Tag Archives: credit crisis

Don’t Blame Bush

The blame is already being dished as John McCain’s presidential campaign sputters toward a crushing election defeat and the Democrats are poised to take control of the White House and both houses of Congress.


Most of the pointing fingers are aimed at the universally loathed George W. Bush, who has become the public face of both economic catastrophe and battlefield disaster.

Other leading candidates for the role of principal victim in the Republican blame game are John McCain – he didn’t run a tough enough campaign or didn’t appeal enough to the party’s evangelical or populist base – and Sarah Palin – she wasn’t ready to be president or didn’t broaden her appeal beyond the party’s evangelical or populist base.

But George W. Bush is not the cause of the Republican Party’s looming election debacle, and neither John McCain nor Sarah Palin is the reason for their party’s 2008 collapse. 

Americans like to personalize politics, preferring to embrace or repudiate personalities rather than policies.  When we evaluate our politicians, we talk about their personal qualities – such as leadership, competence, integrity, consistency, and authenticity.  We like to say that we vote for the candidate not the party.

For this reason, our public debate on the causes of the Republican has focused on questions of Bush’s incompetence, McCain’s temperament, and Palin’s ignorance.

But blaming any or all of them for the coming massive Republican defeat misses the real culprit and lets too many others off the hook.

The cause of the Republican’s imminent electoral disaster is not the personal qualities of their elected officials and candidates, but the fundamental beliefs and policy assumptions of the Republican Party. 

It is these fundamental beliefs and policy assumptions that have caused the nation’s economic meltdown, which has in turned caused the meltdown of the Republican Party.

And every single Republican office holder, from the president to the lowest down-ticket county official, regardless of their personal qualities, shares in the blame.

The modern Republican Party, and every Republican, has embraced these two basic beliefs:

  • No to government regulation of markets and the economy.  A fundamental belief of every Republican is that the economy works best – that is, it is more productive and creates more wealth – when unconstrained by regulation.
  •  No to taxes.  Every Republican believes that taxes, especially on the wealthiest Americans, should be always lower and eliminated whenever possible.  Under no circumstances should there be a tax increase, even in order to fund necessary government program. 

These two fundamental tenets of Republican policy have created the economic crisis the nation is now suffering, and nearly every other crisis that the nation is now facing can be traced to Republican adherence to these principles – including our soaring national debt, our crumbling infrastructure, our failing schools, our ecological vandalism, our oil dependency, our exploding prison population, our shameful veterans hospitals, and our inequitable and dysfunctional heath care system.

Every other Republican talking point – from abortion to immigration to support for continuing the war in Iraq – is contingent and conditional.  There are Republicans who disagree with the party leadership on these issues.

But there are no Republicans who have not sworn eternal hostility to taxes and economic regulation.  One simply cannot be a Republican without embracing these two fundamental policies that have brought near catastrophe to the world economy, to the operations of federal, state and local government, and, finally, and deservedly, to the Republican Party itself.

What has brought America to the brink of disaster and the Republican Party to the brink of an election defeat of historic proportions?

It’s not just Bush.

It’s not just McCain and Palin.

It’s Republicans.

Each and every one of them.

Don’t let Rush Limbaugh, Newt Gingrich, Tom DeLay, Chris Shays, or your local Republican senator or schoolboard member put the blame on someone else.

As another famous Republican once said, they’re all bad.


Begging the Banks

Treasury Secretary Henry Paulson today called on the banks that the federal government has just given $250 billion dollars to make that money available to others in the economy.

beggars“We must restore confidence in our financial system,” Paulson said. “The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.”

The “needs of our economy” might require that the banks not hoard the money that the government has given them, but the Bush administration isn’t requiring much of anything.

I agree with Paulson that the economy will not begin to recover until there is liquidity in the credit markets.  That, indeed, was the rationale behind the government’s massive and unprecedented bailout of the financial industry.

Why, then, is Paulson asking the banks to do the only thing that justified giving them those billions of taxpayer dollars?

If, as is apparent to just about everyone, the economy will not recover until liquidity is restored to financial markets, why doesn’t the federal government require that the banks not hoard the billions that the government is giving them?

The answer is that, despite the acuteness of the financial crisis, and despite the government’s belated decision to take large scale action, the basic approach of the Bush administration has not changed.

In fact, for the past year, the Bush administration has taken a consistent, and faulty, two pronged approach to dealing with the expanding economic crisis, and this approach has not changed with the latest bailout.

