The New Republic

I suspect much of this article won't be believed by the regular TNR readers that have so steadfastly argued F&F had little to nothing to do with all this. What is sickening in all this is how F&F paid off their various political supporters and unleashed racial attacks on anyone that dared to question their methods (see Morgenson's book). This is especially disgusting in light of how little help they actually gave to poor minorities. In other words, they existed largely to serve speculative buyers of middle-class and above means, but then would trot out a minority congressmen who'd claim racism as needed when anyone tried to dig in and understand this house of cards. Just disgusting. ///The meltdown was the greatest punch in the gut the middle class has felt since the 30's. And it was done with the blessing of the government. Not corporations. Not capitalism. But government.

- seattleeng

March 1, 2013 at 1:37pm

I can't even figure out what Galston is talking about, and neither can he. Given that the losses in the last mortgage-backed securities crisis were inflicting overwhelmingly by the private market, with the government agencies merely the tail of the dog, the fact that 97% of the MBS market is now F&F could be the best possible outcome. Does Galston think that if the losses are somehow not inflicted "on the taxpayers" via the Federal government they are not inflicted on the taxpayers as losses of value in a multitude of other ways? Galston, who long ago drank the Republican Kool-aid, takes the reflexive approach that we must somehow "ease government out" in favor of the private market. But he is incapable of explaining why because he doesn't know why. He doesn't have any idea how the market would then function to assess and price risks properly, particularly while still propped up by a different version of government insurance that would carry the same implicit guarantees as FDIC insurance does now. The best Galston can do is ape the anti-government hysteria of the libertarians to generate an incomprehensible mish-mash. Which is to say, Galston is doing much better here than usual for him.

- roidubouloi

March 2, 2013 at 1:21am

'The meltdown was the greatest punch in the gut the middle class has felt since the 30's. And it was done with the blessing of the government. Not corporations. Not capitalism. But government.' Yes, seattle, and no government blessed it more than G.W. Bush's. I saw speeches of his where he said he wanted 7 million new home owners over the next ten years, and he wanted most of them to be minorities. The GOP thinks new minority home owners will somehow become conservative and vote Republican. Bush replaced replaced Clinton's appointees at Fannie Mae and Freddy Mac with his own and issued a press release calling for $440 billion in new home loans over 10 years. And the house of cards came tumbling down. I see you haven't had the nerve to read Michael Hudson's The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America--and Spawned a Global Crisis. How about Kirsten Grind's The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History? That has a local Seattle flavor for you. Both books detail the foaming-at-the-mouth, criminal greed of mortgage companies and banks that brought about the housing crash. BTW, both authors wrote or write for WSJ--impeccable credentials for writing about the destructive greed of capitalists who were, yes, aided by government, starting with Carter's and going all the way through G.W. Bush's. In America and other countries criminal capitalists are aided by government. And criminal capitalists aid government. Bush's largest campaign contributor in 2004 was Roland Arnall, the head of the criminal mortgage company, Ameriquest (he bribed Bush with $500,000). You should do some homework, seattle. Read Kirsten Grind's book. It's fascinating and very well-researched. But you very obviously don't have the courage. It would destroy your fantasy of capitalists as pure angels who have never done anything wrong in all of history. As we know, only government can do evil--I guess by forcing capitalists to do evil against their will. Uh-huh.

- magboy47.

March 2, 2013 at 3:30am

Last I looked, Magboy, GWBush was indeed part of the government. Are you asserting that dems were arguing against this sugar high? Hah. Far from it. From Clinton, through Bush, to Obama, all have aimed to pump up the economy on the backs of taxpayers. What else do you call a gov-guaranteed loan that isn't likely to be payed back? Whether for a mortgage or an education, these poor loans are guarantees of a future tax on producers. All because the Government wants to be seen as you rich uncle that gives you stuff. Of course, that's exactly what you crave, so I'm not surprised by your comment at all.

- seattleeng

March 2, 2013 at 6:09pm

'What else do you call a gov-guaranteed loan that isn't likely to be payed back?' Seattle, you just revealed your total ignorance of what caused the housing-market collapse. Bad loans were not guaranteed by anybody. The only thing guaranteed about them was that they would be criminally doctored by mortgage companies, banks, and even ratings agencies who got fat fees as they passed them along to the next sucker. No government forced them to do that. That was in no law. But cowardly, criminal greed was in their hearts. I'm sure you're a good, dedicated engineer, seattle. But you take an engineering approach to politics and economics, and you're out of your league. Human nature, not a mountain of statistics, is the key to understanding politics and economics. Because human nature is corrupt, both government and business are corrupt. But business is the more corrupt of the two, because its only concern is profit. And government people do not bribe themselves. Business people do. Your ignorance of human nature is jaw-dropping.

- magboy47.

