Friday, October 17, 2008

Review and Outlook (The Wall Street Journal)

OCTOBER 17, 2008 - Wall Street Journal. Page A12.
A Liberal Supermajority
Get ready for 'change' we haven't seen since 1965, or 1933.

If the current polls hold, Barack Obama will win the White House on November 4 and Democrats will consolidate their Congressional majorities, probably with a filibuster-proof Senate or very close to it. Without the ability to filibuster, the Senate would become like the House, able to pass whatever the majority wants.

Though we doubt most Americans realize it, this would be one of the most profound political and ideological shifts in U.S. history. Liberals would dominate the entire government in a way they haven't since 1965, or 1933. In other words, the election would mark the restoration of the activist government that fell out of public favor in the 1970s. If the U.S. really is entering a period of unchecked left-wing ascendancy, Americans at least ought to understand what they will be getting, especially with the media cheering it all on.
The nearby table shows the major bills that passed the House this year or last before being stopped by the Senate minority. Keep in mind that the most important power of the filibuster is to shape legislation, not merely to block it. The threat of 41 committed Senators can cause the House to modify its desires even before legislation comes to a vote. Without that restraining power, all of the following have very good chances of becoming law in 2009 or 2010.

- Medicare for all. When HillaryCare cratered in 1994, the Democrats concluded they had overreached, so they carved up the old agenda into smaller incremental steps, such as Schip for children. A strongly Democratic Congress is now likely to lay the final flagstones on the path to government-run health insurance from cradle to grave.
Mr. Obama wants to build a public insurance program, modeled after Medicare and open to everyone of any income. According to the Lewin Group, the gold standard of health policy analysis, the Obama plan would shift between 32 million and 52 million from private coverage to the huge new entitlement. Like Medicare or the Canadian system, this would never be repealed.
The commitments would start slow, so as not to cause immediate alarm. But as U.S. health-care spending flowed into the default government options, taxes would have to rise or services would be rationed, or both. Single payer is the inevitable next step, as Mr. Obama has already said is his ultimate ideal.

- The business climate. "We have some harsh decisions to make," Speaker Nancy Pelosi warned recently, speaking about retribution for the financial panic. Look for a replay of the Pecora hearings of the 1930s, with Henry Waxman, John Conyers and Ed Markey sponsoring ritual hangings to further their agenda to control more of the private economy. The financial industry will get an overhaul in any case, but telecom, biotech and drug makers, among many others, can expect to be investigated and face new, more onerous rules. See the "Issues and Legislation" tab on Mr. Waxman's Web site for a not-so-brief target list.
The danger is that Democrats could cause the economic downturn to last longer than it otherwise will by enacting regulatory overkill like Sarbanes-Oxley. Something more punitive is likely as well, for instance a windfall profits tax on oil, and maybe other industries.

- Union supremacy. One program certain to be given right of way is "card check." Unions have been in decline for decades, now claiming only 7.4% of the private-sector work force, so Big Labor wants to trash the secret-ballot elections that have been in place since the 1930s. The "Employee Free Choice Act" would convert workplaces into union shops merely by gathering signatures from a majority of employees, which means organizers could strongarm those who opposed such a petition.
The bill also imposes a compulsory arbitration regime that results in an automatic two-year union "contract" after 130 days of failed negotiation. The point is to force businesses to recognize a union whether the workers support it or not. This would be the biggest pro-union shift in the balance of labor-management power since the Wagner Act of 1935.

- Taxes. Taxes will rise substantially, the only question being how high. Mr. Obama would raise the top income, dividend and capital-gains rates for "the rich," substantially increasing the cost of new investment in the U.S. More radically, he wants to lift or eliminate the cap on income subject to payroll taxes that fund Medicare and Social Security. This would convert what was meant to be a pension insurance program into an overt income redistribution program. It would also impose a probably unrepealable increase in marginal tax rates, and a permanent shift upward in the federal tax share of GDP.

- The green revolution. A tax-and-regulation scheme in the name of climate change is a top left-wing priority. Cap and trade would hand Congress trillions of dollars in new spending from the auction of carbon credits, which it would use to pick winners and losers in the energy business and across the economy. Huge chunks of GDP and millions of jobs would be at the mercy of Congress and a vast new global-warming bureaucracy. Without the GOP votes to help stage a filibuster, Senators from carbon-intensive states would have less ability to temper coastal liberals who answer to the green elites.

