I hope no one is betting the farm on Congress being able to tax AIG bonuses to get the money back. The Constitution kind of forbids that sort of thing, and for good reason.
Say the party in power was the Republican Party, and they proposed a bill that instituted a special tax for auto workers to pay for the bailout of General Motors?
Yeah, now THAT doesn’t seem fair, does it?
I know we’re pissed off, and I know we’re tired of this crap, but we have to keep our heads in this situation. This economy took neocons a long time to screw up, and there is no “magical formula” which will fix the whole mess in a couple of months. This situation is the end result of 28 years of supply-side economics, culminating in the “free market uber alles” of the last eight years, in which deregulation was championed, and the regulations Republicans couldn’t kill were routinely ignored by an administration that decided that, as long as it LOOKED like someone was making money, whatever “the market” did was perfectly okay.
If you want to know what brought our economy down, it’s actually relatively simple, even though it looks complicated.
Remember those infomercials featuring that little geeky-looking guy who used to promise that you could make millions of dollars by putting tiny little classified ads in newspapers? Remember how most of us would see those infomercials, roll our eyes and wonder how anyone could be stupid enough to fall for that crap? I mean, how much logic does it take to figure out that, if it was possible to make millions of dollars by running little classified ads in newspapers, he wouldn’t be selling you a package of tapes and books showing you how to do it? Why wouldn’t he just hire people to run the ads for him?
And then there were those other infomercials, where those sincere-looking creeps would offer you a “foolproof” program for making millions of dollars by buying and selling real estate? Again; if it’s so easy, why is he telling other people to do it, and creating competition for himself?
Well, what happened, essentially, is that the “Captains of Industry” in this country, and to a lesser extent, around the globe, bought the bullshit, and believed the infomercials that 99% of the rest of us – you know, the “unwashed masses” – scoffed at. That wouldn’t be so bad, but they used OUR money to seed the project.
Glass-Steagal was a mechanism designed to protect the financial services industry from crooks. That is, after all, the government’s job – to regulate commerce. It is mandated in the Constitution. But Republicans, beginning with Reagan, had been taking it apart for decades, because they believed the “infomercial salespeople,” who were saying that the government was preventing people from making trillions of dollars with its regulations.
When Senator Phil Gramm quietly attached his amendment (and when I say quietly, he attached the amendment breaking down the barriers between different segments of the financial services sector late at night, just before the vote) to Gramm-Leach-Bliley, he let loose a financial shit storm that made the 1920s look quaint by comparison.
Economic “experts” should have seen it coming with the Enron debacle. The accounting tricks that Enron engaged in had never been seen before, and were largely made possible by Gramm’s amendment. But after Enron fell, and even after they were followed by literally hundreds of huge corporations, who were forced to un-cook their books, Congress passed Sarbanes-Oxley, which was subsequently ignored by the Bush SEC, and the Republicans decided they had done enough to mollify the American people, and the corporate sector went on with business as usual, with absolutely ZERO government oversight.
See, the mortgage securities industry is only the worst aspect of the wallpapering business that has engulfed Wall Street the last 28 years. But think about why we’re in economic trouble. I’m going to do this in plan language, so bear with me.
Up until Gramm-Leach-Bliley in 1999 (the bill that finally killed Glass-Steagal), the only two entities buying up mortgages in the secondary market were Fannie Mae and Freddie Mac. See, the purpose of a secondary mortgage market in the first place was to give banks the ability to lend more money. A bank only has so much cash, so when it runs out and needs more, it could sell a bunch of its mortgages to Fannie or Freddie. Fannie had been around since 1938, and Freddie since 1970, and except for being involved in the same sort of accounting shenanigans as other companies were embroiled in for a few years in the early 2000s, there was never a problem with this business model. They were quasi-governmental corporations, like the Federal Reserve, and they were self-sustaining for many, many years.
Then, Gramm-Leach-Bliley changed everything. Suddenly, anyone who wanted to could become a mortgage broker, and the secondary mortgage market was opened up to pretty much anyone. They created a wholly unregulated securities market for mortgages. AGAIN, the market was WHOLLY UNREGULATED! In fact, Gramm-Leach-Bliley should have been unconstitutional, because it actually FORBADE federal regulation.
So, these idiots create this securities market out of whole cloth. They bought up mortgages from banks, put them into a huge pool, and sold shares in the pool. Only, they made two HUGE mistakes that even those of us without business degrees wouldn’t be stupid enough to make; one, they didn’t attach a share value to the securities, and two, the paper they were selling was a share of the overall pool, and not a share of a specific mortgage.
Everything – and I mean EVERYTHING – they did was based on the premise that “real estate values never drop.”