This two pronged approach is

  • (1) make capital available at extremely low rates to banks and financial institutions with the goal of restoring liquidity, and then
  • (2) beg and plead with these same banks and financial institutions to move this capital into the economy.

As the housing and mortgage crisis worsened, Federal Reserve Chairman Ben Bernanke announced a series of cuts in interest rates.  Each time, Bernanke repeated his call for lenders to voluntarily reduce the principal on delinquent loans to adjust them for the drop in home prices, rejecting the far more more forceful action proposed by Democrats favoring legislation that would require the refinancing of hundreds of thousands of mortgages.

Of course, the banks did not voluntarily do what Bernanke requested.

Now Treasury Secretary Paulson is following the same dead end path in asking the banks to voluntarily take the actions that are needed for the restoration of the market.

The Bush adminstration’s beg and plead approach did not work in the past, and it will not work now.

Of course, no one, except the apocalypticals of the far Left and Right, and Libertarians driven crazy by ideology or alcoholism, want to see the global economy collapse.  Sane people don’t want to see bread lines or live with their guns at the ready in a bunker in the woods.

But we can now longer expect that capitalists, driven by personal gain, will voluntarily act to save the system that sustains them.

What is needed is a comprehensive and mandatory overhaul of the entire banking and financial system and the credit markets on the order of the Securities and Exchange Act of 1934.

And for that, we’ll have to wait at least until a new Congress, a new administration, and a new political and economic philosophy take over in January 2009.

I hope we last that long.

John McCain Feels the Pain of the Housing Crisis — With at least Eight Homes, McCain’s Losses are in the Millions

Few Americans have suffered as much from the housing crisis as has John McCain.

tny 9.8.08cvr.inddWhile the liberal media and the Democrats have jumped all over McCain for owning at least eight homes (and for not knowing how many he owns), the terrible toll that the housing crisis has taken on McCain and his wife Cindy has been completely ignored.

It is time to recognize the McCain’s losses.

The eight homes that (so far) have been identified as owned by McCain family are:

1. A 15-acre ranch in Hidden Valley, Arizona.  Value = apx. $1 million.
2. A condo in Phoenix, Arizona.  Value = $4.7 million.
3. A condo in The Coronado in San Diego, California. Value = $2.4 million.
4. Another condo in The Coronado San Diego, California. Value = $2.4 million.
5. A condo in La Jolla, California.  Value = $1.1 million.
6. A three-bedroom condo in Arlington, Virginia. Value = $847,000.
7. Another condo in Phoenix, Arizona.  Value = $730,000.
8. Yet another condo in Phoenix, Arizona.  Value = $830,000.

Now, if we take the above-noted values of the properties (which, let’s assume, are based on pre-housing crash figures) and then subtract the percentage decline in housing prices over the past year (using the latest Case-Schiller Index for the nearest city), we get the following numbers:

Total McCain property values in Arizona = $7,260,000.
Last Year’s Loss in Property Value in Phoenix = 27.9 percent.
Total McCain Property Value Loss in Arizona = $2,025,540.

Total McCain property values in San Diego/La Jolla = $5,700,000.
Last Year’s Loss in Property Value in San Diego = 24.2 percent.
Total McCain Property Value Loss in San Diego/La Jolla = $1,379,400.

Total McCain property values in Arlington, Virginia = $847,000.
Last Year’s Loss in Property Values in Washington, D.C. = 15.7 percent.
Total McCain Property Value Loss in Virginia = $132,979.

Total McCain Property Value Loss for 2007-2008 =  $3,537,919.

Of course, John McCain may own more than these eight homes.  In that case, the calculation of McCain’s losses would have to be increased.

We think, too, that the above valuation figures for McCain’s properties are probably too low.  For example, McCain’s 15-acre ranch should probably have been valued at more than $1 million.  Again, this means that McCain’s losses are larger than the $3.5 million figure we’ve calculated.

As these (admittedly conservative) figures show, John McCain has lost more than $3.5 million dollars, just this year, in the housing crisis.

How many Americans can say that they’ve suffered that much?

He may not have mentioned the housing crisis, the credit crisis, the mortgage meltdown or the foreclosure explosion in his speech at the Republican convention, but that doesn’t mean that he doesn’t care or doesn’t get it.

America, John McCain shares your pain.

Disaster Capitalists Staking Out U.S. Banks

Disaster capitalists are staking out the U.S. banking industry. 

capitalismPrivate equity firms have long wanted to move into banking.  And given the financial crisis that many banks are now facing, isn’t this a good time to allow private equity firms, with their billions of dollars of available resources, to come riding to the rescue?

