Bill Clinton’s 1996 "welfare reform" made him (and his wife) the enemy of the left and a hero to moderates and conservatives who apparently believed that single black mothers on welfare were the greatest threat to American taxpayers. Of course, AFDC payments constituted only 1% of the federal budget, and a majority of welfare beneficiaries were (and still are) white. Nevertheless, the "welfare queen" became a rallying cry for opponents to welfare. Welfare recipients, according to the royal rhetoric, are lazy, make bad choices, have ample opportunity for economic advancement, and are incentivized to idleness and pathology by governmental subsidies. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 required recipients to work, curtailed benefits to unmarried individuals (under the false assumption that marriage ends poverty), and placed a lifetime limit on benefits. By contrast, the unconditional bail-out for Wall Street, as it currently stands, marks a return to welfare as we knew it.
Earlier this year, I wrote a column questioning why the Bear Stearns bail-out failed to trigger a discourse concerning the pathology of Wall Street’s "welfare kings." See (http://www.blackprof.com/?p=2002). Although some liberal commentators have attempted to blame the present financial unrest on "deregulation," most financial experts believe that reckless investment decisions created this havoc. Historically low interest rates in the early in 2000s made it very easy for banks to obtain money to lend (at a profit). The wide availability of credit increased demand for housing which caused rapid price appreciation. Banks, wanting to fatten their coffers, engaged in reckless lending, using "creative" products such as adjustable rate mortgages and no-income verification loans to finance home purchases for individuals with poor credit ratings or "A-credit," but insufficient income. Homeowners used their homes as ATM cards, dipping into their equity to purchase cars and other consumables. Investment banks purchased mortgages, bundled them together as securities, and sold them as assets to investors wanting a fixed return.
Ultimately, market fundamentals could not sustain this excess, and the Federal Reserve began raising interest rates to bring the market back to reality. Adjustable rate loans caused payment shock for borrowers, and foreclosures soared. Suddenly, mortgage-backed securities became risky and unstable assets, and financial institutions that held these securities or traditional mortgages began to suffer huge losses. Lenders refused to extend credit to holders of these assets or to purchase them due to their risk. Essentially credit dried up. Foreign sources of money also ran from the United States, exacerbating the unavailability of credit. Bear Stearns, Lehman Brothers, and other venerable Wall Street institutions hit the dust. And the story continues to unfold.
In response to recent events, the Bush administration has requested $700 billion to allow the Secretary of Treasury to purchase mortgage-backed securities from troubled financial institutions. The companies would receive "market value" for the securities (whatever that is) and would presumably have a better credit rating without the risky assets. In addition to infusing capital into troubled firms, this plan, if successful, would help stabilize financial markets, attract foreign and domestic sources of credit, and prevent steep economic decline. Because a private-sector solution to this madness seems out of reach, governmental intervention is necessary.
Still, we need to label this intervention honestly: it is a handout to people who engaged in highly irresponsible behavior. Not only was their behavior reckless, but they, as financial professionals, had greater knowledge of the risks and consequences of their behavior than the average homeowner, who lacks sophistication concerning financial markets and lending parameters. Although many commentators have bashed "sub-prime" borrowers, which I view as the new "welfare queens" (http://www.blogger.com/(http://www.blackprof.com/?p=2002)) they have not similarly critiqued the companies which had the capital and power to create the current situation – and the financial expertise to avoid it!
The fact that this problem has intensified during a presidential election makes things even more dramatic. Democrats and Republicans are rightfully calling for more conditions placed on the receipt of federal money (and this seems inevitable). Hillary Clinton has even proposed that the government purchase individual mortgages and reiussue them to distressed homeowners under more favorable terms; a similar course of action took place during the Great Depression. But neither side can claim "clean hands" on this issue -- although Democrats have tried to do so. Liberals, in particular, have blamed the current mess on "deregulation," citing to several pieces of legislation, but most often, the Gramm-Leach-Bliley Act of 1999. That legislation allowed commercial banks, investment banks, and insurance companies to consolidate. This statute, however, did not create financial chaos; risky investments did. Countrywide and Washington Mutual are strictly commercial banks. The former has already folded into Bank of America, while the latter is on life support. Bear Sterns and Lehman Brothers were strictly investment banks, and they have both died. AIG is exclusively an insurer, but it too needed a federal rescue. On the other hand, JP Morgan Chase is a consolidated investment and commercial bank, but it is among the strongest of the remaining financial institutions in the country. Furthermore, Bill Clinton signed the legislation into law, and Robert Rubin (former head of Goldman Sachs, now Chairman of Citicorp), his Secretary of Treasury, lobbied for it. Democrats also voted for the measure in large numbers.