- Free speech and voting rights. A liberal supermajority would move quickly to impose procedural advantages that could cement Democratic rule for years to come. One early effort would be national, election-day voter registration. This is a long-time goal of Acorn and others on the "community organizer" left and would make it far easier to stack the voter rolls. The District of Columbia would also get votes in Congress -- Democratic, naturally.
Felons may also get the right to vote nationwide, while the Fairness Doctrine is likely to be reimposed either by Congress or the Obama FCC. A major goal of the supermajority left would be to shut down talk radio and other voices of political opposition.

- Special-interest potpourri. Look for the watering down of No Child Left Behind testing standards, as a favor to the National Education Association. The tort bar's ship would also come in, including limits on arbitration to settle disputes and watering down the 1995 law limiting strike suits. New causes of legal action would be sprinkled throughout most legislation. The anti-antiterror lobby would be rewarded with the end of Guantanamo and military commissions, which probably means trying terrorists in civilian courts. Google and would get "net neutrality" rules, subjecting the Internet to intrusive regulation for the first time.

It's always possible that events -- such as a recession -- would temper some of these ambitions. Republicans also feared the worst in 1993 when Democrats ran the entire government, but it didn't turn out that way. On the other hand, Bob Dole then had 43 GOP Senators to support a filibuster, and the entire Democratic Party has since moved sharply to the left. Mr. Obama's agenda is far more liberal than Bill Clinton's was in 1992, and the Southern Democrats who killed Al Gore's BTU tax and modified liberal ambitions are long gone.
In both 1933 and 1965, liberal majorities imposed vast expansions of government that have never been repealed, and the current financial panic may give today's left another pretext to return to those heydays of welfare-state liberalism. Americans voting for "change" should know they may get far more than they ever imagined.


Medicare for All

The Business Climate

Union Supremacy


The Green revelotion

Free Speech and Voting Rights

Special Interest Potpouri

Monday, October 13, 2008

A Capitalist Manifesto


"A Capitalist Manifesto" by Judy Shelton (Wall Street Journal, October 13, 2008, P. A19) is informative but irrelevant. In my view, the free-enterprise, capitalistic experiment of the United States of America, the most successfully-economic and free society in history, has been under relentless siege since the election of Franklin Delano Roosevelt. Today, we face one branch of our government being controlled by anti-free-market-capitalism forces, with even more substantial control being a reality in the upcoming election. A second branch, the Administrative, is poised to be captured by Barack Obama, who I believe has little understanding or appreciation for free enterprise. (And as the alleged voter-fraud activities of ACORN reflect, perhaps a lack of desire for free democracy itself.) With those two corners of our political system lost by free enterprise advocates, the third part of the triangle, Judiciary, can also be turned by the retirement of a couple of the present justices, some of whom are elderly, assuming Sen. Obama becomes president.
In order to have "A Capitalist Manifesto" meaningful, leaders must embrace its precepts. I don't believe that is the case with the Democratic Congress nor Barack Obama. To us businesspeople, Ms. Shelton makes clear and complete sense, but we believe that the success of the free-enterprise system has brought economic and political freedom to more people in this world than any other system invented by mankind to date. To those who believe that the only way for humanity to better itself is through a centralized decision-making bureaucracy, everything Ms. Shelton writes is misguided and wrong. This Congress micromanages the economy and the businesses within it to a degree never before experienced in the U. S. From sending dollars to the (ill-fated) ethanol "industry" to attempting to regulate credit card interest rates Congress deeply meddles. Not that President Bush pushed back! It is getting worse and we haven't seen anything yet: union "card-check", trade restrictions, vengeful and constant investigations of business executives, further limits on their compensation may all be on the way, not to mention the little daily intrusions.
Ms. Shelton and conservatives and Republicans everywhere must realize that as with dealing with foreign countries, many (most?) Democrats believe in and are talking a tongue foreign to free-market capitalism. One could argue that they -- in their own way -- simply want what's best for the most citizens. I argue that it's about power, and the method of gaining power over free-market advocates. In any event, they are opposed to the concepts of free enterprise. I think many (most?) American citizens don't truly understand "business", that it has created all the wealth we have, by that afore-mentioned free enterprise. At the very start, one entrepreneur had an idea to, for example, make something from some things and sell it at a price his customers were willing to pay. He had some extra money -- "profit" -- that way. And he kept doing it. From this acorn (maybe the wrong word) was created the greatest economic and social society in the world. But how many people think of "business" negatively, as a taker or oppressor rather than an creator? The popular media certainly continually and relentlessly reinforces that negative concept, as do the major financial sources of Democrats: trade union leaders and trial lawyers. Do they all really want what's best for all? (Well, almost all, certainly not the "rich".) Or do they just want power?
In any event, they have the power here in the U. S. now and may well hold it and build on it. They have spent decades in fits and starts gaining it While entrepreneurs and businesspeople were building companies and creating jobs, the Left was, if not in a coordinated effort, certainly in a unified one, putting everything in place, from union teachers and leftish professors to indoctrinate the youth, to the billions won from companies by trial lawyers with the skids greased by liberal judges, justices and lawyers which financed more liberal government. "Popular" media certainly has a left-wing bent which has certainly shown its ugly head this election season more than ever before. And with the painting of deficit spenders and corruption on the 2004 Congress, liberals took initial power. Obama may solidify it. Then comes the Supreme Court. "Le laissez-faire, c'est fini." oui!

