good ideas. But some of them would! ... I think it creates a real opportunity for 'socially conscious insurance underwriting' or whatever you care to call it."
There's simply no limit to what you can afford given time and an unlimited supply of other people's money - that is, ours.
Thanks to the government, it doesn't matter if we've never bought a house; we'll pay for it. It doesn't matter if we've never bought stock; we'll bear its costs without its benefits. It doesn't matter if we've never heard of AIG or if the idea of financing a bridge loan sounds curiously like being knocked to the ground and robbed blind.
"This is not a position where I like to see the taxpayer," Paulson comforted us last Sunday on "Meet the Press." "But it is far better than the alternative."
How can he, or anyone else, be sure of that?
The sad truth is that when you consider what's actually at stake for people our age this November, there's little hope, little change and little straight talk. Just a choice of which suit gets to keep reaching into our pockets and telling us it's for our own good.
David Donadio is a Phillips Foundation journalism fellow and managing editor of Doublethink Online. To comment, e-mail i nsight@sfchronicle.com.
This article appeared on page G - 3 of the San Francisco Chronicle
Congress expected to pass rescue package
WASHINGTON (AP) — Congressional leaders and the Bush administration agreed Sunday on the main elements of a $700 billion bailout for the financial industry, paving the way for swift enactment of the largest government intervention in markets since the Great Depression.
Negotiators sought to iron out the final shape of the legislation and it still had to be reviewed by House Republicans, whose fierce opposition to a federal rescue nearly torpedoed an emerging bipartisan pact late in the week. Officials in both parties said they hoped for a House vote Monday.
"We've still got more to do to finalize it, but I think we're there," said Treasury Secretary Henry Paulson, who participated in the talks at the Capitol.
The measure would create a program that lets the government spend unprecedented sums of public money to prop up tottering financial institutions by buying their sagging mortgage-based investments and other devalued assets.
A breakthrough came when Democrats agreed to incorporate a GOP demand — letting the government insure some bad home loans rather than buy them — designed to limit the amount of federal money used in the rescue.
Another important bargain, vital to attracting support from centrist Democrats and Republicans who are fiscal hawks, would require that financial firms repay the government for any losses. A leading proposal would impose a 2 percent tax on the companies if, after five years, the program had not made back what it spent.
"This is the bottom line: If we do not do this, the trauma, the chaos and the disruption to everyday Americans' lives will be overwhelming, and that's a price we can't afford to risk paying," Sen. Judd Gregg, the chief Senate Republican in the talks, told The Associated Press on Sunday. "I do think we'll be able to pass it, and it will be a bipartisan vote."
Congressional leaders, who announced the tentative deal after marathon negotiations that ended early Sunday, hope to have a House vote Monday; a Senate vote would come later.
The presidential nominees came behind the outlines of the bailout. "This is something that all of us will swallow hard and go forward with," said Sen. John McCain, R-Ariz. "The option of doing nothing is simply not an acceptable option."
Sen. Barack Obama, D-Ill., sought credit for taxpayer safeguards added to the initial proposal from the Bush administration. "I was pushing very hard and involved in shaping those provisions," he said.
Under the plan, the government would purchase mortgage-backed securities and other bad debts held by banks and other investors. The money should help troubled lenders make new loans and keep credit lines open. The government would later try to sell the discounted loan packages at the best possible price.
The legislation would place "reasonable" limits on severance packages for executives of companies that benefit from the rescue plan, said a senior administration official who was authorized to speak only on background.
The government would receive stock warrants in return for the bailout relief, giving taxpayers a chance to share in financial companies' future profits.
To help struggling homeowners, the plan would require the government to try renegotiating the bad mortgages it acquires with the aim of lowering borrowers' monthly payments so they can keep their homes.
"Nobody got everything they wanted," said Democratic Rep. Barney Frank of Massachusetts, chairman of the House Financial Services Committee. He predicted it would pass, though not by a large majority.
Gregg, R-N.H., said he thinks taxpayers will come out as financial winners. "I don't think we're going to lose money, myself. We may, it's possible, but I doubt it in the long run," he said.
