Written by Paul Penner Wednesday, 24 September 2008 00:49
“If I recall correctly, as a school boy living in western Texas, history books said the Midwest was ‘the great American desert.’ You people knew the risks going out there. Don’t expect Congress to bail you out for making a bad business decision when a drought comes around. Trust me, a disaster aid bill is not gonna get passed.” —Recent quote by a Congressional aide
Isn’t it ironic how quickly opinions change and political leaders make an about-face when it becomes politically expedient to do so?
Political will changes quickly, depending on who’s doing the talking. First came the news of the sub-prime mortgage crisis, with thousands of homeowners defaulting on their loans and heading toward foreclosure.
From the public sector, people expressed a desire to do something about it, but very little came of it as pundits and politicians debated the merits of rescuing beleaguered homeowners.
Note how quickly their will changed in the Bush administration and forged ahead with bail-out plans as the crisis threatened the very investment banks and other businesses that, in essence, were largely responsible for creating the crisis in the first place.
The numbers are mind-boggling. The bail-out of Fannie Mae and Freddie Mac will cost taxpayers around $200 billion. American International Group, a.k.a. AIG, the world’s largest mortgage insurer and general insurance underwriter, will cost $85 billion more.
With the latest pronouncements, the tally now runs upward of $1 trillion. Will it hit $1.5 trillion before it’s all over? Who knows?
Prior to the last electoral campaign, the Republicans were at risk of losing their majority mandate. A delegation of Kansas wheat producers, including me and others from the major wheat growing regions in the United States, made a trip to Washington, D.C., to push for a disaster-aid package for Midwestern farmers that had experienced more than six years of drought.
The aid package was a modest proposal of $4 billion that would cover a small percentage of the losses received by farmers due to the drought. We were able to assemble a non-partisan coalition of legislators, including Rep. Jerry Moran and Sen. Pat Roberts, who supported and actively worked to get it through both houses.
Acting on orders from his boss, then House Majority Leader, Rep. John Boehner from Ohio—and, on orders from the White House—the aide communicated the leadership’s message: “Trust me, it’s not gonna happen.”
One election cycle and a new political reality later, the disaster aid package passed through both houses, despite President Bush labeling the Farm Bill as “budget busting” and his twice failed veto attempts.
Look how fast President Bush’s administration changed its mind for federal intervention on this latest crisis. The irony in these circumstances is amazing. The same unregulated and free market philosophy, once touted as the wave of the future, is what brought the wheeling and dealing investment houses down to its knees and begging for a bailout from the taxpayers.
On Bill Moyer’s Sept. 19 program on the Journal, Gretchen Morgenson, MarketWatch columnist for the New York Times, calls this change “21st century socialism.”
In short, AIG, Fannie Mae and Freddie Mac have been nationalized and are under majority ownership by the U.S. government, managed by the current secretary of the Treasury.
Looking back, former New York City Mayor Rudolph Giuliani was only partially right in his speech at the Republican National Convention when he described China as “Adam Smith on steroids.” He should have included the United States of America.
Even Adam Smith, the “father of free enterprise,” called for moral restraint upon the free-market system. The move toward deregulation went too far and encouraged businesses to fully exploit markets, and people, without fear of retribution.
For instance, mortgage insurer AIG underwrote more than $700 trillion of mortgages on paper. In comparison, the entire monetary supply of the entire U.S. economy is less than $10 trillion (M1 and M2 figures taken from the Federal Reserve Bank of New York Web site.)
Anybody can do the math on this one without straining much. It was a house of cards, an accident waiting for a place to happen. All of AIG’s underwriting business is unregulated. No reserves are required to guarantee that AIG will be able to pay on any losses. Their sales staff was paid to underwrite mortgages and collect commissions and little else.
Taxpayers have a right to be outraged and to demand accountability for the misdeeds of investment banking executives who reaped a huge monetary bonanza and left the taxpayer holding the debt.
Furthermore, taxpayers should be outraged with governmental regulatory agencies that allowed this financial blunder to occur in the first place.