Tuesday, October 7, 2008


Today, October 7, 2008, the Dow Jones Industrial Average was off 508.39, another 5%. It ended 9447.11. What? The Bailout isn't working in investors eyes? Duh. It wasn't a bailout anyway it was a porkout. Obama is creeping up in the polls and tonight is the second and second to last debate between Obama and McCain. It is McCain's last chance.

As I wrote to myself just after last Thursday's only debate between Joe Biden and Sarah Palin:

Gov. Palin should have...but now Sen. McCain must go after Obama.

“Sen. Obama you are the problem. You and Sen. Biden are Democratic senators, him for 35 years. Do you know how many pages the Medicare regulations are? Nearly 150,000 pages of believing doctors, nurses, therapists and administrators are crooks. That is why healthcare is so expensive and unattainable for many. And Democrat mandates -- such as parity of mental and physical health slipped into a bailout bill. What does that bailout? It increases costs for all of us...well not us, we are politicians and different. McCain/Palin is for slashing regulations and allowing doctors, nurses and therapists to make the decisions they were trained for. We trust them! McCain/Palin believes in the free enterprise system is all its imperfections it is the best system ever invented. Senator, business creates jobs...8 million in the last 8 years, although it's slipping now. Government income has skyrocketed since the 2004 (?) tax cuts. Business creates jobs, government does not. Business creates wealth for us all, government does not. And it isn't government, it isn't regulation that saves us from the present crisis, it's the people. But government doesn't listen to the people enough, it's busily re-engineering society, as you are wanting to do with income taxes. Senator, that does not work...Senator, that has never worked for the benefit of anyone except politicians like yourself.

"Now. Senator, is it true that you plan to nationalize all banks?

"Now, Senator, is it true that you’ll launch a witch-hunt against all banking executives and officers of financial institutions if you become president? Accompanied by class-action lawsuits launched by your major backers?

"Now, Senator, do you believe profits of big companies are good?

"McCain/Palin is for the jobs that have created the best society known to humanity. We support the businesses that create the jobs."

If McCain doesn't emerge the perceived "winner" tonoght, I believe the market will crash again tomorrow.

Update October 1, 2008: He didn't. Headline in the Wall Street Journal today, "Wild Day Caps Worst Day Ever for Stocks". “Dow Jones Industrials Lost 18% in Their Worst Week Ever” (P. B3 Wall Street Journal). 22% in the eight days after the debate. Friday's close the 10th was 10,325.38 a week later it was 8451.19, with the close capping the most volatile day in the Dow's 112 year history, swinging 1,000 points. During the week, Wells Fargo Banktook over Wachovia, one of the largest mortgage lenders in the country, literally snapping it out of the hands of Citigroup’s deal, which involved a federal backstop after Citi would have taken something like $50 billion of losses in Wachovia’s portfolio and the U. S. taxpayer the rest. Wells’ deal involves no federal risk. And mighty Morgan Stanley negotiated last week a deal from Mitsubishi UFJ Financial for $9 billion for a 21% stake, valuing Morgan at nearly $43 billon; however its market value at the close Friday, October 10 was only $10.3 billion. Perhaps one of the greatest buying opportunities in my lifetime (unless it's like Washington Mutual’s $7 billion infusion from a group of private equity investors last March or so which is worth zero now.) On Friday the Dow had a 1,000 -- 11% -- swing from hitting a high of 8,901.28, a low of 7,882.51 and closing down 128 points, off 1.5% to 8,451.19. The commercial paper market which earlier in the week seemed frozen was operating some again, with GE using the market with no problem. General Motors at 4.89 was up from Thursday’s close which was the lowest GM has traded since 1950, off 46% for the week. Ford did little better.