Frank appeared on C-SPAN, Obama was on CBS' "Face the Nation," while McCain spoke on "This Week" on ABC.
Associated Press writer Holly Ramer in Concord, N.H., contributed to this report.
PACs
Finance, Insurance & Real Estate
PAC Contributions to Federal Candidates
Total Amount: $46,435,372 Total to Democrats: $23,130,377 (50%) Total to Republicans: $23,301,995 (50%) Number of PACs making contributions: 445 Based on data released by the FEC on September 17, 2008.
Accountants: $3,981,417 
42% to Dems / 58% to RepubsCommercial Banks: $7,739,269
44% to Dems / 56% to RepubsCredit Unions: $2,135,889
54% to Dems / 46% to RepubsFinance/Credit Companies: $2,593,425
52% to Dems / 48% to RepubsInsurance: $13,815,165
49% to Dems / 51% to RepubsMisc Finance: $1,200,379
47% to Dems / 53% to RepubsReal Estate: $7,155,917
54% to Dems / 46% to RepubsSavings & Loans: $495,695
54% to Dems / 46% to RepubsSecurities & Investment: $7,318,216
56% to Dems / 44% to Repubs
Hundreds of Economists Urge Congress Not to Rush on Rescue PlanBy Matthew Benjamin
Sept. 25 (Bloomberg) -- More than 150 prominent U.S. economists, including three Nobel Prize winners, urged Congress to hold off on passing a $700 billion financial market rescue plan until it can be studied more closely.
In a letter yesterday to congressional leaders, 166 academic economists said they oppose Treasury Secretary Henry Paulson's plan because it's a ``subsidy'' for business, it's ambiguous and it may have adverse market consequences in the long term. They also expressed alarm at the haste of lawmakers and the Bush administration to pass legislation.
``It doesn't seem to me that a lot decisions that we're going to have to live with for a long time have to be made by Friday,'' said Robert Lucas, a University of Chicago economist and 1995 Nobel Prize winner who signed the letter. ``The situation may get urgent, but it's not urgent right now. Right now it's a financial sector problem.''
The economists who signed the letter represent various disciplines, including macroeconomics, microeconomics, behavioral and information economics, and game theory. They also span the political spectrum, from liberal to conservative to libertarian.
Some lawmakers are already citing the letter as reason not to endorse the Paulson plan. Today Senator Richard Shelby, a Republican from Alabama, said he has ``five pages of the leading economists in America that wrote to me and the leadership saying the Paulson plan is a bad plan. It will not solve problems. It will create more problems.''
`How Capitalism Works'
The letter, initially conceived by economists at the University of Chicago, was signed by professors from dozens of American universities and several outside the U.S.
David I. Levine, a professor of economics at University of California-Berkeley, says the current plan being discussed has the wrong structure.
``The structure is designed for the Treasury to be the first line of defense,'' said Levine, who studies organizations and incentives. ``A whole lot of people made money supposedly by putting their capital at risk, and those are supposed to be the first line of defense, that's how capitalism works.''
Jeffrey Miron, a Harvard University professor and self- described libertarian, objects to what he says is `` a stunningly broad, aggressive government intervention without appropriate precedents.''
He advocates allowing the normal process of business failure and bankruptcy to run its course. ``It's just nothing like the calamity the administration is making it out to be,'' he said.
Unprecedented Power
Erik Brynjolfsson, of the Massachusetts Institute of Technology's Sloan School, said his main objection ``is the breathtaking amount of unchecked discretion it gives to the Secretary of the Treasury. It is unprecedented in a modern democracy.''
Advocates for a rescue plan this week point to a seizing up of credit markets, reflected in elevated inter-bank lending rates, as reason for action. Some economists are unconvinced.
``I suspect that part of what we're seeing in the freezing up of lending markets is strategic behavior on the part of big financial players who stand to benefit from the bailout,'' said David K. Levine, an economist at Washington University in St. Louis, who studies liquidity constraints and game theory.
