Monday, September 22, 2008

Is Capitalism to blame for the economy?

Scrappy socialist Neil Clark is clapping his hands in glee at the economic woes befalling Wall Street - which is pretty typical, since Neil is one of Britain's leading champions of Schadenfreude.

But does his take on the economic situation stand up to examination?

"We are now back in 1989- but the system that is collapsing before our very eyes is not Soviet communism, but Anglo-Saxon turbo-capitalism™. In the end, this most rapacious of economic models was destroyed by its own greed. It's time for everyone... ...to pop the champagne corks."

Greed, dishonesty and a very short-sighted agenda certainly contributed to the crisis on Wall Street - but they aren't exclusively to blame. Capitalism isn't the problem - the government's meddling is.

One such example is the Government's involvement in mortgage giants Frannie Mae and Freddie Mac - entities Neil Clark incorrectly identified as private industries. In reality, they were anything but.

The Federal National Mortgage Association (FNMA, hence 'Frannie Mae') and the Federal Home Loan Mortgage Corporation (FHLMC, hence 'Freddie Mac') are both Government Sponsored Enterprises - corporations created by the government and intricately linked to activities on Capital Hill.

Frannie Mae was created as part of Franklin D. Roosevelt's 'New Deal' in 1938 and was an entirely nationalised industry right up until 1968, when it was turned into a allegedly private corporation (enjoying a virtual monopoly on America's secondary mortgage market.)

Freddie Mac was created in 1970 to expand that market and offer competition to the newly privatised Frannie Mae. (No, two government sponsored companies in competition with each other doesn't make much sense to me, either.)

Despite being hypothetically privatised, both Freddie Mac and Frannie Mae enjoyed many things other private corporations didn't - including an unwritten reassurance that the securities it issued would be guaranteed by the Federal Government. What The Economist called; "the implicit government guarantee."

In addition to that, other private financial institutions had to maintain a capital/asset ratio of at least 3% to the mortgage backed securities they sold. Freddie and Frannie were exempt from that requirement, only having half as much cash to back those securities up.

The final icing on the cake? Both Freddie Mac and Frannie Mae were exempt from local and state taxes, giving them another massive advantage over 'real' private industry.

So Neil's suggestion that Freddie and Frannie were private corporations is pretty short sighted. They weren't - and that makes their collapse even more inexcusable.

Where did Freddie and Franny go wrong?

Neil Clark blames the entire collapse of Wall Street on the 'turbo capitalist' model (no, I have no idea what that means, either.)

With Freddie Mac and Frannie Mae, the blame can actually be directed towards politicians.

The management and accounting practices of Frannie Mae and Freddie Mac were known to be pretty shifty for at least a decade before their collapse.

The House Banking Subcommittee On Capital Markets, Securities And Government Sponsored Enterprises were holding hearings on Frannie Mae as early as 2000, to question how the companies were being run.

In 2001, the Bush administration called for more accountability because Frannie Mae and Freddie Mac posed 'a potential problem' because 'financial trouble of the large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity.'

In 2004, the Office of Federal Housing Enterprise Oversight published a report highlighting accounting 'errors' that shifted losses around the balance books so the senior executives could award themselves millions of dollars in bonuses.

The Bush government again called for more regulation: "The Administration has determined that the safety and soundness regulators of the housing GSEs lack sufficient power and stature to meet their responsibilities, and therefore…should be replaced with a new strengthened regulator.”

John McCain himself highlighted the crooked management back in 2006, telling George Bush: "Mr. President, this week Fannie Mae's regulator reported that the company's quarterly reports of profit growth over the past few years were "illusions deliberately and systematically created" by the company's senior management" to justify those enormous bonuses.

In 2003 and again in 2005, Bush's government tried to bring about legislation that would make the management of Freddie Mac and Frannie Mae more accountable and transparent - and both times, this legislation was shot down by Democrats in congress.

Why?

Because the Democrats received enormous campaign contributions from Freddie Mac and Frannie Mae to help make sure no legislation like that ever came into being - legislation which could have put an end to the Government sponsored cash-cow that allowed them to cook the books and rake in millions of undeserved bonuses.

The evidence is pretty clear: Did you know that Barack Obama raked in over $126,000 in campaign contributions from Freddie and Frannie? In just two years?

Or that Hillary Clinton collected over $75,000 herself?

Even House Speaker Nancy Pelosi - one of the most vocal opponents of Bush's legislation - took over $56,000 in campaign contributions from Freddie Mac and Fannie Mae.

What does this mean?