Recently, Obama called Rubin for "advice" on the economic crisis, and he initially chose James Johnson, a former managing director of Lehman Brothers and Vice President at Fannie Mae, to head his Vice President vetting team. Johnson resigned after the Republicans politicized his connection to Fannie Mae and his receipt of millions of dollars in "loans" from the troubled company. In the past, Democratic Senators Charles Schumer and Christopher Dodd have both rejected stricter regulation of financial institutions, as has Representative Barney Frank. All of these men sit on congressional banking and finance committees. And Fannie Mae employees gave Dodd, Obama, and Clinton most of their campaign contributions this year. No one is innocent.
McCain has "suspended" his campaign, but, ironically, this move is just a campaign strategy designed to delay having a presidential debate during this chaos. Polls have begun to shift towards Obama during the turmoil, proving the old maxim that "it’s the economy stupid." Statistical data indicate that voters tend to blame the incumbent’s party for economic distress. Obama says the show must go on and that presidents have to "multi-task." That’s a great response to McCain’s gimmick. But at the end of the day, both candidates, as leaders of their respective parties, need to endorse the solution. Because it is an election year, expect to hear emotional (and nauseating) appeals to bipartisanship – so that neither side will become vulnerable to charges of "playing politics" with the solution.
Ultimately, both candidates will ceremoniously help craft and endorse the legislation, which will likely have some conditions placed upon the Secretary of the Treasury and the companies that receive governmental assistance. But I do not expect "the people" to benefit directly from the legislation, in terms of mortgage-payment assistance or reissuance with more favorable terms. Nor do I expect that the "conditions" in the law will involve things like job training for financial professionals, a lifetime limit on the receipt of subsidies, or other similar conditions that were all placed in welfare reform legislation. Welfare as we knew has made a triumphant return.
Earlier this year, I wrote a column questioning why the Bear Stearns bail-out failed to trigger a discourse concerning the pathology of Wall Street’s "welfare kings." See (http://www.blackprof.com/?p=2002). Although some liberal commentators have attempted to blame the present financial unrest on "deregulation," most financial experts believe that reckless investment decisions created this havoc. Historically low interest rates in the early in 2000s made it very easy for banks to obtain money to lend (at a profit). The wide availability of credit increased demand for housing which caused rapid price appreciation. Banks, wanting to fatten their coffers, engaged in reckless lending, using "creative" products such as adjustable rate mortgages and no-income verification loans to finance home purchases for individuals with poor credit ratings or "A-credit," but insufficient income. Homeowners used their homes as ATM cards, dipping into their equity to purchase cars and other consumables. Investment banks purchased mortgages, bundled them together as securities, and sold them as assets to investors wanting a fixed return.
Ultimately, market fundamentals could not sustain this excess, and the Federal Reserve began raising interest rates to bring the market back to reality. Adjustable rate loans caused payment shock for borrowers, and foreclosures soared. Suddenly, mortgage-backed securities became risky and unstable assets, and financial institutions that held these securities or traditional mortgages began to suffer huge losses. Lenders refused to extend credit to holders of these assets or to purchase them due to their risk. Essentially credit dried up. Foreign sources of money also ran from the United States, exacerbating the unavailability of credit. Bear Stearns, Lehman Brothers, and other venerable Wall Street institutions hit the dust. And the story continues to unfold.