March 2, 2013 at 6:45pm

Apart from the fact that the vast majority of the bogus mortgage-backed debt was NOT guaranteed by government or by a government agency, there is another critical aspect of the economics that seattle doesn't get. It is easy enough to observe that, in response to demand for MBS, the private market took to ginning up what amounted to bogus securities that were not the obligations of creditworthy or even legitimate borrowers, merely people whose names became attached to the paper in a deal that was, for them, too good to refuse. It is easy to see the benefit to bankers of selling phony securities. But where did the demand come from? Why was there so much more demand for such investment than the available supply of legitimate investments? The answer is too much money in the hands of the investor class. Contrary to what supply-siders and libertarians think, government deficits do not generate purchasing power. As long as they are financed, they remove form the economy -- in the form of the proceeds of government borrowing -- just as much purchasing power as they create, no different in this regard than taxes. The preference for debt financing is that it is easy to skew the reduction purchasing power toward the investor class without the ferocious political resistance that taxing them induces. The alternative of taxing labor and the middle class is much too damaging to aggregate demand. So, deficits don't increase the purchasing power of the investor class, they preferentially reduce it. This ought to favor consumption over investment, yet during the MBS bubble, there was a huge demand for investment in the form of mortgages. The reason was simply the enormous skewing of income distribution toward the wealthy. Money is not invested just because it is lying around. It is invested because there is demand for the output. If income distribution becomes skewed toward investors, capitalists, the wealthy, then demand is reduced at the same time that investable funds are increased. The balance between demand and investment opportunity becomes dangerously disrupted. Investors don't have productive enterprise to expand because demand is not expanding in line with their income. What to do? Mortgages seem like the perfect solution. Think of a mortgage as an investment in physical plant -- a house -- the provides services to consumers -- housing -- with already built-in demand -- the mortgagee. When you invest in business capacity, you have to be concerned about how the output will be sold, and without apparent demand, the investment will not be made, not matter what the supply-side nuts and libertarian wackos preach about giving money, as tax reductions and investment subsidies, to so-called "job creators." With a mortgage, the demand problem is seemingly solved. Even as you build the unit of capital, you appear to have solved the problem of demand. Of course, while the paper can be generated for quite a while without there really being adequate consumer income to support it, that doesn't mean the demand is really there. With cars or washing machines, if they are not moving out of the showroom, it is clear that the demand is not there. With financed houses that the mortgagees cannot really services, the disconnect between supply and effective demand does not show up for a while. When it finally does, an epic bust is inevitable. Thus, the housing crisis too is a direct consequence of the absolutely disastrous Reaganite, supply-side libertarian fiscal, tax, and trade policies that have dominated the US since 1980. All the talk about the need to save and invest, from which is derived the claim that more money in the hands of the wealth is better, is complete and utter nonsense. Only demand can support investment, even if the financial markets can obscure the connection for long enough to create a disastrous bubble. Thus, by adopting policies that direct a larger and large share of national nominal income into the pockets of the wealthy, we created the disaster. Naturally, the solution the morons propose to the disaster is further to decrease demand, through austerity, and to make the tax structure more regressive, dumping an even larger share of national income into the pockets of the wealthy. This is guaranteed to impoverish us if pursued. Do the morons care? Of course not. They are first of all too ignorant to know what to care about and second of all to dominated by the short-term self-interest of the plutocracy to give a damn. (Note: The runup in unsustainable consumer credit is also due to these same macro-economic phenomena. I leave it to the reader to work out the mechanics, but they are essentially the same as with MBS.) The correct solutions are more government spending and a much more progressive tax system, so that aggregate demand is supported and unspendable, uninvestable wealth does not accumulate in the hands of the wealthy. Our economy is so productive already that, unless we get more income share to the middle class and working class, we will be mired in unemployment for years to come.

- roidubouloi

March 3, 2013 at 3:29pm

The better question is why Americans are addicted to real estate, in this case residential real estate. For example, in Germany, the home ownership percentage is only 42%. By comparison, in Greece (Greece!) it's 80% (in 2009). We often hear about the military-industrial complex, and more recently about the health care-industrial complex. What about the housing-industrial complex. It's tentacles are everywhere in my community and yours. Yes, communities, because it's mostly a local phenomenon. From the local politicians who serve the interests of the industry by financing the infrastructure (mainly roads, but also utilities) needed to build the housing and by rezoning the land and issuing the permits to make it all possible, to the bankers who finance the development and construction, to the builders who construct the housing, to the engineers, architects, brokers, and insurers and their agents who facilitate the transactions. America isn't just about business, it's about the real estate business. Is it any wonder that the most affluent in many communities are part of the real estate-industrial complex. Is it any wonder that politicians, many of whom are part of the real estate-industrial complex, are all too willing to assist the industry. Zoning battles and new road projects are merely the most visible friction created by the industry and the politicians who serve the industry. The federal government merely provides an assist for what is driven at the local level. So, back to the fundamental question: why? My view is that real estate, especially housing, has been at attractive investment for Americans, and not just attractive, but the only alternative that provides the ordinary American with leverage - the same leverage that allows wealthy investors to buy and sell entire companies with little of their own funds, but in which ordinary Americans are not allowed to participate. What are other alternatives for ordinary Americans? Picking stocks is one, but not a good one. Index funds is another. Better, but what goes up also comes down, and works only if funds are committed and not needed over a long period, and only if the investor has the good fortune not to need the funds when the index fund is down. So my observation is that the real estate-industrial complex is driven by local special interests, only marginally assisted by the federal government, with ordinary Americans participating in large numbers because it's the only game for which they qualify.

- rayward

March 4, 2013 at 7:25am

It is quite perverse, rayward. With everything else - cars, home appliances, computers, food, clothing -- we understand that we become wealthier when the prices fall relative to income. With real estate, we imagine we are wealthier when prices rise. Collectively, we certainly are poorer. But those who manage to own gain purchasing power at the expense of those who don't. Hence the zeal to buy and the institutional supports for prices, from interest subsidies to mortgage subsidies. Imagine if the government were doing its best to make the prices of everything else go up in real terms. Riots would not be long in coming. If there were indeed any other way for the middle class to accumulate wealth (which does not include being routinely screwed by securities markets and the finance industry) perhaps the perception would change

- roidubouloi

March 4, 2013 at 10:30am