I believe much of this is the Obamacrash. Not only from the absolute cerainty that Obama will raise income taxes, capital gains taxes, dividend taxes and allow Bush's tax cuts to expire -- raiding taxes by a trillion dollars more or less. Certainly the general worldwide market and loan meltdown is the cover and cause of some of the declines, but Obama's upturn in the polls is a significant cause also.

Monday, October 6, 2008

The Sting


The Sting: The U. S. House of Representatives "supporting" President Bush's bill proposal by Treasury Secretary Henry Paulson with relatively minor changes. I believe Speaker Mrs. Pelosi orchestrated its failure to pass, by keeping enough Democrats voting against it. But certainly there was an outpouring of desire to reject the bill by Americans. The House's rejection caused the little crash -- 777 points, in the stock market which immediatley struck fear in Americans reinforced by the Leftish "popular" media coupled with the conservative talk show hosts. In this environment of fear and panic, Senator Majority Leader Harry Reid introduced the "saving" Senate Bill of "Rescue" (not a "Bailout" which was identified as an unpopular term.) It was full of billions of dollars from the Democratic wish list -- "pork" -- (which a week before could not have passed the House and would have been vetoed by Bush). For a full discussion of the bill, see my blog, "Who's to Blame, Part II. The Senate passed it, with a full-on press from the Liberal Press, and frightened and naive Republicans; Then the Senate skipped town, forcing the House to pass it or...or...or else (the threat of a another, bigger crash in the stock market); so even most Blue Dog (conservative) Democrats and many conservative Republicans went against their conservative beliefs and voted for it in the face of such manufactured pressure. It was a brilliant feint by Pelosi with an effective ambush by Reid: Republicans and conservatives, as usual, didn't know what hit them. And the stock market fell, anyway, Tomorrow I think it could crash, but one might wait until after Election Day.

What do we have? The worst day in U. S. History. I believe history will show that October 3, 2008, was worse than Black Friday (the '29 crash), Pearl Harbor Day, and 911. It will be the end of America as it was conceived and built.

We might just have put 1/2-Trillion dollars in the hands of a junior senator from Illinois with socialist tendencies and a demonstrably-corrupt Democratic-led Congress many members of which caused the "crisis". As a free-market, democratic society our time might be over.

Thursday, October 2, 2008

Who's to blame, Part III

The Democrats, especially Barney Frank, Chris Dodd, Chuck Schumer; all politicians; greedy Americans; greedy financial corporations.

Who's to blame, Part II

Let's see. Today America is facing a "financial crisis" -- The U. S. House of Representatives rejected a bill earlier in the week to "Bailout" whomever. Some say Wall Street, some say the U. S. Economy. President Bush and his ex-Goldman, Sachs Treasury Secretary developed and promoted the $700,000,000,000 use of taxpayers' money to purchase "toxic" assets from U. S. banks. Then it went to The Democratic Congress to be put into a bill ("The Economic Stabilization Act of 2008"). The Democrats added their own biases: caps on executives' pay packages when their institutions are helped; adding foreign financial institutions; adding pension funds and "other" financial institutions; giving some money to the Democrats' favorite slush funds like ACORN; establishment of strict oversight, including Congress; giving the government rights to purchase equity in the assisted financial companies so as to return somthing to the taxpayers; and so on. House Republicans jumped in and made some changes, such as eliminating the payola to ACORN. Upon publicity, the public overwhelmingly rose up against the bailout. 100 - 1 in many communications with politicians. It was subsequently defeated, in part by wary Republicans (65 for, about one-third vs. 60%, 140, Democrats for), but also Democrats who were apparently told by House Leader Nancy Pelosi that they could vote against it to protect their reelection campaigns. Democrats could have passed it all on their own but were apparently politically afraid to. Wisely it turned out. The stock market plunged 700+ points Monday. There was blaming all over the place, especially including "deregulation" started by Reagan and abetted by Bush.