To contact the reporters on this story: Matthew Benjamin at mbenjamin2@bloomberg.net
Last Updated: September 25, 2008 17:48 EDT
Subprime loan market grows despite troublesBy Sue Kirchhoff and Sandra Block, USA TODAY
Posted 12/7/2004 1:14 AM Updated 12/14/2004 9:50 PMWASHINGTON — Bad credit is good business.Subprime lending — higher-interest loans to consumers with impaired or non-existent credit histories — has been the fastest-growing part of the mortgage industry.
Subprime mortgage activity grew an average 25% a year from 1994 to 2003, outpacing the rate of growth for prime mortgages. The industry accounted for about $330 billion, or 9%, of U.S. mortgages in 2003, up from $35 billion a decade earlier. (Chart: Key players in subprime game)
The growth has attracted accolades and controversy. Federal Reserve Governor Edward Gramlich has said subprime lenders helped push homeownership to record levels, making it possible for a growing number of minorities to buy homes. But he also raises questions about high delinquency rates.
And dozens of states have passed laws since 1999 to crack down on predatory lending — loans with high fees, excessive interest or other unaffordable provisions — clustered in the subprime sector.
Still, there's no doubt subprime lending is now a Main Street, mainstream business with sophisticated marketing that promises to deliver the American dream of homeownership, or lower the monthly burden of all-too-American consumer debt.
WHAT CAN YOU DO?
How can you avoid being a victim? What can you do if you think you've been victimized? USA TODAY's Sandra Block answers readers' questions.
• Ameriquest, one of the nation's biggest subprime lenders, is paying an estimated $15 million to sponsor February's Super Bowl halftime show and became a season-long NFL sponsor. The California-based firm has naming rights to the Texas Rangers' baseball stadium, Ameriquest Field. The efforts are part of a broader move to expand into prime financing.
• Home 123, a subsidiary of New Century Financial, has home improvement guru Bob Vila as a spokesman. New Century Financial's total revenue was up 87% in the third quarter from a year ago. The company expects $40 billion or more in loan volume this year.
• Citigroup, Wells Fargo and H&R Block are among old-line companies that have subprime entities. Major bond firms including Morgan Stanley and Lehman Bros. have a stake in the industry. That's because the bulk of subprime mortgages are packaged into bonds that are resold to investors.
SUBPRIMES FLOURISHING
Subprime loans are increasing in volume and value, particularly in densely-populated states like California and New York. Nationwide, subprimes account for about 10% of all mortages. Share of mortgage loans in 2003 that are subprime: Rhode Island California Nevada Florida Tennessee Texas Utah New York Oklahoma Maine Delaware Connecticut Mississippi Alabama Arizona Nation New Hampshire Missouri Ohio South Carolina Indiana North Carolina Louisiana Oregon Colorado Georgia Kentucky Hawaii Illinois Kansas Michigan Pennsylvania Maryland New Mexico Massachusetts Minnesota Nebraska New Jersey Idaho Washington Wyoming Iowa Virginia Montana West Virginia Arkansas South Dakota North Dakota Wisconsin Alaska District of Columbia Vermont Puerto Rico Source: Mortgage Bankers Association Amerisave, an online mortgage lender, moved into subprime lending about a year ago, after rising interest rates reduced demand for refinancing among borrowers who qualify for prime mortgage rates.
"We found there was a huge opportunity still in the subprime or less-than-perfect credit area," says David Herpers, chief marketing officer for Amerisave. "Many of these consumers were not able to take advantage of the low rates in the last few years. Our estimates are a third of U.S. citizens fall into this category."
Amerisave has 30 loan officers dedicated to subprime lending. They plan to increase that number to 200 by the end of next year. Amerisave estimates subprime loans will account for at least 50% of the company's total revenue within the next six to 12 months.
Subprime lenders are expected to fare better than the prime lenders as interest rates rise, because their borrowers tend to be less rate sensitive.
Higher-priced products
Even as they push states to pass tougher predatory-lending laws, some consumer groups are working with subprime lenders to deliver credit to borrowers who otherwise could not get financing. And the industry is adopting best lending practices or funding consumer awareness and education campaigns.
