As all Americans suffer the fallout of the sub-prime mortgage disaster in one way or another, our nation's leaders in Washington, D.C. are all atwitter as to what should be done about it. Democrats in Congress will be quick to blame the situation on a lack of meaningful industry regulation, while Republicans will point fingers at irresponsible borrowers who had the gall to take out loans they could ill afford.
President Bush shared some of his thoughts on the issue with a crowd of loyal followers back in December. He said, "Here's my attitude on housing: one, the government should never bail out lenders; two, some people bought a house that they shouldn't have been in the market; three, there are speculators who thought they could get -- buy nice, one of these reset mortgages and flip it, make some money..." He went on to reminisce about his own initiation into homeownership, "I can remember the first home I bought in Midland, Texas. I remember going down to the savings and loan and sitting down with the savings and loan officer and negotiating with the savings and loan officer."
He remembers going to a savings and loan (S&L)? I'll bet he does. He didn't mention the S&L by name, but I wonder if it was one of the ones that went belly-up back in the 1980's. You know, like the Silverado S&L failure. During that period, George's brother Neil was the director of Silverado Savings and Loan in Denver, Colorado. The S&L loaned Neil and two of his partners in a company called JNB Exploration, a failed oil company, over $100 million. The Silverado S&L failed, among other reasons, because Neil and his partners conveniently neglected to repay their loan. While Neil was eventually fined a paltry $50,000, it was the American taxpayers that ultimately picked up the tab. Nationwide, the S&L bailout cost the American taxpayers an estimated $500 billion. We're still paying for it.
While many S&Ls failed across the country in the 1980's, failures were disproportionately high in Texas. Losses at Texas S&Ls accounted for over half of all S&L losses nationwide, including 14 of the 20 largest losses. The Federal Depositors Insurance Corporation has a chronology here. These S&Ls failed basically because they doled out loans by the truckload with virtually no oversight. This followed a relaxation of regulatory standards. The S&Ls failed for reasons not unlike the reasons lenders today are writing down billions of dollars worth of losses – today's troubled lenders were handing out sub-prime mortgages over the last few years to virtually anybody with a pulse without regard to their abilities to repay.
While it is easy to blame the current culture of corporate corruption that has become virtually synonymous with the Bush Administration and its cronies for the sub-prime crisis, there is plenty of blame to go around. The seeds of the current lending crisis might actually have been sown on Bill Clinton's watch. Robert Kuttner, financial journalist, author, and former investigator for the Senate Banking Committee, testified in October before the House Committee on Financial Services that, "Since (the) repeal of the Glass-Steagall Act (or the Banking Act of 1933, designed to prevent lending excesses) in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s – lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s. Much of it isn't paper at all, and the whole process is supercharged by computers and automated formulas. An independent source of instability is that while these credit derivatives are said to increase liquidity and serve as shock absorbers, in fact their bets are often in the same direction – assuming perpetually rising asset prices – so in a credit crisis they can act as net de-stabilizers."
It is somewhat comforting to hear that George Bush does not want to bail out lenders and effectively reward them for making poor business decisions. So, just what is Bush thinking of doing about the crisis? Per a recent Wall Street Journal article, Bush indicated that he thought an economic stimulus package in the form of rebates and other items in the range of $150 billion would help alleviate the crisis. Bush said, "Letting Americans keep more of their money should increase consumer spending."
Okay, but, if they keep their money, then they aren't spending it and if they're spending it, they're not keeping it. Perhaps that's just one more in a long line of Bush's semantic jiu-jitsu moves. In any case, it seems that we've been here before. I seem to recall getting a check back in 2001 or so for about $300. That didn't go far and I viewed it as a thinly veiled attempt by the administration to literally buy favor with the American public. This time around, the average taxpayer would receive a rebate of around $650. If most Americans are in debt up to their eyeballs, then that $650 that they are likely to get will probably go toward payment on their adjustable-rate mortgages or toward paying down predatory high-interest credit cards. So, the tax benefit would effectively pass right through the hands of the debt-ridden taxpayer and right into the hands of the lenders who helped to create this whole mess. This conflicts with the statement Bush made back in December that the government (a.k.a. the taxpayers) should not bail out the lenders.
I would bet that I'm hardly alone in saying that while I could definitely use $650. It would go straight toward paying off my credit card, and not toward any new purchases that would trigger immediate economic results, as, apparently, Bush hopes it would. I'm also not that sure it is really what's best in terms of staving off a recession. I haven't heard a word yet on how this rebate would be paid for. What government programs and services are likely to be cut because their funding was used for this rebate? And isn't there an all-important war that needs to be paid for?
Oddly, allowing the sub-prime debacle to develop might well have been the policy equivalent of shooting oneself in one's foot while cleaning one's own gun. A few short years ago, Bush and virtually the entire political right were extolling the virtues of the Ownership Society. I haven't heard much from the Bush Administration about the good old Ownership Society lately. It sounded so promising. Per a White House fact sheet, "...if you own something, you have a vital stake in the future of our country. The more ownership there is in America, the more vitality there is in America, and the more people have a vital stake in the future of this country." - President George W. Bush, June 17, 2004.
Per that same White House fact sheet, "...in June 2002, President Bush issued 'America's Homeownership Challenge' to the real estate and mortgage finance industries to encourage them to join the effort to close the gap that exists between the homeownership rates of minorities and non-minorities. The President also announced the goal of increasing the number of minority homeowners by at least 5.5 million families before the end of the decade." Indeed, statistics provided by the White House indicate that by the second quarter of 2004, the overall U.S. homeownership rate was at an all time high of 69.2 percent and Minority homeownership set a new record of 51 percent.
So, was the "Homeownership Challenge" a coded message to the lending industry to open the sub-prime floodgates? And, if so, isn't it the most tragic of ironies that the Homeownership Challenge became, well, a homeownership challenge, as forclosures pile up? And what of Bush's noble goal if increasing minority home ownership? Senator from Illinois and presidential hopeful Barack Obama has demanded a Federal Trade Commission investigation into whether minorities were specifically targeted for sub-prime loans. By some estimates, minorities were up to four times as common in black neighborhoods as in white neighborhoods.
I have run across some speculation that the Ownership Society and its related initiatives such as the Homeownership Challenge were part of Karl Rove's master plan to attract Americans to Republican ideals and eventually secure the fabled Republican Permanent Majority in the House of Representatives and the Senate. It would follow that the Supreme Court would consist of Republican appointees and, of course, the White House would be in Republican hands for years to come. Perhaps paradoxically, the Republicans' disdain for effective government, that is, disdain for a government that might have reined in questionable lending practices, sowed the seeds of its own destruction.
I'm not sure what, if anything, should be done about the crisis. I'm hardly an economist. I am not aware of any good options. (Doesn't that sound familiar?) I am equally angry at the lenders who knew they were making very risky loans as I am at the individuals who borrowed the money without thinking through the consequences of just what "adjustable rate" might mean. I'm also angry at our do-nothing government. Any sort of bailout would essentially reward either the lenders or the borrowers, or both, for stupid behavior, and do so at taxpayers' expense. Never mind that the crisis is so far reaching that it will have direct effects on the rest of the economy, to the point that rewarding stupid behavior might be the least painful option. This is what happens when there is no effective government oversight of the lending industry, which is to say that this is what happens when Americans subscribe to the Republican laissez-faire agenda.