So for fun, who IS to blame? I believe, mostly Democrats who began (courtesy Wikipedia:) "The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law that requires banks and savings and loan associations to offer credit throughout their entire market area. (See full text of Act and current regulations.) The act prohibits financial institutions from targeting only wealthier neighborhoods with their services, a practice known as 'redlining.' The purpose of the CRA is to ensure that under-served populations can obtain credit, including home ownership opportunities and commercial loans to small businesses. The Act was passed in 1977 and has been subjected to important regulatory revisions since then." And further..."The CRA was passed by the 95th United States Congress, controlled by Democrats, and signed into law by President Jimmy Carter in 1977 as a result of national pressure for affordable housing, and despite considerable opposition from the mainstream banking community. The CRA mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. That record is taken into account when the federal government considers an institution's application for deposit facilities.
"The Act charged the Federal Reserve System to implement the CRA through ensuring banks and savings and loans met their CRA obligations. The CRA is also enforced by the Federal Deposit Insurance Corporation ("FDIC") CRA Statute. "

And courtesy the N. Y. Post, October, 8, 2008: "Long the director of Chicago ACORN [the Association of Community Organizations for Reform Now] , [Madeline] Talbott is a specialist in 'direct action' - organizers' term for their militant tactics of intimidation and disruption... But her real legacy may be her drive to push banks into making risky mortgage loans.
"In February 1990, Illinois regulators held what was believed to be the first-ever state hearing to consider blocking a thrift merger for lack of compliance with CRA. The challenge was filed by ACORN, led by Talbott. Officials of Bell Federal Savings and Loan Association, her target, complained that ACORN pressure was undermining its ability to meet strict financial requirements it was obligated to uphold and protested being boxed into an 'affirmative-action lending policy.' The following years saw Talbott featured in dozens of news stories about pressuring banks into higher-risk minority loans.
"In April 1992, Talbott filed an other precedent-setting com plaint using the 'community support requirements' of the 1989 savings-and-loan bailout, this time against Avondale Federal Bank for Savings. Within a month, Chicago ACORN had organized its first 'bank fair' at Malcolm X College and found 16 Chicago-area financial institutions willing to participate.
Two months later, aided by ACORN organizer Sandra Maxwell, Talbott announced plans to conduct demonstrations in the lobbies of area banks that refused to attend an ACORN-sponsored national bank 'summit' in New York. She insisted that banks show a commitment to minority lending by lowering their standards on downpayments and underwriting - for example, by overlooking bad credit histories.
"By September 1992, The Chicago Tribune was describing Talbott's program as 'affirmative-action lending' and ACORN was issuing fact sheets bragging about relaxations of credit standards that it had won on behalf of minorities.
"And Talbott continued her effort to, as she put it, drag banks 'kicking and screaming' into high-risk loans. A September 1993 story in The Chicago Sun-Times presents her as the leader of an initiative in which five area financial institutions (including two of her former targets, now plainly cowed - Bell Federal Savings and Avondale Federal Savings) were 'participating in a $55 million national pilot program with affordable-housing group ACORN to make mortgages for low- and moderate-income people with troubled credit histories.' " (Presidental candidate Barack Obama early in his career in Chicago trained Ms. Talbott's executives and street-level workers, and raised and directed monies to ACORN in part from foundations on whose boards he sat.

As the City Journal reported in 2000, using the power to extort granted in the CRA, the radical, anti-free market group ACORN received $760 million from the Bank of New York, the Boston-based Neighborhood Assistance Corporation of America dragged $3 billion out of the Bank of America and a coalition of “community groups” in New Jersey got an astounding five-year, $13 billion agreement with First Union Bank.

