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Title: The Final Failure of Reaganomics
Source:
towardfreedom.com
URL Source: http://towardfreedom.com/home/ameri ... e-final-failure-of-reaganomics
Published: Sep 25, 2008
Author: Greg Guma
Post Date: 2011-02-02 12:25:57 by Godwinson
Keywords: Reaganomics
Views: 4680
Comments: 9
The Final Failure of Reaganomics Thursday, 25 September 2008 00:37 Greg Guma Source: Maverick Media We've all seen the headlines: The government takes over troubled mortgage giants Fannie Mae and Freddie Mac, Lehman Brothers files for bankruptcy, Merrill Lynch is acquired by the Bank of America, and the government announces an $85 billion emergency loan to rescue insurance giant American International Group (AIG) as stock prices plummet. And that was just the beginning. The government is currently debating a $700 billion bailout of distressed banks under a plan that initially proposed to give Treasury Secretary Henry Paulson and the Bush administration unprecedented power. We need to "remove the distressed assets from the financial system," suggests Paulson, who resigned as CEO of Goldman Sachs to become the Treasury secretary in 2006 after amassing a personal net worth of $700 million during his 32-year tenure at the bank. How did all this happen? The root of the problem can be traced back to the deregulation era that began during the Reagan administration. What George H.W. Bush once called "voodoo economics" fast became the biggest redistribution of wealth since the New Deal. The central article of faith in the "Reagan Revolution" was that money rerouted from the poor to the rich would produce a burst of productivity and economic growth. Give to the corporations and the wealthy, said the "supply side" economists, and they will invest the money in new factories, research and technology, and the country will be restored to greatness. Did the theory work? Hardly. Rather than putting their money into jobs, research or equipment, the country's biggest businesses went on the largest merger binge in history, buying up smaller companies in a trend that spelled less competition, less productivity, and more control of the economy in fewer hands. Multi-billion dollar corporate war chests were assembled to finance takeovers of large oil and coal companies, communications giants, and prestigious financial institutions. After a stock market meltdown in 1987, Wall Street advised the US Treasury not to meddle in financial markets. This paved the way for consolidation around large merchant banks, institutional investors, stock brokerage firms, and large insurance companies. Complex speculative instruments - derivatives, options, futures, and hedge funds - were largely unregulated, becoming vulnerable to manipulation. Then, in 1999, the Financial Services Modernization Act - also known as the Gramm-Leach Bliley Act - removed remaining regulatory restraints on Wall Street's powerful banking institutions. Repealing the Glass-Steagall Act of 1933, a New Deal reform put in place in response to corruption that had resulted in more than 5,000 bank failures in the years following the 1929 Wall Street crash, commercial banks, brokerage firms, institutional investors and insurance companies were permitted to invest in each others' enterprises and integrate their financial operations. In short, the current financial crisis has been building for a long time. But the alarm bells didn't start ringing until June, 2007, when two hedge funds of the New York investment bank Bear Stearns lurched toward collapse because of their extensive investments in mortgage-backed securities. They were forced to dump assets as the trouble spread to major Wall Street firms such as Merrill Lynch, JPMorgan Chase, Citigroup, and Goldman Sachs, which had loaned the firm money. Over the summer, German banks with bad investments in the US real-estate market were caught up in the crisis. But the most obvious sign of trouble was the Federal Reserve's decision on August 9 to pump $24 billion into the US banking system through large purchases of securities, while the European Central Bank made a record cash injection of $130 billion into its markets to shake off credit fears. On the same day, Wall Street suffered its second-worst decline of the year as the Dow Jones dropped by nearly 400 points. The next day, the Fed pumped another $38 billion in temporary reserves into the financial system, but the government rejected a request for Fannie Mae and Freddie Mac to take on more debt. At the end of the month, President Bush announced a plan to use the Federal Housing Administration, which insures loans for low-income borrowers, to offer government-guaranteed loans to around 80,000 homeowners in default. On Sept. 18, 2007 the Federal Reserve started cutting interest rates, citing the credit crunch on Wall Street and in the broad economy. The nation's central bank made cuts at seven straight meetings. It also agreed to start loaning money directly to Wall Street firms, rather than only to commercial banks, and to accept troubled mortgage-backed securities as collateral. In October, profits at Citigroup dropped sharply. One large financial institution after another reported heavy losses. At the start of 2008, the Bank of America acquired Countrywide Financial in a deal that rescued the country's biggest mortgage lender. Another sign of trouble: Bear Stearns CEO James Cayne lost his job. In February, Congress approved a $150-billion spending package to stimulate the sluggish economy. In March, on the verge of collapse and under pressure by the Federal Reserve, Bear Stears was forced to accept a buyout by investment bank JPMorgan Chase at a fire-sale price. The deal was backed by Fed loans - up to $29 billion in financing to cover potential losses. In July, the California mortgage lender IndyMac collapsed and troubles deepened for Fannie Mae and Freddie Mac. Which brings us to September 6, 2008, when Treasury Secretary Henry Paulson announced the takeover of Fannie and Freddie, putting the government in charge of firms that own