QUOTE OF THE MONTH: “The laws are not to change the heart, but to restrain the heartless.”
Martin Luther King, Jr.
SENSE AND NONSENSE—WHEN WALL STREET WHINES
From the editor: The debate heard now on our public airwaves is about the “haves” and the “have-nots.” When the cable news “chatter,” as President Obama calls it, features the Republican message machine, voters are subjected to a litany of half-truths, misinformation, and outright lies. The right-wing messengers include neo-conservative ideologues, free marketers/libertarians, talking-head demagogues posing as “experts” and “journalists,” religious zealots, or some combination of the aforementioned. The most recent poster child for the greedy investor class is Rick Santelli—a CNBC analyst who stepped out of his professional role as a financial reporter from the CME Group, formerly the Chicago Board of Trade, to issue an emotional diatribe, on air, invoking the “moral hazard” argument against individuals who are in danger of being foreclosed upon. Santelli’s complaint was that the government is “rewarding bad behavior” with taxpayer money. He implied that individual borrowers who cannot make their mortgage payments are responsible for the economic meltdown. Santelli asked rhetorically, “Are you listening, Mr. President?”
Unfortunately, the president’s press secretary was listening and chastised Santelli very publicly. In so doing, he supplied Santelli with a much larger soapbox from which he has continued his theatrics and ranting—at one point tearing up a document he claimed was the President’s plan to rescue mortgage holders who are “underwater.”
Obama’s press secretary, Robert Gibbs, should have deferred to Shaun Donovan, Secretary of Housing and Urban Development. By Sunday, February 22, Secretary Donovan, appearing on CBS’s Face the Nation, explained the program in clear terms. Donovan summarized the Obama administration’s three-part plan designed to reverse the housing crisis:
“First the largest and, in many ways, the most important part of the plan is up to $200 billion that will help keep mortgage rates low in this country for everyone.
“Today we have mortgage rates, because of actions that the Obama administration has taken, that are as low as we’ve had in a generation. We have to keep those mortgage rates low, because anybody who has got good credit, who wants to go out and buy a new home or refinance—they benefit by having those low mortgage rates. That’s the biggest, most important part of the plan….
“The second part of the plan is we’re going to allow folks who are playing by the rules, who have made every payment, but are underwater because housing values in their neighborhoods have declined, to refinance….
“Again, they’ve played by the rules. Only people who are current on their mortgage can qualify for that refinancing.
“And then the third part of the plan is our modification plan. That’s $75 billion. And that is the one directed at people who are struggling the most.
“But let’s be clear. This may have started as a mortgage crisis, but today, what’s really driving foreclosures is people losing their jobs, not being able to pay for their health care. We have millions of families across this country through no fault of their own that are in trouble on their mortgages….
“And by the way, let’s remember that every time there’s a foreclosure, a next-door neighbor loses value in their house too. This plan, if we don’t move forward with it, we think we’ll see an additional $6,000 drop on average in every single homeowner’s house in America. So this benefits—by stopping foreclosures—this benefits everyone.”
In his self-righteous act of grandstanding before the cameras, Santelli conveniently failed to mention the real causes of the financial crisis in general and the problem of foreclosures specifically.
A little research reveals that one major cause of the housing crisis—subprime loans—actually dates back to 1980. Following are excerpts from a report by the Federal Reserve Bank of St. Louis, titled, “The Evolution of the Subprime Mortgage Market.”
That report states, “Many factors have contributed to the growth of subprime lending. Most fundamentally, it became legal. The ability to charge high rates and fees to borrowers was not possible until the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) was adopted in 1980. It preempted state interest rate caps. The Alternative Mortgage Transaction Parity Act (AMTPA) in 1982 permitted the use of variable interest rates and balloon payments.”
Note the word “Deregulation” in the legislation passed in 1980.
Following are the major villains and culprits in the current economic meltdown:
- Tax cuts that favored the super rich and widened the gap between the greedy investment class and working class Americans.
- Federal Reserve monetary policy, during the Greenspan era, that encouraged a view of residential real estate as an instant path to wealth.
- The Deregulation and Monetary Control Act, which preempted state interest rate caps, passed by the 96th Congress (both houses controlled by Democrats—Carter was President).
- The Alternative Mortgage Transaction Parity Act, which permitted variable interest rates on mortgages and balloon payments, passed by the 97th Congress (Republican Senate and Democratic House—Reagan was President).
- The Tax Reform Act of 1986, which was the center piece of the Reagan Administration’s war on the middle class (Republican Senate and Democratic House—Reagan was President). This act prohibited many tax deductions, such as interest deductions on auto and credit card loans, prevalent among the middle class. It also lowered the tax rate for the wealthiest taxpayers from 50 percent to 28 percent while increasing the bottom rate for low- and middle-income taxpayers from 11 percent to 15 percent—the only time in U.S. history that the top rate was reduced while the lowest rate was increased.
- Mismanagement of mortgage giants Fannie Mae and Freddie Mac, allowed by the Reagan, George H.W. Bush, Clinton, and George W. Bush administrations.
- The rating of Collateralized Debt Obligations (CDOs)—which contained toxic mortgages—as AAA “investment grade” securities, by credit rating agencies like Moody’s, Standard & Poor’s, and Fitch.
- New exotic financial products, such as Credit Default Swaps (CDSs), which were based upon the false assumption that real estate prices, both commercial and residential, would only go in one direction: UP.