Some remain concerned, however, that the industry is selling people higher-priced loans they may not need or be able to handle.
"There are a lot of these people who got the subprime who, if they had shopped more aggressively, would have gotten the prime loans," says Jim Campen, a research associate at the University of Massachusetts Gastón Institute, who works with the Massachusetts Community and Banking Council.
Subprime clients are increasingly being marketed products — zero-down loans, interest-only financing and home equity loans as high as 125% of a home's appraised value — that allow them to buy or borrow, but at an elevated risk.
Like the credit card industry, mortgage companies are pushing their product through television advertising, pop-up ads on the Internet and mailings. While the industry touts its efforts at consumer education, a message of its sales pitch is speed.
"Even if other banks may have turned you down. We don't care — we want to get to know you," says a mailing from Home 123. "We'll get your loan application processed instantly, privately and anonymously over the Internet."
The default rate for subprime loans historically has been well above that of prime loans. The Mortgage Bankers Association says the numbers are improving, with 2.4% of prime loans past due in mid-2004, compared with 10.04% of subprime loans. Those subprime past-due figures are down from 15.67% in mid-2002. Still, 4.61% of subprime loans were in foreclosure in mid-2004, above the 0.49% prime figure.
Growth of the industry
The subprime market has grown for a number of reasons.
Deregulation allowed cross-fertilization between banks and financial service firms, while the federal government in the 1980s lifted mortgage interest ceilings. Congress in 1986 ended the deductibility of consumer debt, such as credit card payments, though still letting filers deduct mortgage interest. The change provided incentives for refinancing. Even rates for subprime loans at 3 percentage points above prime loans, or about 8% to 9% now, are lower than many 18% credit card rates.
Advances in risk modeling have produced standardization. The bond market for subprime loans has provided cash.
The majority of subprime mortgages are now sold by the initial lenders, bundled into bonds and offered to individual and institutional investors. In 1994, $11 billion of subprime mortgages were sold on the secondary market; in 2003, it was more than $200 billion.
"Done right, subprime lending provides an important source of mortgage financing for families with imperfect financial or credit histories," Fannie Mae CEO Franklin Raines said in a recent speech. "Done wrong, subprime lending is a huge rip-off that siphons wealth — and hope — from people who have very little to begin with."
Like the prime mortgage sector, subprime lending is becoming increasingly concentrated, partly because of bankruptcies in the late 1990s when some companies became overextended.
The top 25 lenders made nearly 90% of loans in 2002, nearly double their 1990 market share, according to the Harvard Joint Center for Housing Studies. Ameriquest, New Century Mortgage and National City are among industry leaders. Mainstream lenders are entering the market, but the vast majority of business is done by mortgage firms, thrifts and other entities.
"For a small start-up shop ... it would be harder today to come into this business. In the past you could make a lot of mistakes, and there were very wide spreads. That has gone away," says Laura Swartz, senior vice president of American Mortgage Network, a wholesale firm that sells to mortgage brokers.
The industry is increasingly offering purchase mortgages, though subprime lending is heavily concentrated in refinancing and home equity loans. Firms are targeting potential clients with credit scores and incomes just at the margin needed to easily qualify for a prime loan. They sometimes compete with prime lenders for such loans.
The Fed's Gramlich in a May speech said borrowers with credit scores below 620 are generally viewed as higher risk, unable to get a prime loan without a large down payment. About half of subprime borrowers had credit scores above that threshold, Gramlich noted, indicating "a good credit history alone does not guarantee prime status."
Swartz says borrowers with credit scores of 620 to 640 are the "sweet spot" for the subprime industry.
Consumer groups
The rise of subprime lending presents something of a dilemma for community and consumer groups. Even while they fight for tougher laws against predatory lending, and accuse some firms of reverse red-lining — targeting minority neighborhoods — they are forming partnerships with subprime lenders.
In September, Acorn, a community organization representing low- and moderate-income families, announced an agreement with Citigroup to create an affordable lending program for home buyers, with a special focus on immigrants.
