FacebookTwitterGoogle+RedditEmail

Socializing Losses

by BINOY KAMPMARK

In another installment of the demise of free-market optimism, the US House of Representatives has passed the package effectively giving the green light to the government to protect the two mortgage giants, Fannie Mae and Freddy Mac.

Both these monuments of the mortgage landscape guarantee something in the order of $5.2 trillion of America’s $12 trillion market.  The package raised the national debt limit to $10.6 trillion.  Refinancing for mortgages is also provided, upwards of $300 billion. A measure where some $4 billion worth of local government grants for the purchase and refurbishment of foreclosed properties has also been slipped in.

The package, authored primarily by Representative Barney Frank, Democrat of Massachusetts, has successfully seduced George W. Bush.  Despite initial rumblings of dissatisfaction, the President had to relent.  He had been cornered, looking mean spirited for threatening to veto a package for its $4 billion block grant program.  All fine to help Wall Street, not ‘ordinary’ Americans struggling on the mortgage belt.

But both Fannie and Freddie are curious anomalies in the free market system.  While they operate as private companies with stocks, they have that curious title of ‘government-sponsored enterprises.’  They purchase loans from lending institutions and package them as bonds, thereby selling them to investment firms (for instance, pension funds).

The nature of their constitutions, it must be said, seems to give them a direct link to government assistance in the event of crisis.  As Paul Krugman of the New York Times points out, this system tolerates a pernicious practice: ‘profits are privatized but losses are socialized’.

The package is being labeled as revolutionary as the Home Owners’ Loan Corporation of the 1930s, a New Deal creation that was designed to soften the brutal Great Depression foreclosures.

But this package is getting more opposition than previous bailout and subsidizing measures that have provided a blank check for economic imprudence and incompetence.  During the Reagan administration, it became clear that, on the one hand, supply side economics and private buccaneering would be encouraged; on the other hand, if that buccaneering should fail, the state would happily extend the purse.

This package, which is bound to pass both houses, may be different in so far as it targets Fannie and Freddie mortgage holders, not the pirating exploits of Wall Street.  But the argument is the same, whether one is shoring up the foolish ventures of a well-moneyed executive, or the foolish decisions of a small home owner: preventing economic slide.  To not rescue such institutions as Mac and Mae would see half a million house owners on the streets.  Mortgage prices will be driven up as a result.

The package has proven revealing in how it has split the Republican Party.  Consensus in the minority party of both houses has dissolved (some 45 Republicans joined 227 Democrats in passing the bill).  House Republican leader John Boehner of Ohio was baffled at this mobilization of the treasury to bailout bad loans. The fiscally responsible Republican, or so one is supposed to think, is bucking the trend of the fiscally irresponsible glutton.

Opponents of the package cannot be dismissed lightly.  Whether you agree with the ‘sink or swim’ attitude of the finance measure, a dogma that is of only limited utility these days, the package was never asked for by the two giants.  It comes as a rather costly, unsolicited gift.

Some columnists insist on a sober assessment – Krugman insists that a government rescue may be needed but only to patch over problems which have otherwise been ‘overblown’. In the second place, these giants had little, if almost nothing to do with the high-risk speculation that engulfed the American housing market after the 1990s.  Nor can they actually engage in subprime lending.

In short, Fannie and Freddie were actually regulated to begin with.  The scale of the market meltdown has simply proven so extensive, that Fannie-Freddie regulated mortgages have not been enough to insulate the market and its desperate borrowers. Nor have these giants assured a deep enough capitalization.

Many will wish that the Treasury’s authority will never be used – but this precedent is yet another aimed nail into the coffin of free market buccaneers.

BINOY KAMPMARK was a Commonwealth Scholar at Selwyn Collge, University of Cambridge.  He can be reached at bkampmark@gmail.com

 

 

 

 

 

Binoy Kampmark was a Commonwealth Scholar at Selwyn College, Cambridge. He lectures at RMIT University, Melbourne. Email: bkampmark@gmail.com

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

January 17, 2017
John Pilger
The Issue is Not Trump. It is Us
John K. White
Is Equality Overrated, Too?
Michael J. Sainato
The DNC Hands the Democratic Party Over to David Brock and Billionaire Donors
John Davis
Landscapes of Shame: America’s National Parks
Andrew Smolski
Third Coast Pillory: Politicians and Rhetorical Tricks
Chris Busby
The Scientific Hero of Chernobyl: Alexey V. Yablokov, the Man Who Dared to Speak the Truth
David Macaray
Four Reasons Trump Will Quit
Chet Richards
The Vicissitudes of the Rural South
Clancy Sigal
“You Don’t Care About Jobs”: Why the Democrats Lost
Robert Dodge
Martin Luther King and U.S. Politics: Time for a U.S. Truth and Reconciliation Commission
Jack Sadat Lee
I Dream of Justice for All the Animal Kingdom
James McEnteer
Mourning Again in America
January 16, 2017
Paul Street
How Pure is Your Hate?
Jeffrey St. Clair - Alexander Cockburn
Did the Elites Have Martin Luther King Jr. Killed?
Robert Hunziker
Global Warming Clobbers Ocean Life
Patrick Cockburn
The Terrifying Parallels Between Trump and Erdogan
Kenneth Surin
The Neoliberal Stranglehold on the American Public University
Lawrence Davidson
Is There a Future for the Democratic Party?
Douglas Valentine
Who Killed MLK Jr?
Robert Fisk
The Foreign Correspondent in the Age of Twitter and Trump
Dale Bryan
“Where Do We Go from Here?”
David Swanson
The Deep State Wants to Deep Six Us
Dan Bacher
Obama Administration Orders Speedy Completion of Delta Tunnels Plan
Mark Weisbrot
Obama Should Make Sure that Haitian Victims of UN-Caused Cholera are Compensated
Winslow Myers
The Light of the World
Bruce Mastron
My Latest Reason to Boycott the NFL: Guns
Weekend Edition
January 13, 2017
Friday - Sunday
Gregory Elich
Did the Russians Really Hack the DNC?
Jeffrey St. Clair
The President Who Wasn’t There: Barack Obama’s Legacy of Impotence
Anthony DiMaggio
Ethics Fiasco: Trump, Divestment and the Perversion of Executive Politics
Joshua Frank
Farewell Obummer, Hello Golden Showers
Paul Street
Hit the Road, Barack: Some Farewell Reflections
Vijay Prashad
After Aleppo: the State of Syria
John Wight
Russia Must be Destroyed: John McCain and the Case of the Dodgy Dossier
Rob Urie
Meet the Deplorables
Patrick Cockburn
The Russian Dossier Reminds Me of the Row Over Saddam’s WMDs
Eric Sommer
U.S.-China War: a Danger Hidden from the American People
Andrew Levine
Are Democrats Still the Lesser Evil?
Linda Pentz Gunter
What’s Really Behind the Indian Point Nuclear Deal?
Robert Fantina
Trucks, ‘Terror’ and Israel
Richard Moser
Universal Values are Revolutionary Values
Russell Mokhiber
Build the Bagdikian Wall: “Sponsored News” at the Washington Post
Yoav Litvin
Establishment Narcissism – The Democrats’ Game of Thrones
David Rosen
Return of the Repressed: Trump & the Revival of the Culture Wars
Robert Koehler
War Consciousness and the F-35
Rev. William Alberts
The New Smell of McCarthyism Demands Faith Leaders Speak Truth to Power
FacebookTwitterGoogle+RedditEmail