Thursday, July 17, 2008

Federal Payouts to Mortgage Banks Are Criminal

Fed payouts to mortgage banks are a crime

Workers need bailout plan

By Jaimeson Champion
Published Jul 17, 2008 12:19 PM

Desperate times call for desperate measures. The capitalist class and its state are getting increasingly desperate as they attempt to stave off a global collapse of the financial system.

On July 13 the U.S. Treasury Department and the U.S. Federal Reserve unveiled a hastily devised plan aimed at rescuing Fannie Mae and Freddie Mac, the mortgage lending behemoths, from the brink of bankruptcy.

Combined, Fannie Mae and Freddie Mac own or insure half of the more than $12 trillion mortgage debt in the U.S. Bonds issued by Fannie and Freddie are held in massive quantities by governments and institutional investors around the globe.

The bailout plan is essentially a promise by the capitalist state to help finance Fannie and Freddie for the foreseeable future.

Officials from the Treasury and the Fed have been in constant contact with Wall Street in recent days in panicked attempts to persuade investors to stop dumping Fannie and Freddie stock and to continue purchasing bonds issued by the once-hallowed financial institutions.

The story of Fannie Mae and Freddie Mac begins back in the Great Depression. In 1938 President Franklin Roosevelt initiated the creation of Fannie Mae as a public financial institution. Roosevelt’s aim was to resuscitate the ailing Depression-era housing market by having the government back low-cost, fixed-rate mortgage loans. Fannie operated in this form until 1968.

That year, President Lyndon Johnson, who was growing increasingly worried about the escalating costs of the Vietnam War, pushed to have Fannie taken off the federal books. Johnson didn’t like having to devote part of the budget to mortgages for working families; instead he preferred to spend it on imperialist war in Southeast Asia. From that point forward, Fannie became a quasi-private institution known as a Government Sponsored Entity.

GSEs are shareholder-owned companies, but they have the expressed backing of the capitalist government. GSEs are owned and operated like private companies but are promised public funds if they should ever get into financial trouble. Freddie Mac was established in 1970 to operate as a sibling company to Fannie Mae.

Since decoupling from the federal books in 1968, Fannie and Freddie have taken on an ever-increasing role in the U.S. housing market. The two companies have moved steadily away from Fannie’s once chartered role of providing low-cost, fixed-rate mortgages. They have increasingly assumed the role of massive banks for the vast network of financial institutions involved in the U.S. housing market.

Fannie and Freddie facilitate lending in the U.S. housing market by issuing bonds to investors and then using the money from the bond sales to buy blocs of mortgages from banks. In this way, they grease the wheels of lending in the United States by taking illiquid assets off the banks’ hands and pumping money capital into the system.

During the housing bubble of 2002-2006 Fannie and Freddie grew astronomically as they became the two largest players in the unprecedented housing market boom. The ability of Fannie and Freddie to purchase massive blocs of mortgage loans from the banks helped set the stage for the proliferation of a host of dubious mortgages with untenable rates. The ability of mortgage holders to pay their mortgages was no longer important to many lenders, as they knew they could easily, and quickly, sell the loan to a larger institution.

Fannie and Freddie raked in massive profits for their shareholders during the bubble years, but, like seemingly every other financial institution, insatiable greed led them to become increasingly leveraged and loaded down with fictitious capital.

Around the globe, banks—the heartbeat and lifeblood of modern monopoly capitalism—are steadily becoming insolvent. Banks of all shapes and sizes are going belly up.

From investment banks like Bear Stearns, to commercial lenders like IndyMac and Northern Rock, and now to the GSEs like Fannie and Freddie, it has been one bank-run after another. There is no end in sight as the largest housing market collapse since the Great Depression continues to drag a multitude of large financial institutions to the brink.

Capitalism: exploitative, crisis-prone and not worth saving

As with the Bear Stearns collapse in March, the capitalist-controlled media have been pumping out the message that the bailout of Fannie and Freddie is necessary because the institutions are “too big to fail.” The refrain goes that if Fannie and Freddie go down, the systemic damage their collapse would unleash would cause even greater economic suffering.

How many companies need to be bailed out with public money before it becomes clear that this rotten, exploitative and crisis-prone economic system is not worth saving? The capitalist bankers and bosses have run their ships into the ground. Why should the workers, whom they daily oppress, be forced to provide them with lifeboats?

In any bailout of Fannie and Freddie, the money should go directly to workers who have faced or are facing foreclosure, or the workers who have suffered when their pensions and retirement savings were invested in these companies. But the capitalist state would never truly get behind that kind of a rescue plan. The state’s only loyalty is to the capitalist class.