According to an editorial in the New York Times, “for the past month, some private equity firms have been promoting what they claim would be a relatively pain-free fix of the nation’s banks . . . Private equity firms say they are ready to invest huge amounts in ailing banks — provided the Fed eases up on the regulations that would otherwise apply to such large investments. The firms’ desire to jump in makes perfect sense. Bank shares are cheap now, but for the most part, are likely to rebound when the economy improves.”

What the private equity firms want in return for playing the role of savior are significant changes in banking regulations.  

“Under current rules,” the Times explains, “if an investment firm owns 25 percent or more of a bank, it is considered, properly, a bank holding company, subject to the same federal requirements and responsibilities as a fully regulated bank. If a firm owns between 10 percent and 25 percent of a bank, it is typically barred from controlling the bank’s management. To place a director on a bank’s board, an investor’s ownership stake must be less than 10 percent. The rules exist to prevent conflicts of interest and concentration of economic power. They protect consumers and businesses who rely on well-regulated banks, as well as taxpayers, who stand behind the government’s various subsidies and guarantees to banks.  To maximize their profits, private equity firms want to own more than 9.9 percent of the banks they have their eye on and they want more managerial control — and they want it all without regulation. They argue that because they tend to be shorter-term investors, problems that the rules address are unlikely to occur on their watch.”

The private equity firms’ grab for the gold is an example of what Canadian writer Naomi Klein calls the “shock doctrine” of “disaster capitalism.”

shockdoctrineThe basic idea of the shock doctrine is that corporations are able to remove regulations and operate without governmental oversight when citizens are in a state of shock from a traumatic event, such as a natural disaster, a war, a coup, or an economic crisis and are desperate for a solution and unable to mobilize effective opposition.  When these crises occur, corporations exploit them by promising a solution — the catch is that in return for their solution, the corporations demand the drastic reduction or elimination of regulation and public oversight.

In her book The Shock Doctrine: The Rise of Disaster Capitalism, Naomi Klein identifies University of Chicago economist and Nobel Prize winner Milton Friedman as the ideological father of the Shock Doctrine: “In one of his most influential essays, Friedman articulated contemporary capitalism’s core tactical nostrum, what I have come to understand as ‘the shock doctrine’. He observed that ‘only a crisis – actual or perceived – produces real change’.  When that crisis occurs, the actions taken depend on the ideas that are lying around. Some people stockpile canned goods and water in preparation for major disasters; Friedmanites stockpile free-market ideas. And once a crisis has struck, the University of Chicago professor was convinced that it was crucial to act swiftly, to impose rapid and irreversible change before the crisis-racked society slipped back into the ‘tyranny of the status quo’. A variation on Machiavelli’s advice that ‘injuries’ should be inflicted ‘all at once’, this is one of Friedman’s most lasting legacies.”

shock-and-awe-usa1Examples of the application of the shock doctrine offered by Klein are the government-corporate responses to Hurricane Katrina, the 9/11 attack, the war in Iraq, the oil crisis, and the global food crisis.  In each instance, Klein argues, corporations systematically exploited, and are still exploiting, the state of fear and disorientation that accompanied the shock and crisis to remove regulations and government oversight of their activities.

That’s exactly what’s behind the private equity firms’ solution to the banking crisis.  As the Times points out, “the private equity firms are exploiting the desperation of banks and regulators. They know that banks are desperate to raise capital and that doing so is a painful process bankers would rather avoid. They also know that regulators and other government officials, many of whom where asleep on the job as the financial crisis developed, want to avoid the political fallout and economic pain of bank weakness and failure.”

Giving in to the private equity firms’ offer to save the banks in return for fundamental regulatory concessions would be a serious mistake. 

As the Times explains, “Now, when there is great uncertainty about which institutions are too big or too interconnected to fail, is exactly the wrong time to allow less transparency and less regulation. And with confidence in the financial system badly shaken, it would be a mistake to signal to global markets and American citizens that the government is willing to put expediency above long-term stability.”

In fact, the responsible response to the current crisis is not less regulation, but more effective and focused oversight.  As economist Austan Goolsbee (also of the University of Chicago) said in a Dow Jones interview, “If you can borrow money from the U.S. taxpayer at a moment of crisis, that is a very sacred insurance policy underwritten by the U.S. taxpayer.  We have the right to oversee anyone who is accessing that insurance policy.”

It remains to be seen whether Congress will capitulate to the private equity firms’ demands. 

Most likely, this will be one of the issues that are decided by the November elections.