A Sign That Obama Will Repeat Economic Mistakes

Friday, December 7, 2012 by TruthDig.com
by Robert Scheer

Please don’t tell me that these reports in the business press touting Sallie Krawcheck as a front-runner for chairman of the SEC or even a possible candidate to be the next Treasury secretary are true. Who is she? Oh, just another former Citigroup CFO, and therefore a prime participant in the great banking hustle that has savaged the world’s economy. Krawcheck was paid $11 million in 2005 while her bank contributed to the toxic mortgage crisis that would cost millions their jobs and homes. Sallie Krawcheck.

Not that you would know that sordid history from reading the recent glowing references to Krawcheck in the New York Times, the Wall Street Journal and Bloomberg News that stress her pioneering role as a leading female banker—a working mother no less—but manage to avoid her role in a bank that led the way in destroying the lives of so many women, men and their children. Nor did her financial finagling end with Citigroup, as Krawcheck added a troubling stint in the leadership at Merrill Lynch and Bank of America to her résumé.

A woman who would be an excellent choice as the most experienced as well as principled candidate to head the SEC or Treasury is Sheila Bair, former head of the FDIC, who labored to protect consumers rather than undermine them. Indeed, her outstanding book “Bull by the Horns,” chronicling her fight in the last two administrations to hold the banksters accountable, should be required reading for the president and those who are advising him on selecting his new economic team.

The SEC is supposed to supervise the banks rather than abet them in their chicanery. And although the Treasury Department has been a captive of Wall Street lobbyists for most of the modern era, one would expect something better from the second coming of Barack Obama. Those are key appointments in determining whether the president can turn around the still-moribund economy by channeling the spirit of Franklin D. Roosevelt. Or will he continue to plod along on the course set by George W. Bush, bailing out the banks while ignoring beleaguered homeowners and the many other victims of this banking-engineered crisis?

Obama was given a pass on the economy by voters only because Mitt Romney was an even more craven enabler of Wall Street greed. But the outlines of the Bush Wall Street payoff remain in place, with the Federal Reserve continuing to bail out the banks with virtually free money and the purchase of $40 billion in toxic mortgage-based bonds every month to add to the more than trillion dollars in that junk that the Fed previously had taken off the banks’ books.

The money printing by the Fed is at the heart of the massive debt crisis. But it has been great for the bankers, with compensation at the 32 largest banks slated to hit an all-time high of $207 billion this year, according to a Wall Street Journal estimate. This reward for ripping off the public is almost three times the amount the federal government spends on education. Once again the bankers are blessed for their failures, receiving such wildly excessive compensation despite the fact that banking revenue is down 7.2 percent over the last two years.

A prime example is Krawcheck’s old bank, Citigroup, whose new CEO this week announced that the company has been forced to engage in a major retrenchment, eliminating 11,000 jobs and closing 84 branches. The bank has been deeply troubled ever since the housing meltdown it helped trigger first began, and it was saved from bankruptcy only by a direct infusion of $45 billion in taxpayer money and a commitment of an additional $300 billion in underwriting of Citigroup’s bad paper.

The ugly tale of America’s Great Recession is inextricably entwined with the deplorable practices of Citigroup, the too-big-to-fail bank made legal by Bill Clinton’s signing off on reversing the Glass-Steagall law that prevented the merger of investment and commercial banks. The first beneficiary of the revised law was the newly created Citigroup, saved from bankruptcy a decade later by the taxpayers.

I shouldn’t be surprised that Krawcheck would be considered a viable nominee for a central position in managing our economy. After all, her colleague in the top ranks at Citigroup during the years of financial depravity, Robert Rubin, is considered a significant adviser to the Obama administration, and his protégés, led by Treasury Secretary Timothy Geithner, are still directing policy. It was Rubin who pushed through the reversal of Glass-Steagall, an act of betrayal of the public interest that was rewarded with obscene amounts of money when he ultimately took the job of leading the bank he made legal.

The very fact that these folks remain influential, as witnessed by Krawcheck being considered to head the SEC rather than being the subject of one of its much-needed investigations, gives further evidence of the enduring but ultimately terminal illness of crony capitalism.

