Hi, it’s Meg again. I was ruminating on boarded-up buildings this weekend, and that was before hearing about Paulson’s bailout of Freddie Mac and Fannie Mae. The whole thing seemed so familiar…
One of the favorite assurances of Republicans for longer than I’ve been around is low taxes. Even the least of the politically-aware citizens of this nation know the supposed main difference between Republicans and Democrats is that Democrats tax and spend, while Republicans cut both taxes and government programs.
While the current occupant of the White House isn’t exactly known for his frugality in government spending, he is highly associated with tax cuts. Sure, the deficit is ever-growing, but how can you say a man who hands you $300 doesn’t care about gas prices and ballooning mortgages?
But what good is a tax cut when the taxes we still do pay go to rescuing failing businesses? And don’t even get me started on the proposed gas tax holiday that would pilfer federal funds dedicated to highway infrastructure!
In light of the pending bailout of Fannie Mae and Freddie Mac (on the heels of the Bear Stearns rescue operation and multiple interest rate cuts), it’s time to re-examine the idea of a tax cut, free markets, and capitalism.
First, the idea that a failing business should be bailed out as a matter of course is dangerous to the idea of free market capitalism. However, the “moral hazard” game is one Republicans would rather play with individual homeowners than corporations. “If we bail you out now,” they say to us as if we were teenagers spending our college fund on a jalopy, “you’ll never learn.”
However, as former Secretary of Labor Robert Reich so artfully points out in his blog, individuals learn from their mistakes, while corporations do not. He also notes that corporations should be held to a higher standard:
“Many of the mostly poor home buyers who got into trouble did NOT in fact know they couldn’t afford the mortgage payments they were signing on to. The banks and mortgage lenders that pulled out all the stops to persuade them to the contrary were in a far better position to know; after all, they had lots of experience at this game. So did the credit-rating agencies that gave these loans solid credit ratings, as did the financiers who bundled them with less-risky loans and sold them to other financial institutions, and the hedge fund managers who quietly tucked them into their portfolios.”
Clearly, it’s a bad precedent to set in a free market system. Furthermore, when the government bails out companies that made bad bets, it’s taxpayers who foot the bill.
After saying the government wouldn’t bail the two out last week, Treasury Secretary Henry Paulson announced the bailout of mortgage holders and backers Fannie Mae and Freddie Mac this weekend. The plan still needs Congressional approval, which Paulson hopes will come in the form of an add-on to the housing bill currently being finalized by lawmakers.
The brother and sister in mortgages guarantee nearly half of mortgages in the U.S. Paulson’s plan seems reasonable, until you look at the fact that Freddie and Fannie are not benevolent government-owned loan providers. Fannie’s been in private hands since 1968 and Freddie has been since his invention.
Even the timing of the announcement belied the true beneficiaries of the deal. With the news coming out Sunday night, Wall Street could open on a sunnier note this morning.
The debate on the housing issue has not been about whether or not the government should step in. The housing crisis is so advanced and far-reaching that there is virtually no one who would debate the merits of financial isolationism at this point. Instead, the debate rages over who should get the help.
Democrats are more likely to favor homeowner assistance plans and the restructuring of unfair and impossible-to-repay subprime mortgages.
The Bush Administration has introduced paltry homeowner rescue schemes like FHA Secure with great fanfare, while still insisting the real answer to our economy’s woes are tax cuts. Whatever happened to spending our taxes wisely?
Personally, I’d rather use my tax money to help my neighbor get a restructured loan and keep my street lined with occupied homes. Instead, the city I live in is being depopulated of stable residents and my rent is going up because of the increased demand for non-permanent housing arrangements.
The same Republican philosophy was at work with Fed Chairman Ben Bernanke’s many interest rate cuts since the true nature of the housing crisis made itself apparent last year. Sure, it made loans easier to get. For financial institutions, that is. This was most apparent in the cut Bernanke made in the discount rate, allowing banks to get cheaper federal loans.
Now come reports that students can’t go off to college this fall, not because they can’t afford it (no, that’s been the case for decades), but because they can’t secure a loan.
What it all comes down to is a repeat of financial disasters of the past. Republican-led deregulation in the banking industry led to scandal, financial chaos and finally the Resolution Trust Corporation in 1989. This was a similar bailout notion ostensibly in order to help out an economy beaten down by the trickle-up economic policies of the Reagan Administration. But instead of helping out the economy, taxpayer money again went corporations.
Joseph Stiglitz wrote that the Resolution Trust Corporation was a sufficiently confusing and opaque way for Republicans to get support for subsidizing the banking industry.
History keeps repeating itself. A Republican administration trashes the economy until businesses begin to suffer (well after people like you and me lose our houses and jobs). Then, the government bails out businesses with a fancy word or two about bootstraps on the side.