That was the start. Later, Democrats in Congress pushed this "affordable housing" onto Fannie Mae and Freddie Mac, in part forcing them to purchase sub-prime and alt-A loans, ultimately for over $1 trillion. The support was lubricated by huge campaign contributions and government employees heading to Fan or Fred to work when their government employment was over. The Wall Street Journal and a variety of politicians railed against the added leverage coupled with highly-risky loans, to no avail. An Opinion article in today's Wall Street Journal follows:

OCTOBER 2, 2008
What They Said About Fan and Fred

House Financial Services Committee hearing, Sept. 10, 2003:
Rep. Barney Frank (D., Mass.): I worry, frankly, that there's a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. . . .
Clockwise from top left: Sen. Thomas Carper, Rep. Barney Frank, Sen. Robert Bennett, Rep. Maxine Waters, Sen. Chris Dodd and Sen. Charles Schumer.
Rep. Maxine Waters (D., Calif.), speaking to Housing and Urban Development Secretary Mel Martinez:
Secretary Martinez, if it ain't broke, why do you want to fix it? Have the GSEs [government-sponsored enterprises] ever missed their housing goals?
* * *
House Financial Services Committee hearing, Sept. 25, 2003:
Rep. Frank: I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing. . . .
* * *
House Financial Services Committee hearing, Sept. 25, 2003:
Rep. Gregory Meeks, (D., N.Y.): . . . I am just pissed off at Ofheo [Office of Federal Housing Enterprise Oversight] because if it wasn't for you I don't think that we would be here in the first place.

Fannie Mayhem: A History
A compendium of The Wall Street Journal's recent editorial coverage of Fannie and Freddie.
And Freddie Mac, who on its own, you know, came out front and indicated it is wrong, and now the problem that we have and that we are faced with is maybe some individuals who wanted to do away with GSEs in the first place, you have given them an excuse to try to have this forum so that we can talk about it and maybe change the direction and the mission of what the GSEs had, which they have done a tremendous job. . .
Ofheo Director Armando Falcon Jr.: Congressman, Ofheo did not improperly apply accounting rules; Freddie Mac did. Ofheo did not try to manage earnings improperly; Freddie Mac did. So this isn't about the agency's engagement in improper conduct, it is about Freddie Mac. Let me just correct the record on that. . . . I have been asking for these additional authorities for four years now. I have been asking for additional resources, the independent appropriations assessment powers.
This is not a matter of the agency engaging in any misconduct. . . .
Rep. Waters: However, I have sat through nearly a dozen hearings where, frankly, we were trying to fix something that wasn't broke. Housing is the economic engine of our economy, and in no community does this engine need to work more than in mine. With last week's hurricane and the drain on the economy from the war in Iraq, we should do no harm to these GSEs. We should be enhancing regulation, not making fundamental change.
Mr. Chairman, we do not have a crisis at Freddie Mac, and in particular at Fannie Mae, under the outstanding leadership of Mr. Frank Raines. Everything in the 1992 act has worked just fine. In fact, the GSEs have exceeded their housing goals. . . .
Rep. Frank: Let me ask [George] Gould and [Franklin] Raines on behalf of Freddie Mac and Fannie Mae, do you feel that over the past years you have been substantially under-regulated?
Mr. Raines?
Mr. Raines: No, sir.
Mr. Frank: Mr. Gould?
Mr. Gould: No, sir. . . .
Mr. Frank: OK. Then I am not entirely sure why we are here. . . .
Rep. Frank: I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists.
* * *
Senate Banking Committee, Oct. 16, 2003:
Sen. Charles Schumer (D., N.Y.): And my worry is that we're using the recent safety and soundness concerns, particularly with Freddie, and with a poor regulator, as a straw man to curtail Fannie and Freddie's mission. And I don't think there is any doubt that there are some in the administration who don't believe in Fannie and Freddie altogether, say let the private sector do it. That would be sort of an ideological position.
Mr. Raines: But more importantly, banks are in a far more risky business than we are.
* * *
Senate Banking Committee, Feb. 24-25, 2004:
Sen. Thomas Carper (D., Del.): What is the wrong that we're trying to right here? What is the potential harm that we're trying to avert?
Federal Reserve Chairman Alan Greenspan: Well, I think that that is a very good question, senator.
What we're trying to avert is we have in our financial system right now two very large and growing financial institutions which are very effective and are essentially capable of gaining market shares in a very major market to a large extent as a consequence of what is perceived to be a subsidy that prevents the markets from adjusting appropriately, prevents competition and the normal adjustment processes that we see on a day-by-day basis from functioning in a way that creates stability. . . . And so what we have is a structure here in which a very rapidly growing organization, holding assets and financing them by subsidized debt, is growing in a manner which really does not in and of itself contribute to either home ownership or necessarily liquidity or other aspects of the financial markets. . . .
Sen. Richard Shelby (R., Ala.): [T]he federal government has [an] ambiguous relationship with the GSEs. And how do we actually get rid of that ambiguity is a complicated, tricky thing. I don't know how we do it.
I mean, you've alluded to it a little bit, but how do we define the relationship? It's important, is it not?
Mr. Greenspan: Yes. Of all the issues that have been discussed today, I think that is the most difficult one. Because you cannot have, in a rational government or a rational society, two fundamentally different views as to what will happen under a certain event. Because it invites crisis, and it invites instability. . .
Sen. Christopher Dodd (D., Conn.): I, just briefly will say, Mr. Chairman, obviously, like most of us here, this is one of the great success stories of all time. And we don't want to lose sight of that and [what] has been pointed out by all of our witnesses here, obviously, the 70% of Americans who own their own homes today, in no small measure, due because of the work that's been done here. And that shouldn't be lost in this debate and discussion. . . .
* * *
Senate Banking Committee, April 6, 2005:
Sen. Schumer: I'll lay my marker down right now, Mr. Chairman. I think Fannie and Freddie need some changes, but I don't think they need dramatic restructuring in terms of their mission, in terms of their role in the secondary mortgage market, et cetera. Change some of the accounting and regulatory issues, yes, but don't undo Fannie and Freddie.
* * *
Senate Banking Committee, June 15, 2006:
Sen. Robert Bennett (R., Utah): I think we do need a strong regulator. I think we do need a piece of legislation. But I think we do need also to be careful that we don't overreact.
I know the press, particularly, keeps saying this is another Enron, which it clearly is not. Fannie Mae has taken its lumps. Fannie Mae is paying a very large fine. Fannie Mae is under a very, very strong microscope, which it needs to be. . . . So let's not do nothing, and at the same time, let's not overreact. . .
Sen. Jack Reed (D., R.I.): I think a lot of people are being opportunistic, . . . throwing out the baby with the bathwater, saying, "Let's dramatically restructure Fannie and Freddie," when that is not what's called for as a result of what's happened here. . . .
Sen. Chuck Hagel (R., Neb.): Mr. Chairman, what we're dealing with is an astounding failure of management and board responsibility, driven clearly by self interest and greed. And when we reference this issue in the context of -- the best we can say is, "It's no Enron." Now, that's a hell of a high standard."

