The Myth of Free-Market Capitalism: The Case of Freddie Mac and Fannie Mae

[Christopher Hall]

John-

To what bailout is the cartoon referring? The one that didn't happen?

Congress voted down the proposed bailout yesterday, of course, with both parties (in particular, the Republican Party) soundly rejecting it.

I hope that the Senate doesn't succeed in resusciating it when it convenes tomorrow.

Time will tell.

I think you will find that it will be passed later on this week. The system will not be able to survive without it.

It may not pass this week if a substantial number of the Democrats and most of the Republicans try to tank it like they did yesterday, which I think is a good thing.

As for whether the system can survive without the bailout, the proponents of it (led by the Bush Administration) told us last week that the sky would fall if Congress didn't pass the bailout.

It will be interesting.

[John Simkin]

I've been on the record for letting them fail. Nationalization is the wrong move ofr lots of reasons. I would prefer for us to take the lumps now and move forward.

The problem is that Freddie Mac and Fannie Mae is just the tip of the iceberg. The whole system is under threat. As much as it must hurt, Bush had no choice but to nationalize them. What alternative strategy do you suggest Bush should take?

Let everyone take their lumps and then lets move on. We eitther take the big hit, suffer and then rebuild or we die the death of a thousand cuts. I'll take the big hit.

It is laughable that right-wing politicians are claiming that they are blocking this government aid for ideological reasons. Nouriel Rouriel described George Bush, Henry Paulson and Ben Bernanke as “a troika of Bolsheviks who turned the USA into the United Socialist State Republic of America”. Bill Perkins took out an ad in the New York Times and called the plan “trickle-down communism”.

However, there is nothing new about the Bush administration providing bailouts for its friends. Bush has given out state aid to his financial backers ever since he took power. Corporate welfare is a consistent feature of advanced capitalism. The only difference this time is the publicity that has surrounded the move.

According to a report by the Cato Institute, in 2006 the federal government spent $92bn subsidizing business. Most of this went to major corporations who support the Republican Party. $21bn went to farmers. This was distributed very unfairly with the richest 10% taking 66% of the payouts.

In 2006 the Bush administration gave out hundreds of millions to other countries as part of its Foreign Military Financing programme, which enables them to purchase weaponry from US Corporations. In 2006 Boeing alone received $4.5bn from this fund.

Another report revealed that Wal-Mart alone received over $1bn of public money from a fund that had been set up to regenerate depressed communities.

A report by the Institute for Policy Studies shows that Bush has been spending $20bn a year subsidizing executive pay. A system was introduced that enables multimillionaire executives to declare their income as capital gains. This means that they pay lower rate of tax than the people who clean their offices. An attempt to remove these loophole last year was blocked by the Senate after a lobbying campaign by these multimillionaires.

These lobbyists were also involved in stopping legislators banning unsustainable lending. A major figure in this is John McCain’s current campaign manager. Over the past financial year, the big banks spent $49m on lobbying and $7m in direct campaign contributions. Fannie Mae and Freddie Mac spent $180m in lobbying and campaign finance over the past eight years. Much of this went to the House financial services committee and the Senate banking committee.

This money was well-spent. When Dick Durban’s 2005 amendment seeking to stop predatory mortgage lending, it was defeated in the Senate by 58 to 40. According to Jim Leach, when he proposed re-regulating Fannie Mae and Freddie Mac, their lobbyists managed in “less than 48 hours to orchestrate both parties leadership” to crush his amendments.

According to George Monbiot: “Campaign finance is the best investment a corporation can make. You give a million dollars to the right man and reap a billion dollars’ worth of state protection, tax breaks and subsidies. When the same thing happens in Africa we call it corruption.”

[Christopher Hall]

I've been on the record for letting them fail. Nationalization is the wrong move ofr lots of reasons. I would prefer for us to take the lumps now and move forward.

The problem is that Freddie Mac and Fannie Mae is just the tip of the iceberg. The whole system is under threat. As much as it must hurt, Bush had no choice but to nationalize them. What alternative strategy do you suggest Bush should take?

Let everyone take their lumps and then lets move on. We eitther take the big hit, suffer and then rebuild or we die the death of a thousand cuts. I'll take the big hit.

It is laughable that right-wing politicians are claiming that they are blocking this government aid for ideological reasons. Nouriel Rouriel described George Bush, Henry Paulson and Ben Bernanke as “a troika of Bolsheviks who turned the USA into the United Socialist State Republic of America”. Bill Perkins took out an ad in the New York Times and called the plan “trickle-down communism”.