or back more than $5 trillion in mortgages. The Treasury Department agreed to provide up to $200 billion in loans to the cash- starved firms, which are crucial sources of mortgage funding for banks and other lenders. It was a bid to reverse a prolonged housing and credit crisis. By the way, this was the same week when the McCain campaign was pushing the "lipstick on a pig" charge and the candidate himself remained certain that the "fundamentals of the economy are strong." Both Fannie and Freddie were placed in a government conservatorship, a move that could end up costing billions. The firms own or guarantee about half the home loans in America. The government implicitly had been guaranteeing their creditworthiness, enabling them to borrow at below-market rates. But private shareholders pocketed the profits they made lending cheap money at higher interest rates. A week later, on Sept, 15, 2008, Lehman Brothers, burdened by $60 billion in soured real-estate holdings, filed for bankruptcy after attempts to rescue the 158-year-old firm failed. Merrill Lynch also agreed to be acquired by the Bank of America, and AIG asked for a bridge loan of billions of dollars from the Federal Reserve. The $50 billion Bank of America deal creates a bank that will rival Citigroup, the biggest US bank in terms of assets. Meanwhile, stocks fell, the Dow Jones sliding 504.48 points - the worst drop since the 9/11 attacks. Stocks also posted big losses in markets across much of the globe. The day has been labeled "Black Monday." The next day, Sept. 16, 2008, the government agreed to an $85 billion emergency loan to rescue AIG, saying failure of the company could hurt the already delicate financial markets and the economy. That was Tuesday. On Wednesday, the Dow lost about 450 points, giving it a shortfall of more than 800 for the week. Markets around the world were also having a confidence crisis, and Russia shut down its market for a third day following its worst plunge since 1998. Last Thursday, the Federal Reserve, working with banks in Europe, Canada and Asia, pumped as much as $180 billion into money markets to combat a seizing up of lending. Republicans blasted the Treasury Department and Fed for orchestrating the AIG bailout, and the White House for not informing them of the plan. John McCain said he would fire SEC Chair Chris Cox (which the President can't actually do), and Barack Obama called it evidence of the failure of deregulation and Bush-McCain policies. What's next? Most likely, a $700 billion government bailout, unspecified limitations on executive payouts, a bipartisan board to handle implementation - and, perhaps, changes in regulation of the mortgage market, forcing companies to restructure individual loans rather than foreclose them. It's not surprising that McCain, who proposed this week that his first debate with Barack Obama be postponed because of congressional negotiations on the proposed bailout, would prefer to grandstand in DC than take questions about his changing positions. A joke in Washington these days is that the crisis seems to be turning former deregulators into socialists - at least as far as business risks are concerns. Vermont's junior US Senator, Bernie Sanders, who has never been shy about his socialist leanings, wants to go further. He is proposing a surtax on the very wealthy, stronger oversight of financial institutions, and an end to deregulation policies. He also argues that huge businesses like Bank of America should be broken up so no company in the future could bring the economy down with it. In the meantime, he calls for an immediate economic stimulus package that would put people to work rebuilding infrastructure, and increasing energy efficiency and sustainable energy. "The people who can best afford to pay and the people who have benefited most from Bush's economic policies are the people who should provide the funds for the bailout," Sanders says. "It would be immoral to ask the middle class, the people whose standard of living has declined under Bush, to pay for this bail out while the rich, once again, avoid their responsibilities." Sanders' plan includes: * A five-year, 10 percent surtax on income over $1 million a year for couples and over $500,000 for single taxpayers to raise more than $300 billion in revenue * Ensuring that assets purchased from banks are realistically discounted so companies aren't rewarded for their risky behavior and taxpayers can recover the amount paid for them * Equity stakes in the bailed-out companies so that the assumption of risk is rewarded when companies' stock goes up * A major economic recovery package which puts people to work at decent wages rebuilding infrastructure and moving the country from fossil fuels to energy efficiency and sustainable energy * Reinstalling the regulatory firewalls that were torn down in 1999, including re-regulating the energy markets and possibly abolishing various financial instruments that have created an enormous shadow banking system at the heart of the financial services meltdown Finally, and most radically, Sanders calls for ending the danger posed by companies that are "too big to fail," breaking them up if necessary. "We should not be trying to solve the current financial crisis by creating even larger, more powerful institutions," he argues. It's not likely that most of this plan will be embraced by Congress. But the crisis is certainly forcing the country to take a serious look at Reagan's old claim that "government is the problem." Even President Bush, in his remarks to the country on Sept. 24, admitted that "democratic capitalism" - which he still considers "the best system ever devised" - needs serious help. With the economy's "fundamentals" clearly in jeopardy and the disaster wrought by deregulation and corporate excess finally exposed, government intervention has become the only way out. *** Greg Guma, a Vermont editor and author, is a former Executive Director of Pacifica Radio. His writing on politics and media can be found on Maverick Media (http://muckraker-gg.blogspot.com/).