The 2001 "Dot.Com bust" made the ever-increasing housing prices a political bright spot in an otherwise ugly economy. But in February 2, 2002, an editorial in the Wall Street Journal strongly pointed out the huge funancial risks of Fan and Fred. But a brief chronology:


April: The Administration's FY02 budget declares that the size of Fannie Mae and Freddie Mac is "a potential problem," because "financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity."


May: The President calls for the disclosure and corporate governance principles contained in his 10-point plan for corporate responsibility to apply to Fannie Mae and Freddie Mac. (OMB Prompt Letter to OFHEO, 5/29/02)


January: Freddie Mac announces it has to restate financial results for the previous three years.

February: The Office of Federal Housing Enterprise Oversight (OFHEO) releases a report explaining that "although investors perceive an implicit Federal guarantee of [GSE] obligations," "the government has provided no explicit legal backing for them." As a consequence, unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market. ("Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO," OFHEO Report, 2/4/03)

September: Fannie Mae discloses SEC investigation and acknowledges OFHEO's review found earnings manipulations.

September: Treasury Secretary John Snow testifies before the House Financial Services Committee to recommend that Congress enact "legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises" and set prudent and appropriate minimum capital adequacy requirements. The Bush Administration offered up a proposed bill to add significant oversight. It was blocked by a full vote by the Democrats on the House Financial Services Committee, along party lines. The ranking member of that committee, Rep. Barney Fife stressed the benefits to society of "affordable housing".

October: Fannie Mae discloses $1.2 billion accounting error.