However, there is nothing new about the Bush administration providing bailouts for its friends. Bush has given out state aid to his financial backers ever since he took power. Corporate welfare is a consistent feature of advanced capitalism. The only difference this time is the publicity that has surrounded the move.

According to a report by the Cato Institute, in 2006 the federal government spent $92bn subsidizing business. Most of this went to major corporations who support the Republican Party. $21bn went to farmers. This was distributed very unfairly with the richest 10% taking 66% of the payouts.

In 2006 the Bush administration gave out hundreds of millions to other countries as part of its Foreign Military Financing programme, which enables them to purchase weaponry from US Corporations. In 2006 Boeing alone received $4.5bn from this fund.

Another report revealed that Wal-Mart alone received over $1bn of public money from a fund that had been set up to regenerate depressed communities.

A report by the Institute for Policy Studies shows that Bush has been spending $20bn a year subsidizing executive pay. A system was introduced that enables multimillionaire executives to declare their income as capital gains. This means that they pay lower rate of tax than the people who clean their offices. An attempt to remove these loophole last year was blocked by the Senate after a lobbying campaign by these multimillionaires.

These lobbyists were also involved in stopping legislators banning unsustainable lending. A major figure in this is John McCain’s current campaign manager. Over the past financial year, the big banks spent $49m on lobbying and $7m in direct campaign contributions. Fannie Mae and Freddie Mac spent $180m in lobbying and campaign finance over the past eight years. Much of this went to the House financial services committee and the Senate banking committee.

This money was well-spent. When Dick Durban’s 2005 amendment seeking to stop predatory mortgage lending, it was defeated in the Senate by 58 to 40. According to Jim Leach, when he proposed re-regulating Fannie Mae and Freddie Mac, their lobbyists managed in “less than 48 hours to orchestrate both parties leadership” to crush his amendments.

According to George Monbiot: “Campaign finance is the best investment a corporation can make. You give a million dollars to the right man and reap a billion dollars’ worth of state protection, tax breaks and subsidies. When the same thing happens in Africa we call it corruption.”

This has some good quotes.

Can you give any links to the bolded quotes?

BTW, I agree with the cartoon that you posted a couple of days ago.

I am going to fax "Vote No on the Bailout" letters to both of my state's Senators and to all of the House members.

[John Simkin]

This has some good quotes.

Can you give any links to the bolded quotes?

You will find both quotes from the Newsvine website:

http://redruby.newsvine.com/_news/2008/09/...-contradictions

You can find out more about Nouriel Rouriel and Bill Perkins here:

http://unjobs.org/authors/nouriel-roubini

http://www.billperkins.net/

[John Simkin]

You can hear Nouriel Rouriel talking to the BBC here:

http://europe.real.com/inc/freedomplayer/i...p;brand=bbcnews

[Christopher Hall]

You can hear Nouriel Rouriel talking to the BBC here:

http://europe.real.com/inc/freedomplayer/i...p;brand=bbcnews

Thanks, John.

I will check out these sources.

[John Simkin]

John-

To what bailout is the cartoon referring? The one that didn't happen?

Congress voted down the proposed bailout yesterday, of course, with both parties (in particular, the Republican Party) soundly rejecting it.

I hope that the Senate doesn't succeed in resusciating it when it convenes tomorrow.

Time will tell.

I think you will find that it will be passed later on this week. The system will not be able to survive without it.

It may not pass this week if a substantial number of the Democrats and most of the Republicans try to tank it like they did yesterday, which I think is a good thing.

As for whether the system can survive without the bailout, the proponents of it (led by the Bush Administration) told us last week that the sky would fall if Congress didn't pass the bailout.

It will be interesting.

It seems that Congress was eventually convinced that if it did not pass the bailout the system would collapse. However, the stock-markets today suggest that they are not convinced that the measure is enough to save the system. It turns out that it will be six weeks before the bailout will be operative.

[Christopher Hall]

John-

To what bailout is the cartoon referring? The one that didn't happen?

Congress voted down the proposed bailout yesterday, of course, with both parties (in particular, the Republican Party) soundly rejecting it.

I hope that the Senate doesn't succeed in resusciating it when it convenes tomorrow.

Time will tell.

I think you will find that it will be passed later on this week. The system will not be able to survive without it.

It may not pass this week if a substantial number of the Democrats and most of the Republicans try to tank it like they did yesterday, which I think is a good thing.

As for whether the system can survive without the bailout, the proponents of it (led by the Bush Administration) told us last week that the sky would fall if Congress didn't pass the bailout.

It will be interesting.

It seems that Congress was eventually convinced that if it did not pass the bailout the system would collapse. However, the stock-markets today suggest that they are not convinced that the measure is enough to save the system. It turns out that it will be six weeks before the bailout will be operative.

