Economy -- Bailing Out Right-Wing Economics

September 10, 2008

by Faiz Shakir, Amanda Terkel, Satyam Khanna, Matt Corley, Benjamin Armbruster, Ali Frick, and Ryan Powers

ECONOMY

Bailing Out Right-Wing Economics

Last weekend, the Bush administration took the necessary step of bailing out Fannie Mae and Freddie Mac, the two congressionally chartered, but privately held, troubled mortgage giants whose missions include "boosting homeownership and funding apartment construction for low- and moderate-income families." The two firms "guarantee or own roughly half of all the $12 trillion US mortgage market" and, as such, their bailout "represented one of the most sweeping interventions in financial markets since the Depression," according to the Wall Street Journal. Under the Bush administration plan, the two companies have been placed "under 'conservatorship,' a legal status akin to Chapter 11 bankruptcy" and the government "replaced the companies' chief executives and shifted management control to their regulator, the Federal Housing Finance Agency." The two firms recently suffered billions in losses due to the unprecedented number of defaults and foreclosures in the U.S. housing market. Earlier this summer, the U.S. Treasury began to fear the firms' liabilities were in danger of exceeding their assets and asked Congress to allow a federal bailout, should the need arise. The bailout is reminiscent of the Bush administration's $30 billion rescue of Bear Stearns in March, a move that President Bush and his conservative allies called "the right decision." Dispensing with regulatory oversight, only to embrace dramatic and expensive subsequent bailouts, has become the hallmark of years of failed right-wing stewardship over the economy.

'PRIMARY CONTRIBUTORS': In an op-ed in yesterday's Wall Street Journal, Sen. John McCain (R-AZ) and Gov. Sarah Palin (R-AK) reluctantly endorsed the federal takeover of Fannie Mae and Freddie Mac, arguing that the two institutions' lobbyists are the "primary contributors to this great debacle." McCain and Palin wrote that, should they be elected, their administration would "no longer use taxpayer backing to serve lobbyists, management, boards and shareholders." Fannie Mae and Freddie Mac "spent a combined $170 million" over the past 10 years on lobbying activities aimed at creating "a sort of regulation-free zone around their businesses." Although McCain and Palin are correct in naming lobbyists as "primary contributors" to the current crisis, their feigned outrage rings hollow because "at least 20 McCain fundraisers have lobbied on behalf of Fannie Mae and Freddie Mac" in recent years. In all, these 20 fundraisers earned "at least $12.3 million in fees" from the two institutions. More troubling, however, is the fact McCain's campaign manager, Rick Davis, "served as president of an advocacy group led by Fannie Mae and Freddie Mac" that worked to cripple regulatory initiatives in Congress. Fannie Mae and Freddie Mac founded the lobbying organization because they feared that "congressional meddling would lower their healthy profits." During his tenure, Davis moved to challenge even the smallest measures to make sure that Fannie Mae and Freddie Mac are be held more accountable for their actions. In July 2003, for example, Davis "wrote to the American Banker, taking issue with an opinion piece...arguing that Fannie and Freddie should operate with greater transparency." Such transparency and greater regulatory controls could have helped avert the current crisis.

MORE THAN SIZE: The Bush administration argued that the interventions were needed not because federal regulators had been "asleep at the switch" as Fannie Mae and Freddie Mac deepened their involvement in the subprime lending market, but because Congress failed to act as the two institutions grew "too big to fail." The remedy, the Bush administration suggests, is simply downsizing their held portfolios at a rate of 10 percent per year, presumably until the two firms are no longer "too big to fail." But as Center for American Progress Senior Fellow David Abromowitz explains, the problem is that "the intertwined nature of global financial markets today requires" federal intervention "even in the case of smaller financial players...when regulators fail to do their jobs." Abromowitz asks, "How small would [Fannie Mae and Freddie Mac] have to get to matter little if they failed but still be able to benefit consumers?" U.S Treasury Secretary Henry Paulson believes such questions are beside the point, arguing on Monday that the two institutions "should not have existed" at all. Similarly, Alan Greenspan has argued that the two firms "should be broken up, made smaller and fully privatized, without even a whiff of government support." Such statements however, ignore the very real benefits that Fannie Mae and Freddie Mac deliver: keeping "the supply of money widely available and at a lower cost" and ultimately expanding access to homeownership. As Abromowitz writes, "If one concludes that the current housing crisis results heavily from laissez-faire ideology trumping common sense protection of safety, soundness, and consumers, then the logical remedy would be to require more effective regulation" -- not piecemeal privatization.