"The partnership with Citigroup had less to do with subprime lending, predatory lending, and more to do with our interest in working with Citigroup and other lenders to extend credit broadly," says Steve Kest, executive director of Acorn. "We see thousands of families who have staked their whole future in this country, have jobs, (but have) only been able to access subprime credit through pretty shady lenders."
Ameriquest, working with consumer groups, is among subprime lenders that have developed best practices for loans, including no loan "flipping" — refinancing at high fees that strip out equity.
While consumer groups and subprime firms have joint interests, disagreements remain. Consumer activists say too many subprime customers are not told they could qualify for prime financing.
New Century, one of the biggest subprime lenders, in testimony to Congress laid out its own internal numbers, which it says underscore that the industry does not overcharge for loans or target minorities. But they also appear to bolster the contention that good credit alone does not guarantee a prime rate.
The firm said slightly more than 19% of its borrowers had credit scores 660 or higher, which lending experts say could easily qualify borrowers for a prime loan, including more than 30% of Asian/Pacific Islander borrowers, 23% of Hispanics, 12% of blacks and 19% of whites. An additional 22% had scores between 620 and 660, which could also qualify them for prime rates, depending on their income, collateral and other financial data, including the ability to make a down payment.
A slight majority of borrowers were white, and on average, New Century clients were under age 50 with annual family income of about $72,000.
Terry Theologides, executive vice president for corporate affairs at New Century, says credit scores tell only part of the story.
"The products that we offer to our highest-credit-grade borrowers are competitive with prime (rates). The spread becomes extremely compressed when you get to those folks," he said, adding the company offered loans with interest rates near 5% to 6% — competitive with prime rates.
The federal Office of the Comptroller of the Currency in a 2002 study said pricing in the industry did not seem out of line with its higher risk. But even a small difference in rates means a big jump in payments. The Harvard Joint Center says a 2 percentage-point difference on an $85,000 loan, a common size for many first-time buyers, adds up to $18,000 halfway into paying off a conventional 30-year mortgage.
Subprime borrowers are far more likely than those in the prime market to take out adjustable-rate loans, and could take a hit as interest rates rise.
Subprime lenders offer products from fixed-rate mortgages to interest-only loans, where borrowers pay just the interest for a set number of years, or 80-20 loans, in which borrowers finance a home with an 80% mortgage at one rate and the remaining 20% through a second loan. Prime lenders also offer such products.
Interest-only products are "very appropriate for a sophisticated borrower, but are they appropriate for a first-time home buyer who has not amassed a lot of equity?" asks Jim Carey, vice president of marketing for AmeriDream, a Maryland non-profit for low-income buyers.
Industry officials say they carefully screen clients to make appropriate loans and avoid defaults that cost the industry money and hurt its reputation.
"If you owned a bank, would you rather be Jimmy Stewart or Mr. Potter sitting in the wheelchair?" asks Mitch Feinstein, National Home Equity Mortgage Association, referring to banker Henry Potter, the villain in the classic movie It's A Wonderful Life.
...And It All Started with Deregulation
There was a time, not too long ago, when Washington did regulate banks. The Depression triggered the creation of government bank regulations and agencies, such as the Federal Deposit Insurance Corporation, the Federal Home Loan Bank System, Homeowners Loan Corporation, Fannie Mae, and the Federal Housing Administration, to protect consumers and expand homeownership. After World War II, until the late 1970s, the system work. The savings-and-loan industry was highly regulated by the federal government, with a mission to take people's deposits and then provide loans for the sole purpose of helping people buy homes to live in. Washington insured those loans through the FDIC, provided mortgage discounts through FHA and the Veterans Administration, created a secondary mortgage market to guarantee a steady flow of capital, and required S&Ls to make predictable 30-year fixed loans. The result was a steady increase in homeownership and few foreclosures.
In the 1970s, when community groups discovered that lenders and the FHA were engaged in systematic racial discrimination against minority consumers and neighborhoods -- a practice called "redlining" -- they mobilized and got Congress, led by Wisconsin Senator William Proxmire, to adopt the Community Reinvestment Act and the Home Mortgage Disclosure Act, which together have significantly reduced racial disparities in lending.