The problem is, at the same time, mortgage brokers were popping up everywhere, and writing more and more complicated mortgage instruments, in order to write a mortgage and collect a commission. I know you saw the ads all over the Internet during this time – “Get a $400,000 mortgage for $700 per month.” – I know you remember those.
As the mortgages became more and more convoluted, and as mortgage brokers were fraudulently altering mortgage applications, or giving the banks a load of shit regarding the qualifications of the people getting the mortgages, the volume of sales was driving the price up. No matter, though, because the higher the price went, the more convoluted the mortgage instrument.
Banks didn’t care, because they were going to sell the mortgage to the mortgage securities market, anyway, and wouldn’t be dinged if someone couldn’t pay the mortgage.
Mortgage brokers didn’t care, because they received thousands of dollars from a bank for every mortgage they wrote, regardless of whether or not someone could afford to pay. And when one mortgage failed, they’d write another to replace it.
And the government didn’t care, because Republicans don’t believe in regulation, and think anything that makes the economy look good is fine.
And EVERYONE was investing in these mortgage backed securities, because they return was so great. That includes the banks who were selling these mortgages to the secondary market. In other words, they were selling mortgages, and then buying securities in the resultant mortgage pool.
Once more… and this is VERY important…
Everything – and I mean EVERYTHING – they did was based on the premise that “real estate values never drop.”
But it gets better. Because there was no regulation in place, someone needed to insure these mortgage backed securities. After all, the best way to keep writing mortgages and selling mortgage-backed securities is to assure everyone of the safety of the entire investment pool through insuranc
e. That’s where AIG came in. They were actually INSURING the losses on these mortgage-backed securities.
They were selling insurance on securities that had no underlying value, where shares were simply written, without being securitized by anything specific, and without making sure they had enough cash to cover any losses, because we all KNOW that “real estate values never drop.”
But you know…
When you have millions of people being suckered into mortgages they really can’t afford, and banks pretty much accepting any mortgage put in front of them, because they don’t have to understand or take responsibility for the mortgage, anyway, and when you have no one paying attention to anything that’s going on, what happens to prices? It’s called supply and demand, folks. Prices for homes were going up beyond all reason, and these idiots – again, the people whom CNBC says are the only people qualified to run the economy – actually thought everything could continue to go up forever.
And that’s just stupid.
This thing actually started to crash under its own weight in about 2005, but the solution to the increase in foreclosures was for mortgage brokers to write more mortgages. The problem is, people can only be suckered for so long. It took until 2007 for the system to hit critical mass, which is the point at which mortgages couldn’t be written fast enough to cover the foreclosure losses.
But worse, you had these securities out there – NOW they call them “toxic assets,” but used to call them “gold.” EVERYONE invested in them, even if you don’t THINK you did. And now, they’re worth – well, they’re not worth “nothing,” exactly; they have some value, but no one is sure what they’re worth. And that is what’s killing the economy. Millions of economic “experts” have these little pieces of paper, and no one can knows what they’re worth. No one kept track of how many there were, and none of them are actually attached to a mortgage, so it’s not possible to determine the value of each share. And because banks are reticent to lend money without knowing if they have enough security to cover a loss, they’re not lending to anyone who isn’t incredibly rich already.
And AIG, those geniuses, insured these instruments, but they don’t have enough cash to cover their losses on these securities, and they have other, legitimate insurance customers who depend on their services, as well. If they simply go out of business, they will literally take the entire financial services sector with them.
In other words, folks, we’re screwed because the government didn’t do its job. We’re screwed because the party running the show has an aversion to the government actually doing its job. They are SUPPOSED to protect us from morons and crooks, which means protecting our money from banks that cater to morons and crooks, and they’re supposed to regulate the instruments morons and crooks use to rip us off, and they’re supposed to prevent morons from getting licenses to run financial institutions, and lock up the crooks.
Instead, they let morons and crooks run the show. Not only that, but they abandoned the bank, and gave the morons and crooks a key and told them to lock up when they were done.
Well, now they’re done. And, as anyone with half a brain should have known would happen, we have a lot of clean up to do.
In other words, take it easy, and give the current government, which is now being run by adults, time to figure out what actually happened, and what they have to do to clean it up.
We need patience. But more than that, we need to learn our lesson this time. This is the second time we put neocons in charge of the government, and the second time they led us down the path to depression. The only thing keeping us from heading to depression this time are the safeguards FDR built in the last time neocons let the morons and crooks run things. That, and Obama was elected before this one got as far as the last one.
Never again can we afford to give neocons the keys to the economy and tell them to lock up. Every time we do, we lose our shirts.