MORE OF THE SAME: McCain's endorsement of the bailout of Fannie Mae and Freddie Mac is the second major federal intervention that he has supported in recent months. In March, he backed the Federal Reserve's decision to extend a $30 billion credit line to finance the takeover of Bear Stearns by JP Morgan. The strange dissonance between McCain's free-market, pro-deregulation rhetoric and his repeated support for sweeping government interventions suggests that a McCain administration would depart little from the Bush administration's status quo. One example of just how close McCain and Bush are to one another with regard to financial policy is the Bush administration's appointment of Herbert Allison to head Fannie Mae in the wake of the government bailout. Allison is a close McCain ally who during McCain's 2000 campaign was considered the "best bet" to become McCain's Treasury Secretary. McCain himself argued yesterday that the U.S. Treasury "had broadly followed the McCain plan" for the Fannie Mae and Freddie Mac bailout. McCain and Palin lament that "Fannie and Freddie's lobbyists succeeded and Congress failed" and claim that "under our administration this will not happen again." However, their pattern of endorsing dramatic and expensive federal bailouts, while shunning the regulatory measures needed to prevent them, suggests otherwise.

IRAQ -- BUSH DECLARES VICTORY IN IRAQ: Yesterday, President Bush gave "another chest-thumping victory speech" in front of a group of military officers, heralding a "moment of success in the war on terror." He also announced the withdrawal of roughly 8,000 troops from Iraq of the 146,000 U.S. forces there by next February, a slight reduction that will keep troop levels "several thousand above what they were in January 2007 when he announced the 'surge.'" Brian Katulis, a Center for American Progress Senior Fellow, writes in the Guardian today that political reconciliation, despite Bush's rosy claims,s has completely stalled. "When it comes to true power-sharing -- who has control of the guns, money and other key state resources like -- Iraq has not moved forward substantially," Katulis writes. Though Iraq "is a less violent place," Katulis argues, "it remains a fragmented country." "By overstating the gains to date on Iraq's political transition, Bush continues to overstate the considerable challenges that lie ahead," he adds. Today, the Iraqi parliament reconvenes after a one-month recess to work on an election law; elections were supposed to take place this fall but, the date has been steadily pushed back to, at best, "early next year."

ECONOMY -- GREEN RECOVERY: A NEW PROGRAM TO CREATE GOOD JOBS AND START BUILDING A LOW-CARBON ECONOMY: Yesterday, the Center for American Progress released Green Recovery, a new report by Dr. Robert Pollin and University of Massachusetts Political Economy Research Institute economists, which "outlines a green economic recovery program to strengthen the U.S. economy over the next two years and leave it in a better position for sustainable prosperity." The report "demonstrates how a new Green Recovery program that spends $100 billion over two years would create 2 million new jobs, with a significant proportion in the struggling construction and manufacturing sectors." If Congress were to spend roughly the same amount "on new oil and gas subsidies and subsidizing gasoline and oil prices, only a quarter as many jobs would be created," according to the report's findings. "A comprehensive clean energy agenda is essential to the future of our country. The green recovery and infrastructure investment described here is doable in the early days of a new administration," says Center for American Progress President and CEO John Podesta. Leo Gerard, international president of the United Steelworkers, agrees, telling reporters that "from the point of view of the steelworkers union, the view is quite simple, that a energy efficient green economy creates jobs and it can create jobs in America."

