The Free Market Ain’t Free

Posted by Bobbi Murray on September 22, 2008

On Friday, President Bush suddenly decided it was okay for Government to make contact with the Market’s Invisible Hand, as long as Government does not slap The Hand’s wrist but instead stuffs It with cash.

Yeah, yeah, so much for the much-vaunted Free Market.

Not so free, as it turns out–someone pays. This time it’s a proposed tab of $700 eye-popping billion. And Wall Street’s losses are to be absorbed by–oh, guess who?

You!

And me, and our offspring and theirs. Because otherwise the economy will completely collapse even further, although we could still be looking at an implosion that will only be good for writers of post-apocalypse novels. But not really, since the publishing and distribution mechanisms are sure to be compromised,

We’ll bail out the financial houses, but so far, if yours is one of the homes being foreclosed — 1,000 a day going down that road here in Southern California — don’t wait around by your mailbox waiting for your bailout check.

That is, if you still have a mailbox.

Oh, Bush has made some noise about maybe-could-be-would-be bailing out homeowners — guess the GOP held a finger to the wind and saw that coddling Wall Street while sticking it to Main Street is dumb-ish election year politics.

Still, searching the interwebs for the Administration’s firmness of resolve on this idea comes up thin.

Anyway, here’s CNN’s take on — the latest early Tuesday Eastern time.

The Dems at least are getting up on their hind legs and calling for homeowner relief and more oversight, and the Bushies are predictably saying hurry, hurry, don’t think too hard about this even though it’s the largest bailout in the history of the world.

And as if the Wall Street Titans couldn’t see this all coming.

I remember a plaintiffs attorney representing clients facing foreclosure saying that last summer when I interviewed her as the meltdown began.

She told me about the boiler rooms full of brokers hawking dodgy products over the phones en masse, pushed by the mortgage companies who were making gobs selling off the loans to Wall Street.

To review:

Huge financial institutions bundled junk mortgage loans into securities, selling them off to investors for gobs of cash, then telling themselves and investors a little fib — we’ll mix up all the loans, sound ones with sub-prime, and spread the risk.

And companies like AIG insured the transactions, and the biggest names on Wall Streets had stuffed their portfolios full of the hinky securities.

Immodestly quoting a piece I wrote about it in The Nation in 2002:

Household-name companies like Lehman Brothers, Prudential and First Union are involved in managing the process of bundling loans — including subprime and predatory — into mortgage-backed securities.

They often provide the initial cash to make the loans, find banks to act as trustees, pull together the layers of financial and insurance institutions, and create the “special vehicles” — shades of Enron — that shield investors from risk.

The real estate market, they said, was on fire, default was unlikely as housing values went up, they said.

And besides — say it with me — THE RISK WAS SPREAD OUT.

But of course it wasn’t. Economist Robert Pollin of the Political Economy Research Institute at the University of Massachusetts Amherst puts it crisply in this piece he wrote in the summer edition of New Labor Forum:

The fortunes of most subprime borrowers rose and fell together with the housing market’s boom and bust cycle. The difficulties that borrowers faced of meeting monthly payments were pervasive, not a matter of isolated individual cases.

Read the whole thing here.

With money to be made selling off the loans, mortgage giants like New Century Financial went hog-wild.

Then the real estate market went south and you know the rest.

New Century went belly-up last year, beginning the catastrophic slide.

A bankruptcy examiner’s report on New Century, written in March 2008, noted:

The demise of New Century was an early contributor to the subprime market meltdown. The fallout from this market catastrophe has been massive and unprecedented.

The report marveled at New Century’s “brazen obsession with increasing loan originations, without due regard to the risks associated with that business strategy.” A story in the Orange County Register about the report went on to say:

Examples of the company’s high-risk strategy included introductory “teaser rates” that would escalate to unaffordable mortgages, so-called “liar loans” based on stated income and 100 percent financing of homes, the report said.

New Century execs were making a fortune on the racket, as were the brass at all the other mortgage lenders adopting the same practices.

Shall we charitably say the whole thing got out of hand?

Well, really, no need to be charitable.

Please!

You’re already so generous with the $700 billion.

It wasn’t a matter of getting out of hand, it was a whole setup to find another cash faucet after the tech bubble burst in the late 1990’s. By then the deregulation kicked off by Ronald Reagan and completed during the Clinton administration had set the stage for the securitizing of mortgage loans, sound and un.

And then George W. Bush brought deregulation to its apotheosis.

He straight-up converted the whole government apparatus into a gravy train for his buddies, went beyond deregulation to letting all the pirates regulate themselves.

In the words of James K. Galbraith, author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should, Too:

The administration, following the installation of George W. Bush, became little more than an alliance of representatives from the regulated sectors — mining, oil, media, pharmaceuticals, corporate agriculture — seeking to bring the regulatory system entirely to heel.

And to this group was added another, overlapping to some degree, of equal importance: those who saw the economic activities of the government not in ideological terms but merely as opportunities for private profit on a continental scale. Jack Abramoff became, for a moment, the emblem of this class.

Follow this link for an interview with Galbraith about it.

So let’s see, the tech bubble was the cash source in the 1990’s, junk mortgage securities were this decade’s. Last week I was wondering what the next decade’s cash source for Wall Street will be.

And on Friday, I caught on — hey! It’s US.

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COMMENTS

Andrew Macurak
24 Sep 08, 10:00 am

I always wanted to own a share of AIG. Now I do - and I got some stock in Lehman Brothers to go along with it. Who’d have thought that I (along with the other several hundred mllion taxpaying Americans) would become such a high-profile investor so quickly?

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