"However, the stock-markets today suggest that they are not convinced that the measure is enough to save the system."

Exactly.

The market needs to suffer the consequences of awful investment strategies (e.g. hyper-leveraging).

The institutions do not need to be the beneficiaries of a hysterical Congressional response to their own self-inflicted institutional failures.

I thought that the bailout (which I call the "sellout") would result in even greater market upheaval.

Edited October 6, 2008 by Christopher Hall

[John Simkin]

John-

To what bailout is the cartoon referring? The one that didn't happen?

Congress voted down the proposed bailout yesterday, of course, with both parties (in particular, the Republican Party) soundly rejecting it.

I hope that the Senate doesn't succeed in resusciating it when it convenes tomorrow.

Time will tell.

I think you will find that it will be passed later on this week. The system will not be able to survive without it.

It may not pass this week if a substantial number of the Democrats and most of the Republicans try to tank it like they did yesterday, which I think is a good thing.

As for whether the system can survive without the bailout, the proponents of it (led by the Bush Administration) told us last week that the sky would fall if Congress didn't pass the bailout.

It will be interesting.

It seems that Congress was eventually convinced that if it did not pass the bailout the system would collapse. However, the stock-markets today suggest that they are not convinced that the measure is enough to save the system. It turns out that it will be six weeks before the bailout will be operative.

"However, the stock-markets today suggest that they are not convinced that the measure is enough to save the system."

Exactly.

The market needs to suffer the consequences of awful investment strategies (e.g. hyper-leveraging).

The institutions do not need to be the beneficiaries of a hysterical Congressional response to their own self-inflicted institutional failures.

I thought that the bailout (which I call the "sellout") would result in even greater market upheaval.

The problem is that it will not be the investment bankers who will really suffer (they have already taken their money out in the form of wages and bonuses). The people who will suffer are those who will lose their jobs because of the credit crunch, those who are retired whose pensions are invested in stocks and shares and the small businesses that will close because the banks have taken away their credit. The Bush plan is failing because it was too feeble. Bush needs to imitate what the Swedes did in 1992.

[John Simkin]

The market needs to suffer the consequences of awful investment strategies (e.g. hyper-leveraging).

The institutions do not need to be the beneficiaries of a hysterical Congressional response to their own self-inflicted institutional failures.

I thought that the bailout (which I call the "sellout") would result in even greater market upheaval.

It is becoming clear that the US bailout has failed to provide confidence in the market. After dithering for several weeks the collapse in bank shares has forced Gordon Brown into action. This morning the government has announced details of a rescue package for the banking system worth up to £50bn ($88bn). It will initially make the extra capital available to eight of the UK's largest banks and building societies in return for preference shares in them. The banks are resisting the prospect of the government taking control over these companies. They are frightened that the government will insist on controlling the scale of the renumeration of the leaders of these banks. Although in a strong position, the UK government is unwilling to take control of the banks. I imagine the reason for this is that Brown has been offered a generous position as a bank director when he is finally removed from office.

HBOS, Barclays, Lloyds TSB and RBS, the five failing banks, have issued statement welcoming the plan. The problem for Brown is that these measures will not work. The market has lost confidence in the banking sector and the FTSE 100 in London continues to fall.

John McDonnell, the Labour MP is one of the few politicians talking any sense about the crisis. He issued this statement this morning:

The government needs to act urgently to protect the British people against the economic turmoil that was not of their making, but is now resulting in them losing their jobs and struggling to pay their rent or mortgage and fuel bills. There should be no blank cheques to bail out the banks that contributed to this crisis.

We are calling upon the government to implement a people's programme to protect our people from the crisis, not just the bankers, including:

1) Nationalising the banks and establishing democratic control over banking decisions, ensuring democratic representation on boards, ending the bonus binges, controlling executive pay and shareholder rewards;

2) Cutting interest rates significantly and immediately, restoring democratic control over key economic decision-making by not only widening the remit of the Bank of England beyond ensuring price stability to advising on the wider economic health of the country, but also reverting the Bank's role to being one voice among many others to be taken into account;

3) Securing people a home by converting repossessions to social rentals so that people have a "right to stay" in their homes and embarking on a massive council housebuilding programme;

4) Enhancing security in employment by ensuring people have a say over the future of the companies by strengthening rights and representation at work;

5) Bring fuel bills under control with price controls on the consumer price of gas and electricity, so that people are not being forced to choose between heating and eating this winter, with the threat of nationalisation if needed.

[Terry Mauro]

The market needs to suffer the consequences of awful investment strategies (e.g. hyper-leveraging).

