Friday, July 11 – the end of a long, strange week – and it was hard to muster the energy to think about what Jesse Jackson said about Barack Obama (words he thought no one would hear, but Fox News blasted his offline comment far and wide so no one would miss it). Here’s an NPR Roundtable on the matter, if such things interest you. Obama said black men should be better fathers, and Jackson muttered Obama was talking down to black folks and he’d like to cut off the man’s testicles. Jackson apologized, Obama accepted the apology – no big deal, as we all lose it now and then – and Fox News rode their scoop for many news cycles, while many speculated on what was going on. Not much – Jackson realized he lost his temper and was wrong. Obama wasn’t concerned.
It changed very little. All fathers should be better fathers. All fathers know this. The whole thing seemed to have far more to do with the agenda over at Fox News than anything else.
People – normal people, as opposed to political junkies – had other things fret about. Gasoline for the SUV is getting more expensive than anyone imagined – nearing five dollars a gallon out here in Los Angeles. If you own a home you know its value is dropping – you can no longer use it as an ATM to keep you afloat. Refinancing is not an option – you now have no equity, and the value of the thing will not be rising to bring it back. And of course you probably now owe more on the mortgage than the house is worth – you cannot sell it, as what you would receive would now not come close to covering what you owe. You’d sell it and still owe the bank two-hundred grand? No. And given the way things are going in this economy, with layoffs and businesses shutting down, if you cannot make your monthly payments in that situation there’s little choice but foreclosure – you walk away with nothing and with a ruined credit rating so you cannot easily borrow to get back on your feet.
There’s that, and what you saved for your future in your IRA or 401(k) or whatever – all tied to the markets, all disappearing into thin air. At the end of this particular week the Dow hit a two-year low, well into Bear Market territory – twenty percent or more off its high. You’re screwed. And oil hit another all time high, nearing one hundred fifty dollars a barrel – but the rumors early in the day that we had given the Israeli Air Force permission to use Iraqi airspace to practice bombing the crap out of Iran turned out to be just rumors, so oil backed down off the record high, just a bit. Still you know oil will never be much lower ever again, and as with the house, who will buy your SUV now? Jesse Jackson might just as well have said he was the tooth fairy and, by the way, he could fly, and he was really Swedish. Who cares?
What was clear by the end of this particular Friday was that things were getting far worse than anyone had anticipated. Tom Raum of the Associated Press covers the big story:
The last thing the Bush White House and the rest of the country needed in these economically trying times was another financial crisis. But they got one.
The Republican administration and Democratic-run Congress now are facing the possibility that mortgage giants Fannie Mae and Freddie Mac, once staid and stable, could need a bailout or even go under.
Well, if they default, that “would send shock waves through already distressed financial markets, drive the US economy further into recession territory, and make it even harder for people to obtain mortgages or refinance their homes.”
Gee, that doesn’t sound good. But everyone in both parties made nice sounds – no way we’d let this happen. The two are too essential. But Raum notes that “the government may have little choice but to take them over or bail them out,” or both actually.
To be clear, these are two government-chartered, shareholder-owned companies. They own or guarantee over five trillion dollars of home loans – that’s trillion not million, and about half of all the mortgage debt that is outstanding in the United States. This is a big deal. A bail-out would add five trillion to the national debt, doubling it. That’s two and a half times greater than the most dire projection of the cost of the wars we decided to wage. And we find out about this now?
Raum quotes President Bush and Treasury Secretary Henry Paulson saying insolvency or a government takeover is not something to worry about just yet – maybe something can be worked out.
That didn’t help matters much:
Bush, the first U.S. president with an MBA degree, may have been assured, but investors apparently weren’t. They dumped stocks in response to the woes of Freddie and Fanny, pushing the Dow Jones industrials at one point below the 11,000 mark for the first time in two years before recovering slightly.
The two companies’ stocks are now at their lowest levels in 16 years, down 80 percent from just a year ago.
And this kind of matters, as Congress set up the companies to ensure that money for home loans would be available – to keep things liquid. Fannie Mae and Freddie Mac, as Raum notes, buy mortgages, turn them into securities and sell them to investors, and hold some mortgages in their own portfolios. And “because they were sponsored by the government and deemed to be nearly risk-free, they have been able to borrow money at slightly below-market rates.”