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#1. To: All (#0)
(Edited)
The American people were told in hinted words by the Reaganomics boosters that there would be some people kicked to the curb but eventually everyone would get more wealthy. Well we are at the tail end of the Reagan influenced economic era after the collapse of the economy into a Great Depression/Recession and the end result is 1% of the population got super wealthy and the 90+% of the population either stagnated or regressed in income. Reaganomics thus failed to produce the greatest wealth for the greatest number of people it had promised and in the people who were tricked by this ideology are now the one suffering for the first time in a noticeable way. In fact the American wealth gap of 1% to 99% is at USSR income gap levels....... From an economic standpoint what has happened is that the link between productivity and wages has been broken. No longer does economic growth mean increases in the real earnings for the working class as their productivity rises. This was evident through Clinton’s last term when between 1997 and 2001 the top 10 percent of U.S. earners received 49 percent of the growth in real wages and salaries; indeed, the top 1 percent got 24 percent of the total while the bottom half of workers received less than 13 percent. This trend is of longer duration. Based on a somewhat different calculation the share of income going to the top .1 percent quadrupled between 1970 and 1998 at the expense of working- class earners. "Keep Your Goddamn Government Hands Off My Medicare!" - Various Tea Party signs.
so it seems the problem wasn't deregulation, but overregulation with the CRA.
Deregulation allowed savings banks to become investment banks playing with poor peoples money. Before only the wealthy could play at that level of risk - and it was their money to play with so it was not a big deal. But after savings banks went into the gambling business thanks to the Clintonites and their Republican allies the banks started to play with our money and they could care less if We The People lose out on their bets. Republican kooks are the only ones still maintaining that their "god that failed" deregulated - hands free - capitalism - can save the day.....
"Keep Your Goddamn Government Hands Off My Medicare!" - Various Tea Party signs.
Three Ways The CRA Pushed Countrywide To Lower Lending Standards When we discuss the role of the Community Reinvestment Act and other fair lending rules in contributing to lax lending standards, people bent on exonerating the CRA often point out that many of the questionable loans were made by non-depository mortgage companies not covered by the CRA. Barry Ritholtz has been a prominent critic of the theory that the CRA has some culpability for lax lending. He has pointed out that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision. “How was this caused by either CRA or GSEs?” Barry asked. As much as I respect Barry’s formidable analytical powers, I’m afraid he’s taken too narrow of the view of the matter. His question is far easier to answer than he suspects. Regulations often touch those who are not directly regulated. Indeed, the regulation of one group in a marketplace will almost always wind up affecting other groups. More concretely, there are three very specific ways in which the CRA nudged Countrywide and other mortgage companies to adopt lax lending standards. 1. The Creation Of Artificial Demand For Low-Income Mortgages. Banks that were regulated by the CRA often found it difficult to meet their obligations under the CRA directly. Long standing lending practices by local loan officers were a big problem. But as banks expanded their deposit bases and other businesses, they often found that they were at risk of regulators discovering they had fallen behind in making CRA loans. One way of addressing this problem was buying the loans in the secondary market. Mortgage companies like Countrywide began to serve this entirely artificial demand for CRA loans. Countrywide marketed its loans directly to banks as a way for them to meet CRA obligations. "The result of these efforts is an enormous pipeline of mortgages to low- and moderate-income buyers. With this pipeline, Countrywide Securities Corporation (CSC) can potentially help you meet your Community Reinvestment Act (CRA) goals by offering both whole loan and mortgage-backed securities that are eligible for CRA credit,” a Countrywide advertisement on its website read. 2. The Threat Of Regulation Is Often As Good As Regulation. It is highly misleading to claim that just because mortgage companies were not technically under the CRA that they were not required by regulators to meet similar tests. In fact, regulators threatened that if the mortgage companies didn’t step up to the plate by relaxing lending standards they would be brought under the CRA umbrella and required to do so. Here’s how City Journal explains the dynamic: To meet their goals, the two mortgage giants enlisted large lenders—including nonbanks, which weren’t