In response to recent events, the Bush administration has requested $700 billion to allow the Secretary of Treasury to purchase mortgage-backed securities from troubled financial institutions. The companies would receive "market value" for the securities (whatever that is) and would presumably have a better credit rating without the risky assets. In addition to infusing capital into troubled firms, this plan, if successful, would help stabilize financial markets, attract foreign and domestic sources of credit, and prevent steep economic decline. Because a private-sector solution to this madness seems out of reach, governmental intervention is necessary.
Still, we need to label this intervention honestly: it is a handout to people who engaged in highly irresponsible behavior. Not only was their behavior reckless, but they, as financial professionals, had greater knowledge of the risks and consequences of their behavior than the average homeowner, who lacks sophistication concerning financial markets and lending parameters. Although many commentators have bashed "sub-prime" borrowers, which I view as the new "welfare queens" (http://www.blogger.com/(http://www.blackprof.com/?p=2002)) they have not similarly critiqued the companies which had the capital and power to create the current situation – and the financial expertise to avoid it!
The fact that this problem has intensified during a presidential election makes things even more dramatic. Democrats and Republicans are rightfully calling for more conditions placed on the receipt of federal money (and this seems inevitable). Hillary Clinton has even proposed that the government purchase individual mortgages and reiussue them to distressed homeowners under more favorable terms; a similar course of action took place during the Great Depression. But neither side can claim "clean hands" on this issue -- although Democrats have tried to do so. Liberals, in particular, have blamed the current mess on "deregulation," citing to several pieces of legislation, but most often, the Gramm-Leach-Bliley Act of 1999. That legislation allowed commercial banks, investment banks, and insurance companies to consolidate. This statute, however, did not create financial chaos; risky investments did. Countrywide and Washington Mutual are strictly commercial banks. The former has already folded into Bank of America, while the latter is on life support. Bear Sterns and Lehman Brothers were strictly investment banks, and they have both died. AIG is exclusively an insurer, but it too needed a federal rescue. On the other hand, JP Morgan Chase is a consolidated investment and commercial bank, but it is among the strongest of the remaining financial institutions in the country. Furthermore, Bill Clinton signed the legislation into law, and Robert Rubin (former head of Goldman Sachs, now Chairman of Citicorp), his Secretary of Treasury, lobbied for it. Democrats also voted for the measure in large numbers.
Recently, Obama called Rubin for "advice" on the economic crisis, and he initially chose James Johnson, a former managing director of Lehman Brothers and Vice President at Fannie Mae, to head his Vice President vetting team. Johnson resigned after the Republicans politicized his connection to Fannie Mae and his receipt of millions of dollars in "loans" from the troubled company. In the past, Democratic Senators Charles Schumer and Christopher Dodd have both rejected stricter regulation of financial institutions, as has Representative Barney Frank. All of these men sit on congressional banking and finance committees. And Fannie Mae employees gave Dodd, Obama, and Clinton most of their campaign contributions this year. No one is innocent.
McCain has "suspended" his campaign, but, ironically, this move is just a campaign strategy designed to delay having a presidential debate during this chaos. Polls have begun to shift towards Obama during the turmoil, proving the old maxim that "it’s the economy stupid." Statistical data indicate that voters tend to blame the incumbent’s party for economic distress. Obama says the show must go on and that presidents have to "multi-task." That’s a great response to McCain’s gimmick. But at the end of the day, both candidates, as leaders of their respective parties, need to endorse the solution. Because it is an election year, expect to hear emotional (and nauseating) appeals to bipartisanship – so that neither side will become vulnerable to charges of "playing politics" with the solution.
Ultimately, both candidates will ceremoniously help craft and endorse the legislation, which will likely have some conditions placed upon the Secretary of the Treasury and the companies that receive governmental assistance. But I do not expect "the people" to benefit directly from the legislation, in terms of mortgage-payment assistance or reissuance with more favorable terms. Nor do I expect that the "conditions" in the law will involve things like job training for financial professionals, a lifetime limit on the receipt of subsidies, or other similar conditions that were all placed in welfare reform legislation. Welfare as we knew has made a triumphant return.
No comments:
Post a Comment