Now they’re holding a whole lot of nothing. The good old days are gone:
Because they were deemed safe, stable and chartered by the government, Fannie Mae and Freddie Mac have less restrictive requirements for cash reserves than other financial institutions. They have no explicit government backing despite their charter, but there was always an assumption that the government would bail them out if necessary.
While most of the mortgages they hold are fixed-rate loans to borrowers with good credit, the housing downturn has been so severe that they have sustained gigantic losses in their loan portfolios due to foreclosures – about $11 billion over the past few months – pushing them closer to the financial brink.
And because their stock prices have plunged so far, they are hard pressed to raise fresh capital on their own.
You saw that second paragraph above – the mortgages they hold are fixed-rate loans to borrowers with good credit. That’s the good stuff. Things have gotten out of hand.
This is a death-spiral:
Former St. Louis Fed President William Poole this week said Fannie and Freddie were already technically insolvent.
Under a 1992 law, if either becomes heavily undercapitalized, it can be placed into a “conservatorship,” a partial federal takeover.
“There’s no good news here for the housing market or for the broader economy,” said Mark Zandi, chief economist at Moody’s Economy.com.
Zandi said he doesn’t think the two mortgage companies are yet at the point of default. “Yet, the pessimism is so dark, it can become self-fulfilling.”
Best case is that the government use three stopgap options, as it “could lend money to the two companies, it could buy their stock, it could make the implied government guarantee an explicit one with a big line of credit.” That might keep the wolf from the door.
Also see, in Slate, Daniel Gross with Fannie, Freddie, Folly:
Should Washington intervene and explicitly do what has been assumed all along – backing Fannie Mae and Freddie Mac’s debt – critics on the left will correctly claim that it’s another example of privatizing profit and socializing risk. Critics on the right will argue that the government has effectively nationalized the mortgage industry.
But guess what? It already has, to a large degree. Even as housing was melting down, Washington encouraged and enabled Fannie Mae and Freddie Mac to do more. As part of the stimulus package passed earlier this year, the caps on the size of mortgages Fannie and Freddie were permitted to back were lifted from $417,000 to $729,000. And as lenders have disappeared from the field, Fannie and Freddie have reassumed their leadership roles. In the second quarter of 2006, Fannie and Freddie accounted for 37.7 percent of mortgage bonds issued, a record low. But in the first quarter of 2008, the two firms accounted for nearly 70 percent of all new mortgages.
Without Fannie and Freddie, in other words, there isn’t much of a private mortgage industry. That is why, despite protestations, Washington’s economic policymakers must be considering ways to deal with the potential failure of these firms…
AT CNBC see Jared Bernstein with this:
When you’re in the middle of a maelstrom, it’s hard to step back for a teaching moment.
The prospect of Fannie Mae and Freddie Mac failing is almost too unsettling to contemplate. As one investor told the New York Times, “If people lose faith in Fannie and Freddie, then the whole system freezes up, and nobody can buy a house, and the entire housing market can crash.”
Oh – that.
But after the markets closed, there was this news. Office of Thrift Supervision Shuts Down IndyMac:
IndyMac Bank’s assets were seized by federal regulators on Friday after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures.
The bank is the largest regulated thrift to fail and the second largest financial institution to close in U.S. history, regulators said.
And the Federal Deposit Insurance Corporations estimated that its takeover of IndyMac would cost between four billion and eight billion dollars – give or take. Where does that money come from?
This historical perspective:
IndyMac’s collapse is second only to that of Continental Illinois National Bank, which had nearly $40 billion in assets when it failed in 1984, according to the FDIC.
The director of the Office of Thrift Supervision, John Reich, blamed IndyMac’s failure on comments made in late June by Sen. Charles Schumer (D., N.Y.), who sent a letter to the regulator raising concerns about the bank’s solvency. In the following 11 days, spooked depositors withdrew a total of $1.3 billion. Mr. Reich said Sen. Schumer gave the bank a “heart attack.”
“Would the institution have failed without the deposit run?” Mr. Reich asked reporters. “We’ll never know the answer to that question.”
Mr. Schumer quickly fired back.
“If OTS had done its job as regulator and not let IndyMac’s poor and loose lending practices continue, we wouldn’t be where we are today,” Sen. Schumer said. “Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs.”