Wake-Up Time for a Dream

June 7, 2010
By JOE NOCERA

Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, began her week with a bit of honest heresy, the kind that only she, among all the bank regulators, seems willing to utter in the wake of the financial crisis.

Deep in a speech she delivered Monday before the Housing Association of Nonprofit Developers — a speech that got surprisingly little attention — Ms. Bair listed her three main recommendations to “put the mortgage industry on a sounder footing.” The first two were the usual suspects: better consumer education and protection, and a reformed securitization market. Her third proposal, however, was a shocker, taking dead aim at one of the most sacrosanct tenets of American politics: the lofty goal of homeownership.

“For 25 years federal policy has been primarily focused on promoting homeownership and promoting the availability of credit to home buyers,” Ms. Bair said. She mentioned some of the many subsidies home buyers get, including the home mortgage interest deduction and the ability to deduct property taxes.

She tossed in Fannie Mae and Freddie Mac, the two “G.S.E.’s” (government-sponsored entities) whose role as a guarantor and securitizer of mortgages greatly expanded the ability of mortgage originators to make loans to home buyers — and which are now, of course, in federal conservatorship, with taxpayers holding the bag for their gargantuan losses.

She also pointed out that during the bubble, when anyone with a pulse could get a mortgage, the percentage of Americans owning homes rose to an unprecedented 69 percent, a number that was greeted with bipartisan hurrahs, but which turned out to be “unsustainable,” Ms. Bair said.

She concluded: “Sustainable homeownership is a worthy national goal. But it should not be pursued to excess when there are other, equally worthy solutions that help meet the needs of people for whom homeownership may not be the right answer.” Like, you know, renting.

The point is: the financial crisis might well have been avoided if we as a culture hadn’t invested so much political and psychological capital in the idea of owning a home. After all, the subprime mortgage business’s supposed raison d’être was making homeownership possible for people who lacked the means — or the credit scores — to get a traditional mortgage. It’s also why bank regulators and politicians were so willing to avert their eyes from the predations and excesses of the subprime companies.

Yet even now, it is difficult for the body politic to face this truth squarely, so intertwined is homeownership with the American Dream. Which is why Ms. Bair’s comments were so heretical. Maybe, she seemed to be suggesting, it’s time to break that link, painful though it would be. Maybe she’s right.

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The idealization of homeownership by both the public and the federal government is hardly a recent phenomenon, of course. The Federal Housing Authority has been around since 1934. Fannie Mae was founded in 1938. After World War II, the G.I. Bill included modest loans allowing veterans to buy their first homes, according to Michael D. Calhoun, the president of the Center for Responsible Lending. For decades, the savings and loan industry existed solely to make loans to home buyers. In return, the government gave savings and loans certain regulatory advantages over the banks. The mortgage-backed security itself — which emerged in the 1980s, and made the securitization of mortgages possible — required the passage of a handful of laws, which Congress happily provided.

And every president, Democrat and Republican alike, trumpeted the virtues of homeownership for all Americans. Bill Clinton put numerical goals on the percentage increase he wanted to see in homeownership, and greatly increased Fannie and Freddie’s affordable housing goals. (Those goals had first been in put in place during the presidency of George H. W. Bush.) George W. Bush trumpeted his “ownership society”— and increased those housing goals. Fannie Mae, for its part, explicitly wrapped itself in the American Dream; anyone who opposed Fannie Mae was quickly labeled “anti-homeownership” by the company’s lobbyists.

Indeed, conservatives tend to view the affordable housing goals imposed on Fannie and Freddie as the central reason for the credit crisis. “In order to increase homeownership, Fannie and Freddie were required to decrease their standards,” said Peter Wallison, a fellow at the American Enterprise Institute and perhaps the country’s leading critic of the G.S.E.’s. “We made a big mistake in trying to force housing onto a population that couldn’t afford housing.”

But, to my mind, that view is only half-right. Yes, people got loans who had no hope of paying them back, and that was insane. But Fannie and Freddie’s affordable housing goals — which the G.S.E.’s easily gamed — were not the main reason. Rather, it was the rise of the subprime lenders — and their ability to get even their worst loans securitized by Wall Street —that was the main culprit. Fannie and Freddie lowered their standards mostly because they were losing market share to the subprime originators.