The disastrous collapse of Freddie Mac and Frannie Mae had very little do to with the capitalist system and a lot to do with two government backed organisations being driven into the ground by crony management.

The left-wing politicians who were meant to be rallying against such forces of 'unregulated capitalism' sat idly by and let all this all happen (counting the money they'd accepted to turn a blind eye.)

Neil Clark might blame 'turbo capitalism' for the Freddie and Frannie disaster - I think the opposite is true. These two mortgage giants illustrated the flaws in the socialist system he advocates. When a government monopoly is backed by taxpayer's money, the inevitable result is corruption and profiteering by the minority in charge.

Right now, the collapse of Freddie Mac and Frannie Mae has resulted in the American taxpayer being saddled with up to a trillion dollars in 'bailout' money - and the crooks who'd 'cooked the books' and walked off with millions in crooked bonuses?

Well, former Chairman and CEO of Frannie Mae, Franklin Delano Raines, is an advisor to Barack Obama's presidential campaign on economic matters.

In the capitalist system, a scandal like this would have resulted in criminal investigations that would have made those of Enron pale into insignificance.

But thanks to the pseudo-socialist system that supported Frannie Mae and Freddie Mac, the crooks who collected millions in bonuses (more than $20 for Franklin Raines) didn't get busted and imprisoned - they got recruited by the Democratic party to help with their election campaign.

["Turbo-capitalism" trademarked Neil Clark, 1996, all rights reserved. Quotes butchered and taken out of context to maximise effectiveness - Kitty Copy Editor]

8 comments:

PQG said...

In the capitalist system, a scandal like this would have resulted in criminal investigations that would have made those of Enron pale into insignificance.

Huh? I don't think that capitalism creates justice all by itself. In fact, capitalism is not even a prerequisite of justice. Methinks you are confused.

In general Fannie and Freddie were but one part of the problem. Just like with Enron, the problem was not too much gov't meddling but to little regulation of the finanical sector.

In a nutshell, deregulation allowed fees collected on the origination and securitization of loans to be decoupled from the risk of those loans. Loan originators and Wall Street investment banks made all their money up front selling garbage to suckers.

It was just another big swindle in the Wall Street tradition. Much bigger than most. Big enough to crash the entire economy and leave it crashed for quite a while I fear.

Perhaps this little presentation will help explain what happened:

http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1

also this article...

http://www.atimes.com/atimes/Global_Economy/JI23Dj06.html

Roland Hulme said...

That powerpoint presentation was hysterical! And hilarious! And educational!

I guess I didn't really explain my point so well - which was that people keep blaming 'the capitalist system' and the Bush government for this mess, but I think the liberals and Democrats have a LOT of blame as well.

I mean, as far as regulation goes, it was Bush and co. who were rooting for it and the Democrats stopped them!

And as for the bad banking model... Well, it was Freddie and Fannie who were knee deep in it and their unscrupulous (Democratic) bosses were raking in the dollars from this housing bubble. They encouraged the whole market to act this way, since Freddie and Frannie basically ARE the mortgage market.

Certainly a lot of people on Wall Street screwed up, but I believe they did so because they followed Freddie and Frannie's example. The Dems are at least partly to blame for all this.

And no, capitalism doesn't create justice. I'm just pointing out that if Freddie and Frannie were REALLY private corporations, their bosses would be in jail right now, instead of helping head up Obama's economic policy.

PQG said...

Here's a short post by a very smart economist (who has been warning about the housing bubble for a long time) on why the financial crisis cannot be attributable to the close government relationship with Fannie Mae and Freddie Mac. Enjoy!

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=09&year=2008&base_name=market_place_misleads_the_publ

Roland Hulme said...

I did enjoy! But I disagree! Freddie and Franny led the way when the '77 CRA was enacted because they had implied government funding to back up their risky mortgages.

They ARE the mortgage industry. Frannie has been since 1938. Whatever forces have driven the market, they've been at the forefront of them.

fb said...

Roland,

You are blighted by the fact that you had your impressionable years under Blair and you attached labels to that which you did not like. The opposite of capitalism is not socialism, nor is capitalism a description of the corporatism that has overtaken America.

You really need to study harder, much harder actually, before you can write on the subject. My suggestion is that you forget the silly terms you throw around without comprehension and start afresh on this subject.

fb

Anonymous said...

How was the 2003 and 2005 Bush legislation shot down by the democrats when the democrats were the minority party in both houses?

Anonymous said...

Because the Democrats (and sufficient republicans) voted against it, dummy!

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