Now that’s interesting – the guy from the Office of Thrift Supervision said it was all sort of psychological. Schumer publically wondered if things were, really, slightly shaky out in Pasadena, where IndyMac is based, and his worry caused a bank ran. Had Schumer not been such a worrywart, or had he just shut up and stopped whining, everything would have been just fine.
That is pretty much to say the whole financial system is a house of cards – its working at all depends on people ignoring the facts and lying to each other, and agreeing to pretend the lies are truth.
But then, that seems to be what John McCain has been saying all along, sort of. His chief economic advisor said that, but not in so many words.
Of course, McCain had a bad week. At the Weekly Standard, the voice of neo-conservatism, see Dean Barnett:
That sound you’ve been hearing all day is me hitting my head in Boston with a baseball bat, trying to forget all the silly things the McCain campaign has done this week. First, McCain surrogate Carly Fiorina engaged in some freelance idiocy as she riffed on abortion. Next the candidate himself made some intemperate remarks about social security and killing Iranians. The former will almost surely come back in the form of an Obama advertisement in the fall, and may even surpass “100 years” as McCain’s biggest misstatement of 2008. Now, ranking McCain economic advisor Phil Gramm has told America to stop whining about the economy while pronouncing the country in the throes of a “mental recession.” Brilliant.
Well, Phil Gramm did speak to the Washington Times:
“You’ve heard of mental depression; this is a mental recession,” he said, noting that growth has held up at about 1 percent despite all the publicity over losing jobs to India, China, illegal immigration, housing and credit problems and record oil prices. “We may have a recession; we haven’t had one yet.”
“We have sort of become a nation of whiners,” he said. “You just hear this constant whining, complaining about a loss of competitiveness, America in decline” despite a major export boom that is the primary reason that growth continues in the economy, he said.
Things are fine. People’s attitudes are the problem. They’ve never had it so good.
McCain sensed this was trouble, and said Gramm – even if Gramm was his chief economic advisor – really didn’t speak for him. As for the plan to make Gramm the next Treasury Secretary, McCain threw him under the bus:
I think Sen. Gramm would be in serious consideration for Ambassador to Belarus. Though I’m not sure the citizens of Minsk would welcome that.
For a roundup of press reaction, see the Columbia Journalism Review. This mini-scandal got some coverage, though not as much as Wesley Clark saying “I don’t think getting in a fighter plane and getting shot down is a qualification to become president,” and Obama’s comment about rural voters being bitter and clinging to their guns and religion. The press naturally cuts McCain a lot of slack – the consequences of questioning a war hero are grave, and everyone has know him for years and likes the guy.
There was, however, a web column by Newsweek writer Howard Fineman, calling Gramm’s comments “bone-headed” and “so asinine as to make Jesse Jackson … sound like Plato.” And the CJR notes that the Huffington Post reported in January that, at a meeting with the Wall Street Journal editorial board, McCain “admitted he ‘doesn’t really understand economics’ and then pointed to his adviser and former Senate colleague, Phil Gramm – whom he had brought with him to the meeting – as the expert he turns to on the subject.”
McCain doesn’t have much wiggle-room here. His main man just told America to stop whining. That actually could make some people bitter – the hapless suckers who lost their jobs and their homes. But as McCain has said many a time, it’s not the job of the government to protect people from their foolish choices – so no bail-outs for individuals, just essential corporations. Now he must balance that with saying he does understand people’s pain, and it is quite real – he knows that – and it’s not his problem, or something. It gets tricky.
Add that he has the charisma of wallboard, and painfully awkward lack of public speaking skills, and doesn’t care much for policy, beyond war or not war, and you have a recipe for trouble.
Add to that, Obama, the smooth guy, is soon off to Europe. See Mark Ambinder:
Obama’s trip to Europe will be a huge event… maybe as big as his convention, maybe as big as a debate. Sheer curiosity will translate into enormous crowds, even as most of Obama’s events will be small and pooled. The European press will climax, repeatedly.
I predict an extended media orgasm as well. Europeans are desperate to fall in love with America again. This young, black Kennedy figure will likely create iconic scenes – reminding the old of the America that once inspired them and the young of the capacity for change that America still contains. And it’s simply great theater.
One thing we have learned about the Obama campaign that has been overlooked: they understand theater. In fact, no campaign has understood theater this way – and its powerful relationship to politics – since Deaver managed Reagan.