November: Council of the Economic Advisers (CEA) Chairman Greg Mankiw explains that any "legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk." To reduce the potential for systemic instability, the regulator would have "broad authority to set both risk-based and minimum capital standards" and "receivership powers necessary to wind down the affairs of a troubled GSE." (N. Gregory Mankiw, Remarks At The Conference Of State Bank Supervisors State Banking Summit And Leadership, 11/6/03)


February: The President's FY05 Budget again highlights the risk posed by the explosive growth of the GSEs and their low levels of required capital, and called for creation of a new, world-class regulator: "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." (2005 Budget Analytic Perspectives, pg. 83)

February: CEA Chairman Mankiw cautions Congress to "not take [the financial market's] strength for granted." Again, the call from the Administration was to reduce this risk by "ensuring that the housing GSEs are overseen by an effective regulator." (N. Gregory Mankiw, Op-Ed, "Keeping Fannie And Freddie's House In Order," Financial Times, 2/24/04)

June: Deputy Secretary of Treasury Samuel Bodman spotlights the risk posed by the GSEs and called for reform, saying "We do not have a world-class system of supervision of the housing government sponsored enterprises (GSEs), even though the importance of the housing financial system that the GSEs serve demands the best in supervision to ensure the long-term vitality of that system. Therefore, the Administration has called for a new, first class, regulatory supervisor for the three housing GSEs: Fannie Mae, Freddie Mac, and the Federal Home Loan Banking System." (Samuel Bodman, House Financial Services Subcommittee on Oversight and Investigations Testimony, 6/16/04)


April: Treasury Secretary John Snow repeats his call for GSE reform, saying "Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America… Half-measures will only exacerbate the risks to our financial system." (Secretary John W. Snow, "Testimony Before The U.S. House Financial Services Committee," 4/13/05). The Bush Administration tried again, with Sen. McCain a sponsor of a stronger regulatory bill for Fan and Fred. It was again blocked by Democrats from getting a full Senate vote by the Senate Banking Committee. (The vote again along party lines.)

Offered easy money, banks and mortgage companies piled on. Including Countrywide Mortgage which became the largest mortgage originator in the country and largest seller to Fan and Fred. Its CEO, Angelo Mozilo, made under-market mortgages to a variety of politicians, including executives (and former Clinton Administration member Fan CEO Franklin Raines) of Fan and Fred and members and Chairmen of the Congressional subcommittees overseeing them. In 2004 both Fan and Fred announced financial statement revisions, or, in other words, "accounting scandals" in both Government-Sponsored Enterprises (GSEs). CEOs left, with tens of millions of dollars in severance, but the campaign contributions rolled on. Sen. Charles Schumer, later Chairman of the Senate Banking Committee, announced that things were good, not to create problems where there were none and where oversight was sufficient.

And the Federal Reserve kept interest rates low. Thank you Mr. Greenspan.

Housing prices moved up and up. And mortgage brokers shoved out the loans; appraisers assisted them, sometimes by inventing housing values; financial institutions stopped asking for verification of income and other minor little details; consumers and housing speculators bought, knowing prices would increase and they'd get to keep their dream house or make some serious money flipping them. A classic mania. And housing prices moved up and up.

And up and up and up until they flattened and started down. The beginning was the day I purchased a $1.6 million condominium, August 2007!

So...then the wily Democratic-controlled Senate Majority Leader Harry Reid, after Mrs. Pelosi's House bill failed, coldly brought ITS bill, essentially a failed tax bill from the week before (which then wouldn't have passed the House and would've been vetoed, perhaps, by President Bush.) This bill larded the "Bailout Bill" with a Democrat wish-list: $18 billion in clean-energy tax breaks, including one for bicyle riders; tariffs on Caribbean rum; easing film and TV companies to use some tax deduction; exempting children's practice arrows from an excise tax; allow Valdez-affected fishermen to income average; extensioning tax credits: for specific economic-development, mine-rescue training teams, certain things on Indian Reservations, short-line railroad track maintenance, motorsports racetrack land improvements, victims of some natural disasters, deductions for state and local sales taxes, decuctions specifically for teachers getting higher education and spending their own money buying stuff; and some reductions on import duties for some wool fabrics. The biggest Democratic success, in my view, is another health-care price-increasing mandate, the equalization of coverage for mental with physical health. A Democrate desire for ten years. And softening the blow to some 20 million taxpayers of the Democratic-invented Alternative Minimum Tax. All imperitives for a "Bailout"! (Not.) Four hundred pages of Democratic Pork. Some real bailout provisions, good and bad, are increasing FDIC guarantees to $250,000; attempting to change the "mark-to-market" accounting that some believe partially reponsible for making some banks and insurance companies fail or falter. But it put the Republicans, including an amazingly naive President Bush, in an impossible situation. The bill was passed 74 to 25. Next stop the U. S. House of Representatives tonight or tomorrow.

Now follow to Who's to Blame III