- The rule change, by the 2004 Securities and Exchange Commission (SEC), that allowed five major Wall Street investment banks to liberalize their “capital to debt” ratio. The rule relaxed the capital to debt ratio, from a ratio of 12 to 1, to a ratio of 40 to 1. In other words, these banks were only required to keep $1 in capital for every $40 in debt that they assumed.
- “Alt-A” mortgages, also called “Liar Loans,” that intentionally lied about the income of potential mortgage borrowers.
- Private equity firms, formerly known as “leveraged buyout operators” or LBOs. These firms buy other firms, take over their equity positions, and leave the acquired company with highly leveraged debt.
- The Financial Products branch of the global insurance firm known as the American International Group (AIG). This division of AIG sold highly leveraged insurance to a world wide network of financial institutions, reaping huge profits and placing the global economy at risk through the sale of CDSs.
- A 28-year political movement toward deregulation of the loan origination market.
The Santelli tirade obscures the economic reality that the current meltdown has been almost 30 years in the making and is systemic in nature. Any attempt to blame individual mortgage holders is pure theatrics. The way out of this mess is first to return to a financial system that includes effective institutional checks-and-balances on predictable human greed, such as regulation of hedge funds and private equity firms. Second, public policy must set the risk levels assumed by financial institutions using a simple formula: the level of risk assumed should be based upon the borrower’s fully documented ability to repay the loan, rather than the fees and compensation collected by the loan originator and service industry.
[Editor’s Note: I strongly recommend that readers of The Compass and Compass Society members view the documentary produced by CNBC and narrated by David Faber. The documentary is entitled “House of Cards,” and it will air again on Sunday, March 15, 9 p.m. ET and on Sunday, March 29, 8 p.m. ET. This special program provides the most accurate and understandable summary I have found on the mortgage crisis and its role in the current economic meltdown. By way of explanation, I am devoting much time and space to the financial crisis in this and recent past issues of The Compass because the crisis affects all of our daily lives in a profound way. Other recent issues providing important background information include The Compass, vol. v, no 10 (November, 2008) and The Compass, vol. v, no. 11 (December, 2008). You can view these past issues online at our website http://www.thecompasssocietynews.com.
The Compass
TEN GOOD REASONS FOR SINGLE PAYER HEALTH CARE
From A. Blevins in Billings, Montana: Following are excerpts from a letter to President Obama authored by Compass Society members Marilyn and Auzie Blevins and dated Nov. 24, 2008. The letter has been edited for the sake of brevity.
“We believe the existing for profit health care system is a serious drag on the economy. The time has come for radical change. Unfortunately, and for a number of reasons, Americans have not had an open, fair debate about health care, especially the advantages of single payer. We offer below ten (10) reasons America should have a single payer national health system. They are as follows:
1. Single payer would be simple and easy to understand. The for profit private insurance system is extremely complex and involves up to 1500 private insurance companies who offer hundreds of different health insurance policies. Under single payer, one federal agency would act as insurer and would administer one national health insurance policy -- with one set of rules and regulations.
2. Single payer would be far more economical. The country spends $2.3 trillion each year on health care. According to Physicians for a National Health Program (PNHP), administrative costs for a single payer system would be about one (1) percent of total program costs -- the same as Medicare. In contrast, annual administrative costs for private insurance companies are about 32 percent or $350 billion.
3. Single payer would provide career and personal security to workers and families. Good health insurance is one of the most sought after job benefits. Many workers will stay with a bad employer just to keep health insurance. We are the only country that allows medical bankruptcy. By guaranteeing health care, single payer would eliminate a huge area of insecurity for individuals and families.
4. Single payer would provide universal coverage. There are some 47 million uninsured and several million more under-insured Americans. Under single payer, every American would receive basic medical care regardless of marital status, sexual orientation, age, race, religious belief, occupation, place of residence, and importantly, pre-existing conditions.
5. Single payer would make businesses more competitive in the global economy. Because single payer focuses on individuals and family, businesses would no longer be obligated to purchase health insurance.
6. Single payer would help eliminate fraud and abuse. There are no government watch dogs to monitor pricing and prevent fraud under the for profit private insurance system. Under single payer, it is anticipated federal auditors would be strategically placed to monitor health care providers.
7. Single payer would relieve families, especially the elderly, of complex administrative burdens. These burdens include the complexity of selecting the best insurance policy, choosing the best insurance company, and determining if certain medical procedures are covered by the insurer. Also, one has to make sure a health care provider is “preferred” by the insurance company. In addition there are billing inconsistencies, misleading statements, and necessary phone calls. The present system can only be described as Byzantine. The single payer system would simplify these burdens.
8. Single payer would be more accepted by the public. With a single federal agency managing the health care system, subject to duly promulgated rules under the watchful eye of Congress, the public would readily accept ownership of a single payer system, much as we have accepted our Social Security system.
9. Single payer would build on already successful federal health programs. Examples include Medicare and Medicaid. Both are paid for with federal taxes, except for state matches in the case of Medicaid. The Children’s Health Insurance Program (CHIP) is a joint federal-state program providing private health insurance for eligible children.
10. Single payer would help fulfill a basic human right and end disaster capitalism. The health insurance industry has profited obscenely off the American people for decades. We are aware of the power of the health insurance lobby. We urge President Obama to confront the insurance lobby and put the health and well being of Americans first by pushing for a single payer national health care system.”
Copyright © 2009, The Compass Society
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