Did government policy make the rise of the subprime lenders possible? You betcha. Over time, the federal government gradually loosened regulations and interest rate caps that allowed the business to first become viable and then to explode. And it completely bought into the idea that the subprime industry was a force for good, because it was expanding homeownership. This, of course, is something the mortgage originators encouraged. Angelo Mozilo, the founder of Countrywide Financial, was as vocal about his company making the American Dream possible as any Fannie Mae lobbyist.

But it was a lie. Gary Rivlin, my former colleague at The New York Times, has just published a scathing, important book, “Broke, USA,” which includes one shocking anecdote after another of people being conned into taking on mortgages, filled with hidden fees and adjustable rates, that they couldn’t possibly afford. The companies that did these things were not the outliers — they were the bulwarks of the industry: Household, Countrywide, New Century and a raft of others. And when state officials tried to crack down on these unseemly practices, the Office of the Comptroller of the Currency, instead of investigating, blocked their efforts. After all, homeownership was on the rise!

Somewhat to my surprise, the housing activists I spoke to — people who had been in the forefront of trying to stop the subprime lenders — generally didn’t agree that homeownership should be de-emphasized. “Let’s not throw out the baby with the bathwater,” said John Taylor, the chief executive of the National Community Reinvestment Coalition. “I think owning a home is the most common way for working-class people to join the middle class.” Mainly, he said, that was because of a home’s appreciation, which gave people the opportunity for wealth creation that would otherwise have remained out of reach. Others mentioned additional societal benefits of homeownership, like stable neighborhoods. And homeowners had every incentive to keep their homes up, precisely because of the equity in their homes.

The academics I spoke to, however, were not so convinced that homeownership offered benefits to society that were so important they demanded federal subsidies. Especially since those subsidies were so huge, and so distorting to the economy. For instance, in 2009, according to the Congressional Budget Office, government subsidies for housing amounted to a staggering $230 billion.

“You hear all this rhetoric about stability caused by homeownership,” said Richard Florida, the author of “The Great Reset,” and a professor at the University of Toronto. “But the communities that survived the housing bubble the best were the ones that had the highest percentage of renters.”

Edward Glaeser, a professor at Harvard and a contributor to The Times’s Economix blog, said that if homeownership had to be encouraged — which he was not at all convinced of — it should be through a “flat homeowners’ tax credit” rather than a home mortgage deduction that essentially “bribes people to buy bigger houses.” What he says he really believes, though, is that renters offer plenty of social good themselves, helping creating vibrant cities. “The idea that homeownership is always great and renting is un-American is an awful state of affairs,” he said.

Obviously, the country is too psychologically invested in the idea of homeownership to ever abandon completely the homeownership ideal, or to put renting on a equal footing with owning. Which is why I found the most appealing idea to be Mr. Rivlin’s.

Despite having spent the last two years of his life reporting on the destruction wrought, in part, by the government’s unthinking push for ever more homeownership, he still wasn’t willing to abandon it completely. Rather, he thought the big policy mistake we had made as a culture was in promoting policies that encourage all home purchases, under any circumstance. “Why should the government help me buy a second home? Why should it subsidize a refinancing?” he asked. (I was amazed to discover that, if you qualify, you can actually get an F.H.A. loan for a refinancing.) “We have missed the essential piece,” he added. “The social good is in helping qualified first-time buyers own a home. That should be our goal. After that, people should be on their own.”

Right now, more than two years after the fall of Bear Stearns, which represented the beginning of the financial crisis, the federal government is more involved in the mortgage industry than it has ever been in its history. As wards of the state, Fannie and Freddie are insuring three out of every four mortgages. Most of the remaining 25 percent are being guaranteed by the F.H.A. As much as you might resent the fact that the taxpayers now have to pick up behind new Fannie and Freddie, the sad truth is that without them, no one in America would be able to buy a home.

Surely, that’s the logical culmination of decades of government policy promoting homeownership. Eventually, of course, the private market will return to the mortgage business, though it is hard to know when. Fannie and Freddie will be reconfigured in some way. But unless we change the way we think as a society about the virtues of homeownership, the fundamental fact will remain: the government will always be the backstop for the mortgage business, with the taxpayers always liable for the losses.

Is that really what we want?