I have a dear friend who understands the world of finance as well as I know my way around my own kitchen. For a long time, she’s been sending me alarming bulletins from people who keep a close eye on banks, Wall Street and federal financial regulators.
The economy has developed such an elaborate and arcane array of financial instruments—futures, variance swaps, derivatives, basket options—that what I read about it often sounds to me more like a multiplayer fantasy than a down-to-earth matter of dollars and cents. Sometimes even ordinary financial news and analysis seems to be written in a foreign language: I stare at the charts and graphs, shrug, and move on to something I can comprehend. But this much I have been able to grasp: the sub-prime mortgage fiasco, the meltdown of Bear Sterns and all the recent events of that ilk were by no means unexpected. Watchful and prudent types have been sending out distress signals for a long time now, but until recently, few have been listening.
New York Times Op-Ed columnist Paul Krugman, a renowned liberal economist, has written that in an attempt to revive the economy, the Federal Reserve Bank is doing things that only are tried
when conventional monetary policy isn’t getting any traction. Instead of following its usual practice of buying only safe U.S. government debt, the Fed announced this week that it would put $400 billion — almost half its available funds — into other stuff, including bonds backed by, yes, home mortgages. The hope is that this will stabilize markets and end the panic.
Officially, the Fed won’t be buying mortgage-backed securities outright: it’s only accepting them as collateral in return for loans. But it’s definitely taking on some mortgage risk. Is this, to some extent, a bailout for banks? Yes.
For months, I’ve been hearing the same phrases on the news, “relief for homeowners,” and the same vague promises of help for people who are losing their homes because they can’t pay the adjustable rate mortgages lenders pushed to borrowers deemed high-risk because of low income or poor credit history. Credible people such as Catherine Austin Fitts, lead FHA financial advisor in the Clinton administration, have called this practice “fraudulent inducement of debt,” a violation that public authorities ought to denounce and pursue.
So far, the best President Bush has done is float something called the Hope Now Alliance, which has provided some type of assistance (mostly debt counseling) for a tiny fraction of affected borrowers, fewer than ten percent.
My friend keeps asking why more progressives don’t see this as an issue of economic justice, why they don’t actively call for and support alternatives to spending taxpayers’ money to bail out banks from their self-made crisis. The Center for Economic and Policy Research is one of the independent economic groups active on this issue, and they have proposed various interventions, including something called “The Subprime Borrower Protection Plan,” which would protect homeowners without rewarding bankers for their greedy and irresponsible mistakes. In a nutshell, it would give homeowners facing foreclosure the right to continue living in their homes by renting them at a fair market rate. It’s a simple plan requiring no significant public expenditure, one that promises to address not only the rise in homelessness this crisis will produce if unchecked, but the blight that results from large numbers of vacant homes in affected neighborhoods.
I imagine that many people like myself, not really understanding finance, unaware of alternatives to rewarding bad-faith business practices with bailouts, have thrown up their hands in confusion and tried to ignore the whole thing. But this is the sort of humane and practical response even a financial ignoramus like myself can advocate with full understanding.
To protect themselves, my friend says that the most important thing ordinary people can do is to put any savings into a bank with top bank deposit ratings. In general, the watchful experts say, local banks operating within a specific community or region have usually made limited loans, taking fewer risks, and have fewer connections to the bond market, so they will be most secure. As in the case of Bear Stearns, the idea that the biggest is the safest cannot be substantiated.
It is impossible to fully predict the effects of this financial crisis on individuals and communities, but it’s a safe bet it will not improve the situation of the most economically stressed in our society. In a capitalist society, where do we draw the line? When will the people whose rapacious practices got us into this mess be called to account? In my own case, ignorance has outlived its usefulness as an excuse for inattention to these questions.
Congress is considering several interventions, though none of them include anything as imaginative as the rental option described above. All the presidential candidates have made clear and forthright statements of their positions. Clinton and Obama both support the Barney Frank-Christopher Dodd bill to allocate Federal Housing Administration funds to insure and guaranteed refinanced mortgages. As chief economic advisors, Clinton has claimed Robert Rubin and Alan Greenspan, who pretty much created this mess; while Obama has turned to Joseph Stiglitz and Robert Reich, strongly identified with efforts for economic fairness. McCain scolded banks and homeowners alike for irresponsibility, counseling caution in taking public action; Clinton blamed Bush; and Obama on Thursday delivered a speech that progressive economist Robert Kuttner described this way:
Astounding! I wish I had written the speech. It is this kind of leadership and truth-telling that is the predicate for the shift in public opinion required to produce legislative change. A radical, appropriately nuanced, and deeply public-minded description of what has occurred, the speech was Roosevelt quality: the president as teacher-in-chief. Those who felt that Obama was capable of real growth that will transcend the campaign’s early and somewhat feeble domestic policy proposals should feel vindicated.
Yesterday’s New York Times previewed proposals the Treasury Department will make on Monday, ostensibly to address the economic crisis. In some ways, they will actually reduce regulation of rapacious practices, and overall, as the Times says, “The plan would not rein in practices that have been linked to the housing and mortgage crisis, like packaging risky subprime mortgages into securities carrying the highest ratings.”
I hope we elect leadership who respond with vision and energy to our economic crisis, but obviously, we can’t wait till November. If an economic naif like myself gets it, none of us has an excuse to keep pretending that this is a problem to be solved on Wall Street or in the White House.