I predict soon we'll all be repeating famous words from 1992: then-presidential candidate Bill Clinton's mantra, "It's the economy, stupid." The past week's Fed bailout of securities firm Bear Stearns with a $30 billion credit line ought to convince everyone that the "R" word that matters is not Race, Racism, or Religion, but Recession.
It's the biggest campaign issue no one's talking about right now.
The NYT reports:
WASHINGTON — Hoping to avoid a systemic meltdown in financial markets, the Federal Reserve on Sunday approved a $30 billion credit line to engineer the takeover of Bear Stearns and announced an open-ended lending program for the biggest investment firms on Wall Street.
Franck Robichon/European Pressphoto Agency
Pedestrians in Tokyo watch the Nikkei’s decline on Monday.
Mario Tama/Getty Images
Bear Stearns headquarters in New York City.In a third move aimed at helping banks and thrifts, the Fed also lowered the rate for borrowing from its so-called discount window by a quarter of a percentage point, to 3.25 percent.
The moves amounted to a sweeping and apparently unprecedented attempt by the Federal Reserve to rescue the nation’s financial markets from what officials feared could be a chain reaction of defaults.
Wednesday, March 12, Bear Stearns CEO Alan Schwartz reassured the rest of Wall Street that there was no problem with liquidity. Basically large sums that were owed were now being called due, and other investment firms were concerned that Bear Stearns didn't have the cash on hand to cover the debts.
By Friday, March 14, the Fed announced a bailout of Bear Stearns precisely because it did not have the liquidity to make good on its debts. So much for CEO Schwartz's reassurances.
Today, we read that JP Morgan is purchasing Bear Stearns for $2/share, or what a Huffington Post article touts as "93% off". Stocks that trade for $2/share are often considered "penny stocks," and aren't exactly movers and shakers on the NY Stock Exchange. At these rates, Bear Stearns is now valued at $236 million, down from $57 billion just last week. But have no fear, the Fed is guaranteeing Bear Stearns with the $30 billion credit line. (See sister MOMocrat Kady Liang's excellent rip on America's pawnbroker/Federal Reserve head Ben Bernanke here.)
RealClearPolitics is calling for a three-way debate featuring Senators Clinton, Obama, and McCain on their solutions for economic crisis-in-progress.
We also are experiencing a historic reduction in the value of the dollar. When a banking crisis and a currency crisis occur at the same time, as they are now, they likely are to be followed by a recession, and the recession is likely to be longer and deeper.
And unlike the Japanese crisis of the 1990s, America's dominant place in the world economy increases the likely worldwide effect of our crisis and recession. For example, the subprime mortgage crisis has been exported to the world already because the world has bought those assets, but the world never bought much Japanese real estate mortgage assets in the '80s and '90s. Further adding to the high risk of economic contraction, of course, is the sharp and continuing rise in oil prices.
The first domino was the subprime mortgage meltdown--paper not worth the devalued house that collateralizes it. Consumers bet on home values forever defying gravity. Bad subprime mortgages took down banks in England and currently threaten the liquidity of U.S. banks and mortgage lenders (Washington Mutual, Wells Fargo, Countrywide) that gorged on this innocent-looking but rotting-from-the-inside roadkill. No less a brand name than Citibank had to get a cash infusion from Abu Dabi.
The next domino: the Frankenstein monster of Structured Investment Vehicles (SIVs) and Collateralized Debt Obligations (CDOs) that stitched together a bunch of ugly subprime and prime mortgages as new investment products which were sold around the world. World financial markets are now infected with this jetsam that's floating free of the real property that actually originally gave it financial heft and value. This goes beyond an individual homeowner's financial woes--SIVs and CDOs are everyone's problem now. Pension funds, hedge funds, and plenty of other large institutional investors, as well as overseas investors, are hip-deep in the stuff.
Future dominoes: option-ARM (Adjustable Rate Mortgage) resets in 2009-2010. More banks on the brink of failure. Ongoing currency devaluation.
With its bailout over this weekend, the Federal Reserve has indicated there are more investment firms like Bear Stearns that also bloated on funky secondary market product and are about to choke.
Never let it be said that no one saw this coming. I'm convinced the appointment of Ben Bernanke to the Federal Reserve, a specialist in the 1929 stock market crash and Great Depression, was no coincidence.