covered by the CRA—into the effort. Freddie Mac began an “alternative qualifying” program with the Sears Mortgage Corporation that let a borrower qualify for a loan with a monthly payment as high as 50 percent of his income, at a time when most private mortgage companies wouldn’t exceed 33 percent. The program also allowed borrowers with bad credit to get mortgages if they took credit-counseling classes administered by Acorn and other nonprofits. Subsequent research would show that such classes have little impact on default rates. Pressuring nonbank lenders to make more loans to poor minorities didn’t stop with Sears. If it didn’t happen, Clinton officials warned, they’d seek to extend CRA regulations to all mortgage makers. In Congress, Representative Maxine Waters called financial firms not covered by the CRA “among the most egregious redliners.” To rebuff the criticism, the Mortgage Bankers Association (MBA) shocked the financial world by signing a 1994 agreement with the Department of Housing and Urban Development (HUD), pledging to increase lending to minorities and join in new efforts to rewrite lending standards. The first MBA member to sign up: Countrywide Financial, the mortgage firm that would be at the core of the subprime meltdown. 3. The CRA Distorted the Mortgage Market. With banks offering mortgages with high loan to value, delayed payment schedules and other enticing features, the mortgage companies would have quickly found themselves unable to compete if they didn’t offer similar loans. The requirement to offer risky loans from banks created a situation where other lenders found they had to offer similar products if they wanted to expand their business. Of course, Angelo Mozillo didn't need very much prompting on this score. He believed exactly what the CRA regulators believed: that these lax lending practices were the wave of the future, democratizing the glories of home ownership.
The Reagan Ruins (How Ronald Reagan destroyed America)
"Keep Your Goddamn Government Hands Off My Medicare!" - Various Tea Party signs.
Saint Ronnie: 1. First to turn America into a DEBTOR nation in the modern era 2. First to increase DEBT faster than growth of national income in eight years 3. First to increase DEBT faster than growth of GDP over eight years 4. First to double the deficit in just eigh t years 5. First to "almost": triple the national DEBT in just eight years 6. First to increase SPENDING by 80%--over 8 years. 7. First to SPEND more in eight years than was spent in prior 50 years. 8. First to have "real" INTEREST RATES of 8% after averaging 1% over 35 years. 9. First to keep PRIME INTEREST RATES at 20%. 10.First to over value the dollar to the yen at rate of 262 yen to 1 dollar.
"Keep Your Goddamn Government Hands Off My Medicare!" - Various Tea Party signs.
I am surprised that lending institutions who were being forced against their better judgment to make bad loans didn't do what big business does in this instance - namely send lobbyists to Washington and buy enough politicians to end the madness. Poor helpless victims!
Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains. Thomas Jefferson
And the Tip O'Neal Democrats never delivered the spending cuts they promised under TEFLA. What's your point?
Which means the article is complete horse-shit. Of course, the title told me that, but still...
"There will be no more money when the U.S. dollar has no value, until that time we can keep printing more." -- go65, LF's answer to Ben Bernanke -- We always like cool X-rays, right? Wage Stagnation, Growing Insecurity, and the Future of the U.S. Working Class..snip.....Over the three decades from 1972 to 2001, the wages and salaries of even those Americans at the 90th percentile (those doing better than 90 percent of their fellow citizens) experienced income gains of only 1 percent a year on average. Those at the 99.9th percentile saw their income rise by 181 percent over these years (to an income averaging almost $1.7 million). Those at the 99.99th percentile had income growth of 497 percent.
#2. To: Godwinson (#0)
when two hedge funds of the New York investment bank Bear Stearns lurched toward collapse because of their extensive investments in mortgage-backed securities.
#3. To: no gnu taxes (#2)
so it seems the problem wasn't deregulation, but overregulation with the CRA.
#4. To: Godwinson (#3)
#5. To: no gnu taxes (#4)
#6. To: no gnu taxes (#4)
#7. To: no gnu taxes (#4)
3. The CRA Distorted the Mortgage Market. With banks offering mortgages with high loan to value, delayed payment schedules and other enticing features, the mortgage companies would have quickly found themselves unable to compete if they didn’t offer similar loans. The requirement to offer risky loans from banks created a situation where other lenders found they had to offer similar products if they wanted to expand their business.
#8. To: Godwinson (#6)
#9. To: Godwinson (#0)
by Godwinson
Here's one of our own American Socialist,
"godwinson," resident socialist goober.
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