MILITARY -- VETERANS GROUPS ATTACK BUSH ADMINISTRATION PLAN TO OUTSOURCE GI BENEFITS: In June, President Bush signed a war supplemental bill that included a doubling of GI Bill college benefits for veterans, which he initially opposed. Last month, Department of Veterans Affairs (VA) Secretary James Peake wrote to the American Federation of Government Employees (AFGE), stating that the VA plans to outsource processing of these new benefits to the private sector. "The challenges of creating the procedures and systems to support a new program and ensuring accurate and timely benefit payments under this new program effective August 1, 2009, will tax VA's resources," the letter says. "Therefore, the decision has been made to seek private-sector support to implement this new program." The AFGE and veterans advocacy groups condemned the decision, noting that "the move would eliminate the valuable expertise of federal employees." Marty Conatser of the American Legion said, "Our newest generation of veterans deserve the benefits administered by the Dept. of Veterans Affairs, not outside contractors. Patients, critics and most media all cite the outstanding job the VA is doing. Outsourcing is not the answer."

A new intelligence report being "prepared for the next president on future global risks envisions a steady decline in U.S. dominance in the coming decades, as the world is reshaped by globalization, battered by climate change, and destabilized by regional upheavals over shortages of food, water and energy."

"The Coalition of the Willing appears to be going out of business." In a speech yesterday announcing his plan to withdraw 8,000 troops from Iraq, President Bush also "announced that most of the countries that have been partnering with the United States in Iraq over the past five years will be pulling their troops out as well." Read ThinkProgress' report on the Coalition of the Defeated here.

Congressional budget analysts said yesterday that the federal budget deficit will reach "a near-record [of] $407 billion when the budget year ends later this month, and the next president is likely to face a shortfall in January of well over $500 billion.”

"I have believed from day one that Iraq was going to change the face of the Middle East. I've never stopped believing that," Secretary of State Condoleezza Rice said in May 2008, according to Bob Woodward. "There's nothing that I’m prouder of than the liberation of Iraq," she said "without hesitation."

"The rate of suicides among-active duty soldiers is on pace to surpass both last year's numbers and the rate of suicide in the general U.S. population for the first time since the Vietnam war, according to U.S. Army officials." Officials attribute the rise to "the increased pace of combat operations, the number of deployments and financial and family troubles connected with deployments."

House Democratic leaders "are considering a $25-billion rescue package for the auto industry as part of an effort to bolster the sagging U.S. economy." The proposal, "with its clear political implications for key battleground states, is likely to be put on a legislative fast track, possibly clearing Congress in a matter of weeks."

Florida Gov. Charlie Crist (R) said yesterday that he "won't actively support a state constitutional amendment to ban same-sex marriage, casting doubt on whether the issue will pack a political punch this fall." "I'll support it, I’ll vote for it, move on," he explained. "It's not top-tier for me, put it that way."

And finally: Olympian Michael Phelps is "everywhere these days" -- even in the minds of federal lawmakers. Rep. Ted Poe (R-TX) has sponsored legislation to congratulate all U.S. athletes who competed in the Beijing Olympics this summer, while "while another authored by Rep. John Sarbanes (D-Md.) calls out Baltimore native Phelps in particular for his wins this summer and for ‘becoming one of the most highly decorated athletes in Olympic history.'"

The new Interstate 35W bridge in Minneapolis, which collapsed last year, "is expected to open to traffic as early as next Tuesday, less than 14 months after its predecessor collapsed into the Mississippi River."

THINK PROGRESS: BobWoodward: bin Laden capture could be 'the September or the October surprise' of the U.S. election.

WONK ROOM: President Bush and faith-based national security.

YGLESIAS: The Bush administration keeps creeping towards the progressive position that we need strategic redeployment out of Iraq.

POLITICAL INSIDER: Conservative Georgia congressional candidate refers to black reporter as "uppity."

FLORIDA: Monroe Circuit Court judge has ruled Florida's 31-year-old gay adoption ban "unconstitutional."

NORTH CAROLINA: "Workers' compensation insurance rates will be dropping in North Carolina next year, for the first time in five years."

ENERGY: "Indiana and Michigan could see more than 100,000 jobs between them if the federal government invests in a green jobs plan put forward" by the Center for American Progress.

"While you all were out [on recess], I and my Republican colleagues were here each and every day."
-- House Minority Leader John Boehner (R-OH), 9/9/08, on the House GOP's oil drilling protest

VERSUS

"Boehner was around for the start of the fake House session Friday but then left town and hasn't been back since. ... Boehner also has found time to squeeze in a couple rounds of golf."
-- Washington Post, 8/6/08

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