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:
Weekend Edition
July 29, 2016
Friday - Sunday
Michael Hudson
Obama Said Hillary will Continue His Legacy and Indeed She Will!
Jeffrey St. Clair
She Stoops to Conquer: Notes From the Democratic Convention
Rob Urie
Long Live the Queen of Chaos
Ismael Hossein-Zadeh
Evolution of Capitalism, Escalation of Imperialism
Margot Kidder
My Fellow Americans: We Are Fools
Ralph Nader
Hillary’s Convention Con
Lewis Evans
Executing Children Won’t Save the Tiger or the Rhino
Vijay Prashad
The Iraq War: a Story of Deceit
Chris Odinet
It Wasn’t Just the Baton Rouge Police Who Killed Alton Sterling
Brian Cloughley
Could Trump be Good for Peace?
Patrick Timmons
Racism, Freedom of Expression and the Prohibition of Guns at Universities in Texas
Gary Leupp
The Coming Crisis in U.S.-Turkey Relations
Pepe Escobar
Is War Inevitable in the South China Sea?
Norman Pollack
Clinton Incorruptible: An Ideological Contrivance
Robert Fantina
The Time for Third Parties is Now!
Andre Vltchek
Like Trump, Hitler Also Liked His “Small People”
Serge Halimi
Provoking Russia
David Rovics
The Republicans and Democrats Have Now Switched Places
Andrew Stewart
Countering The Nader Baiter Mythology
Rev. William Alberts
“Law and Order:” Code words for White Lives Matter Most
Ron Jacobs
Something Besides Politics for Summer’s End
David Swanson
It’s Not the Economy, Stupid
Erwan Castel
A Faith that Lifts Barricades: The Ukraine Government Bows and the Ultra-Nationalists are Furious
Steve Horn
Did Industry Ties Lead Democratic Party Platform Committee to Nix Fracking Ban?
Robert Fisk
How to Understand the Beheading of a French Priest
Colin Todhunter
Sugar-Coated Lies: How The Food Lobby Destroys Health In The EU
Franklin Lamb
“Don’t Cry For Us Syria … The Truth is We Shall Never Leave You!”
Caoimhghin Ó Croidheáin
The Artistic Representation of War and Peace, Politics and the Global Crisis
Frederick B. Hudson
Well Fed, Bill?
Harvey Wasserman
NY Times Pushes Nukes While Claiming Renewables Fail to Fight Climate Change
Elliot Sperber
Pseudo-Democracy, Reparations, and Actual Democracy
Uri Avnery
The Orange Man: Trump and the Middle East
Marjorie Cohn
The Content of Trump’s Character
Missy Comley Beattie
Pick Your Poison
Kathleen Wallace
Feel the About Turn
Joseph Grosso
Serving The Grid: Urban Planning in New York
John Repp
Real Cooperation with Nations Is the Best Survival Tactic
Binoy Kampmark
The Scourge of Youth Detention: The Northern Territory, Torture, and Australia’s Detention Disease
Kim Nicolini
Rain the Color Blue with a Little Red In It
Cesar Chelala
Gang Violence Rages Across Central America
Phillip Kim et al.
Open Letter to Bernie Sanders from Former Campaign Staffers
Tom H. Hastings
Africa/America
Robert Koehler
Slavery, War and Presidential Politics
Charles R. Larson
Review: B. George’s “The Death of Rex Ndongo”
July 28, 2016
Paul Street
Politician Speak at the DNC
FacebookTwitterGoogle+RedditEmail