The institutions do not need to be the beneficiaries of a hysterical Congressional response to their own self-inflicted institutional failures.

I thought that the bailout (which I call the "sellout") would result in even greater market upheaval.

It is becoming clear that the US bailout has failed to provide confidence in the market. After dithering for several weeks the collapse in bank shares has forced Gordon Brown into action. This morning the government has announced details of a rescue package for the banking system worth up to £50bn ($88bn). It will initially make the extra capital available to eight of the UK's largest banks and building societies in return for preference shares in them. The banks are resisting the prospect of the government taking control over these companies. They are frightened that the government will insist on controlling the scale of the renumeration of the leaders of these banks. Although in a strong position, the UK government is unwilling to take control of the banks. I imagine the reason for this is that Brown has been offered a generous position as a bank director when he is finally removed from office.

HBOS, Barclays, Lloyds TSB and RBS, the five failing banks, have issued statement welcoming the plan. The problem for Brown is that these measures will not work. The market has lost confidence in the banking sector and the FTSE 100 in London continues to fall.

John McDonnell, the Labour MP is one of the few politicians talking any sense about the crisis. He issued this statement this morning:

The government needs to act urgently to protect the British people against the economic turmoil that was not of their making, but is now resulting in them losing their jobs and struggling to pay their rent or mortgage and fuel bills. There should be no blank cheques to bail out the banks that contributed to this crisis.

We are calling upon the government to implement a people's programme to protect our people from the crisis, not just the bankers, including:

1) Nationalising the banks and establishing democratic control over banking decisions, ensuring democratic representation on boards, ending the bonus binges, controlling executive pay and shareholder rewards;

2) Cutting interest rates significantly and immediately, restoring democratic control over key economic decision-making by not only widening the remit of the Bank of England beyond ensuring price stability to advising on the wider economic health of the country, but also reverting the Bank's role to being one voice among many others to be taken into account;

3) Securing people a home by converting repossessions to social rentals so that people have a "right to stay" in their homes and embarking on a massive council housebuilding programme;

4) Enhancing security in employment by ensuring people have a say over the future of the companies by strengthening rights and representation at work;

5) Bring fuel bills under control with price controls on the consumer price of gas and electricity, so that people are not being forced to choose between heating and eating this winter, with the threat of nationalisation if needed.

The entire system is bankrupt. Look at all the derivative obligations sloshing around in the banking system. We are at a point of no return, no amount of money pumping will bail out the massive derivatives market. All they will do is create hyperinflation.

[Evan Burton]

I'm a little amazed that the $AUS is down to 70c to the $US; when I came back from the US in June it was 98c and they were talking parity by Xmas. I wish I had put the US$1300 I brought back aside; it would be worth a lot more now!

Still, I'm confused as to why it is happening. All reports say that Australia is best prepared to weather this financial storm. Then again, I have no idea about these things.

[John Simkin]

I'm a little amazed that the $AUS is down to 70c to the $US; when I came back from the US in June it was 98c and they were talking parity by Xmas. I wish I had put the US$1300 I brought back aside; it would be worth a lot more now!

Still, I'm confused as to why it is happening. All reports say that Australia is best prepared to weather this financial storm. Then again, I have no idea about these things.

It is happening because no one really believes politicians that says everything is fine. It is one of the reasons why McCain lost so much support when he said this just before the crash in share-prices. Despite the action taken by governments in the US and the UK, share-prices in both countries continue to fall. For example, yesterday US stocks fell for a seventh straight session, with the Dow Jones index tumbling below 9,000 points for the first time in five years. In the UK they are at their lowest point since 1997. The real reason for this is that the banks have still not revealed the full details of their bad debt. In fact, it is claimed that because of the way these deals were packaged, they do not know themselves. All the banks in Iceland have collapsed. Yet only last week they had 3 star ratings from the leading agencies. Clearly, we have reached the point where none of the banks and the regulatory institutions can be trusted. As a result, the shares will continue to fall. Only governments can raise loans because they are backed by future taxes. Eventually, governments will be forced to takeover the banking system (as they have already done in Iceland) or we will see the end of capitalism as we know it.

[John Simkin]

Australian Prime Minister Kevin Rudd has now announced a A$10.4bn ($7.3bn) economic stimulus package. It will allow for one-off payments to the country's low-wage earners and pensioners and follows earlier announcements of guarantees of bank deposits for three years.

This is a good move as people on low incomes will always spend money given to them and will help the economy. It is also morally right to give money to the poor rather than to the rich. Maybe, Bush will follow this example.

[Mike Tribe]

Maybe, Bush will follow this example.

Oh, look! Flying farmyard animals!