But let's look at the Democratic candidates for president and see what stances they took as well as their most recent statements on how to get us out of a recession. Consider this an overview of the topic to get you started. For now, let's agree that the most important color isn't black or white, but the green we all bleed.
Senator Hillary Clinton
- Official Senate homepage: a statement on the subprime mortgage crisis and timeline of Clinton's speeches and legislation proposing to address the problem. Most notably, she reintroduced the 21st Century Housing Act on March 15, 2007; no information as to when it was first introduced to the Senate.
- "Clinton Calls For Subprime Rate Freeze," CNN/Money.com
- "Lenders Agree to Freeze Rates on Some Loans," NYT
- Hillary for President Fact Sheet: Protecting the Dream of Home Ownership
Senator Barack Obama
- Official Senate homepage, co-sponsored STOP FRAUD Act, introduced April 25, 2007 (supposedly based on an earlier February 2006 bill; I can find no evidence of this on thomas.gov)
- "Fine Unscrupulous Lenders," August 28, 2007 Financial Times editorial
- "Subprime Obama," The Nation: "Obama's foreclosure plan mostly avoids direct government spending in favor of a tax credit for homeowners, which amounts to about $500 on average, beyond which only certain borrowers would be eligible for help from an additional fund."
- Change We Can Believe In: Protect Home Ownership and Crack Down on Mortgage Fraud
Lobbyists and Finance-Industry Donors, and the Mortgage Meltdown
Both Obama and Clinton get funding from the Illinois banking family, the Pritzkers. Is this a restraint on either candidate's ability to make a strong stand on regulating the banking industry? And here's an excellent article that notes Obama's tough talk on predatory mortgage lenders at the same time as his candidacy is funded by individuals at Goldman Sachs.
The Democratic presidential candidates have traded criticisms of each others' plans to address the subprime fiasco (here), but both have less to say about the financial crisis as it's currently unfolding. Perhaps this is wise--last I checked President Bush was still Cowpoke-in-Chief. Or would that be Lame-Duck-in-Chief?
Mother Jones magazine has a comparison of the overall economic plans of the two Democratic candidates, with an assessment of ten crucial policy points and the differences between their platforms; CNN/Money.com did a similar round-up of candidate positions back in August, 2007, when the Democratic nominee field was larger. I think it's time we bring this issue front and center again.
A good source for updates is the Center for Responsible Lending, a non-partisan, non-profit research and policy group that opposes all forms of predatory consumer lending. The subject is so vast and multi-faceted and complex, we all need help figuring out what the solutions are and who will pay for them. So far, it looks like with a few exceptions, taxpayers will be expected to fund most of the proposed bailout packages.
And notice how Republican Party nominee Senator McCain has nothing to add to the conversation? A search of his campaign website using the word 'subprime' gets... crickets chirping. Uh-huh.
Cynematic counts her pennies at P i l l o w b o o k.
There was a great post in HuffPo today about how this mess is the result of Republican economic policy. You know the one where regulation of ANYTHING is practically communism?
Posted by: Lawyer Mama | March 17, 2008 at 02:39 PM
Oh, you mean a single mom with kids on public assistance for a paltry sum gets "welfare," but a giant 95-year old investment firm with DC lobbyists at its beck and call gets a "bailout"? I guess the argument is, the investment firm has the potential to take the entire banking industry down with it, but the woman-headed household is just another casualty of her own inability to get what trickles down to her in this "spend and sabre-rattle" Republican administration.
Grrrrrrr.
Posted by: cynematic | March 17, 2008 at 06:19 PM
So, basically, thanks a lot Milton Friedman. To bad he didn't live long enough to see this free market capitalism BS come crashing down.
Posted by: Glennia | March 17, 2008 at 08:36 PM
*resists urge to wring hands and sob into a kitchen towel*
This is why it's so important for us to not only ensure that we elect a Dem, but to maintain a constant vigil re: what that Dem's administration is up to, post-election. A CONSTANT VIGIL.
This is our country. Let's get it back from those few (have-mores) marauders who've lately pillaged and plundered so desperately and with such blood thirst.
Posted by: debbie - i obsess | March 18, 2008 at 11:27 AM