But by the early 1980s, the lending industry used its political clout to push back against government regulation. In 1980, Congress adopted the Depository Institutions Deregulatory and Monetary Control Act, which eliminated interest-rate caps and made sub-prime lending more feasible for lenders. (usury laws--java) The S&Ls balked at constraints on their ability to compete with conventional banks engaged in commercial lending. They got Congress -- Democrats and Republicans alike -- to change the rules, allowing S&Ls to begin a decade-long orgy of real estate speculation, mismanagement, and fraud. The poster child for this era was Charles Keating, who used his political connections and donations to turn a small Arizona S&L into a major real estate speculator, snaring five Senators (the so-called "Keating Five," including John McCain) into his web of corruption.
The deregulation of banking led to merger mania, with banks and S&Ls gobbling each other up and making loans to finance shopping malls, golf courses, office buildings, and condo projects that had no financial logic other than a quick-buck profit. When the dust settled in the late 1980s, hundreds of S&Ls and banks had gone under, billions of dollars of commercial loans were useless, and the federal government was left to bail out the depositors whose money the speculators had put at risk.
The stable neighborhood S&L soon became a thing of the past. Banks, insurance companies, credit card firms and other money-lenders were now part of a giant "financial services" industry, while Washington walked away from its responsibility to protect consumers with rules, regulations, and enforcement. Meanwhile, starting with Reagan, the federal government slashed funding for low-income housing, and allowed the FHA, once a key player helping working-class families purchase a home, to drift into irrelevancy.
Into this vacuum stepped banks, mortgage lenders, and scam artists, looking for ways to make big profits from consumers desperate for the American Dream of homeownership. They invented new "loan products" that put borrowers at risk. Thus was born the sub-prime market.
At the heart of the crisis are the conservative free market ideologists whose views increasingly influenced American politics since the 1980s, and who still dominate the Bush administration. They believe that government is always the problem, never the solution, and that regulation of private business is always bad. Lenders and brokers who fell outside of federal regulations made most of the sub-prime and predatory loans.
In 2000, Edward M. Gramlich, a Federal Reserve Board member, repeatedly warned about sub-prime mortgages and predatory lending, which he said "jeopardize the twin American dreams of owning a home and building wealth." He tried to get chairman Alan Greenspan to crack down on irrational sub-prime lending by increasing oversight, but his warnings fell on deaf ears, including those in Congress.
As Rep. Barney Frank wrote recently in The Boston Globe, the surge of sub-prime lending was a sort of "natural experiment" testing the theories of those who favor radical deregulation of financial markets. And the lessons, Frank said, are clear: "To the extent that the system did work, it is because of prudential regulation and oversight. Where it was absent, the result was tragedy."
Some political observers believe that the American mood is shifting, finally recognizing that the frenzy of deregulation that began in the 1980s has triggered economic chaos and declining living standards. If they needed proof, the foreclosure crisis is exhibit number one.
Those who profited handsomely from the sub-prime market and predatory lending, the mortgage bankers and brokers, are working overtime to protect their profits by lobbying in state capitals and in Washington, DC to keep government off their backs. The banking industry, of course, has repeatedly warned that any restrictions on their behavior will close needy people out of the home-buying market. Its lobbyists insisted that the Bush plan be completely voluntary.
This isn't surprising, considering who was at the negotiating table when the Bush administration, led by Treasury Secretary Henry Paulson, forged the plan. The key players were the mortgage service companies (who collect the homeowner's monthly payments, or foreclose when they fall behind) and groups representing investors holding the mortgages, dominated by Wall Street banks. The Bush plan reflected both groups' calculation that -- for some loans -- they would do better temporarily freezing interest rates than foreclosing. Groups who represent consumers -- ACORN, the National Community Reinvestment Coalition, the Greenlining Institute, Neighborhood Housing Services, and the Center for Responsible Lending -- were not invited to the negotiation....
Sunday, September 28, 2008
Political Will
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