But the administration is working hard to make sure Obama does not speak at the Brandenburg Gate in Berlin, as we see here:
Deputy Treasury Secretary Robert Kimmitt told the mass circulation tabloid Bild that “it would be nice if the German government would focus on strengthening its contacts to us rather than already beginning to look for our successors.”
And there’s this:
It’s said that the Chancellor’s foreign policy advisor, Christoph Heusgen, was berated by a member of the Bush team over Obama’s plans at the G-8 summit in Japan.
And the Republicans are piling on.
Mitt Romney – “I do think that, frankly, Barack Obama looks toward Europe for a lot of his inspiration. I think John McCain is going to make sure that America stays America.”
Rudy Giuliani – “Well this is why [Obama] is a popular candidate in Europe, because there is such an anti-American feeling and he is sort of capturing that.”
Ah, Obama is not really an American. See this New Jersey Republican website – “Obama Loves America Like O. J. Loved Nicole”
You get the idea.
And add this:
Democrat Barack Obama batted away conservative criticism Friday over a comment he made about Americans’ lack of foreign language skills.
“The Republicans jumped on this. I said, absolutely immigrants need to learn English, but we also need to learn foreign languages,” the likely Democratic nominee said as the 1,000-plus crowd in a school gymnasium cheered. It’s a position he long has held.
“This is an example of some of the problems we get into when somebody attacks you for saying the truth, which is: We should want our children with more knowledge. We should want our children to have more skills. There’s nothing wrong with that. That’s a good thing. I know, because I don’t speak a foreign language. It’s embarrassing,” Obama said chuckling as his audience did the same.
At issue was a remark the Illinois senator made Tuesday in Powder Springs, Ga., that drew laughter from the crowd – but disdain from conservatives and groups advocating English as the official U.S. language. His remark has caused buzz on the Internet and talk radio.
The AP was gracious enough to straighten things out:
The Americans for Legal Immigration PAC said in a statement, “Barack Obama has stepped on a political land mine by stating Americans should be forced to learn to speak Spanish.” But that’s not what Obama said.
Obama was answering a question on education when he said he doesn’t understand people who say “we need English only.”
“I agree that immigrants should learn English,” Obama said. “But instead of worrying about whether immigrants can learn English – they’ll learn English – you need to make sure your child can speak Spanish. You should be thinking about how your child can become bilingual. We should have every child speaking more than one language.”
He only said that we should be emphasizing foreign language study in classrooms:
“You know, it’s embarrassing when Europeans come over here, they all speak English, they speak French, they speak German. And then we go over to Europe and all we can say is ‘merci beaucoup!'” Obama said, laughing.
But speaking any foreign language has long been the mark of someone who hates America, or so the conservatives insist. It came up with John Kerry and his French. See Geoffrey Pullum at Language Log (University of Pennsylvania) with this:
… The last thing you want in American politics, apparently, is to be captured on camera understanding French, let alone speaking it. Rush Limbaugh would start portraying you as hardly American at all (he already does this with Kerry, in fact, having heard about these suspicious francophone abilities on the grapevine).
Geoff Nunberg pointed out to me that in Nebraska they once passed a law making it illegal to teach foreign languages in the schools, period. Foreign language learning is now, like sodomy, legal in all states; but these are not freedoms that a politician should brag about taking advantage of. Such is the determined linguistic isolationism of the USA. I would have thought that to have a US president (for once) who could argue fluently and convincingly in the native language of some other head of state would be a fantastic asset. But instead it is perceived as a kind of disloyalty, evidence of being an untrustworthy egghead, and you would lose millions of votes over it. It’s both depressing and amazing.
Fine – that’s how it is. Keep the kids narrow.
And we are who we are. In the Telegraph (UK), see this from the close of the G-8 Summit:
The American leader, who has been condemned throughout his presidency for failing to tackle climate change, ended a private meeting with the words: “Goodbye from the world’s biggest polluter.”
He then punched the air while grinning widely, as the rest of those present including Gordon Brown and Nicolas Sarkozy looked on in shock.
There’s something very wrong here. We need to believe the lies about the economy, or it will fall apart, and that will be our fault for whining, and we need to keep ourselves from knowing too much – and then we have to be arrogant assholes.
Do we really have to?