It is painfully clear that the growth and expansion of free markets, which took place in the wake of the dissolution of the Soviet Union, have been an unmitigated disaster for workers and oppressed around the globe.

In the past two decades, proponents of free-market economics have denounced socialism as inefficient and utopian. They claimed that the growth of “democracy and free markets” would bring about a post-Cold-War era of global prosperity.

Yet with the global financial system on the precipice of collapse, millions of workers forced from their homes by foreclosure, skyrocketing energy prices and nearly 1 billion people going hungry every year, the idea that “democracy and free markets” will bring about an era of global prosperity seems ridiculously utopian.

Capitalism is clearly failing, but what is the alternative? The answer lies in the development of working class consciousness and the renewed struggle for socialism.

Karl Marx wrote that the capitalist state is set up to manage the common affairs of the capitalist class. This fact is evident today as Republicans and Democrats hastily put aside their manufactured election year differences in order to legislate the bailout plans being concocted by the Treasury and the Fed.

The working class, long subject to the divisive prejudices deliberately sown among us by the ruling class, must unite in our own common class interest and take the offensive against the capitalist class.

Private ownership of the means of production is at the root of this deepening economic crisis. The abolition of private property and the development of socialism can provide the way out of this crisis, and ensure that the kind of economic suffering this crisis has wrought never occurs again.

While the abolition of private property sounds like a daunting task, the reality is that the ruling class has already laid the foundations for its own demise.

By organizing billions of workers into a vast productive network, where everything from the extraction of raw materials to the sale of the final commodity is linked, the ruling class has already socialized the productive capacity of society. An organized army of workers already has the reins to the productive apparatus.

In this period of extreme economic crisis, the capitalist class would find itself in even bigger trouble in the face of concerted and well-organized strikes, walkouts, plant takeovers and militant resistance to the banks that are seizing our homes. A united working class could quickly bring the vast machinations of global capitalism to a screeching halt.

In the coming period, which will be marked by ever-increasing economic instability, it is incumbent upon the entire revolutionary left to do everything possible to help foster militant working-class solidarity and to renew and reenergize the global class struggle. There is a world to win.
Articles copyright 1995-2008 Workers World. Verbatim copying and distribution of this entire article is permitted in any medium without royalty provided this notice is preserved.

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Failing banks line up for gov’t handouts

By Milt Neidenberg
Published Jul 17, 2008 12:10 AM

Panic is spreading among Wall Street investors. Have their dreams of an everlasting, profit-driven capitalist economy à la Goldilocks—not too hot, not too cold, just right—become a nightmare?

After having reached dizzying heights of optimism, the transnational banking empires, financial satellites and corporate boardrooms—which have gathered riches beyond belief at the expense of the multinational working class and oppressed nationalities—are now gripped by fear.

“Many investors are on edge after federal regulators seized the California lender, IndyMac Bank, one of the nation’s largest savings and loans, last week. With $32 billion in assets, IndyMac, a spin-off of the Countrywide Financial Corporation, was the biggest American lender to fail in more than two decades.” (New York Times, July 13)

IndyMac, the giant mortgage lender, had gone bankrupt and was bought at a fire sale by the Bank of America.

The article continued: “Time may be running out for some small and mid-size lenders ... but the troubles are growing so rapidly at some small and mid-size banks that as many as 150 out of the 7,500 banks nationwide could fail over the next 12 to 18 months, analysts say. Other lenders are likely to shut branches or seek mergers.”

Many more banks are on the hit list as the credit/debt crunch deepens. They are holding fictitious capital—like collateralized debt obligations, structured investment vehicles, hedge funds, derivatives and other incomprehensible financial instruments that are becoming nearly worthless paper.

Larger institutions will present financial reports in the third week of July and multi-billion-dollar write-offs are expected. The stocks of investment banks like Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs were battered following the run on IndyMac. National City Bank stopped trading after its stock plunged 20 percent, but started up later in the day. “Washington Mutual fell 27 percent, Wachovia dropped 12 percent. M&T Bank, which reported a 25 percent drop in its second-quarter earnings early Monday, fell 15 percent.” (Wall Street Journal, July 14)

Banks—large and small—feed the arteries of the capitalist state. Is their accelerating meltdown leading to a government bailout for which the worker/taxpayer will have to pick up the tab?

That’s what happened when Bear Stearns, the fourth-largest investment bank, went belly-up in March. The Federal Reserve Bank and the Treasury cranked out $31 billion, accepting subprime mortgage paper and other debt as collateral so JPMorgan Chase could buy Bear Stearns for peanuts.

Public money down the rathole

Can the U.S. government assume the humongous private sector debt incurred by a period of hyper-speculation, inflation and economic stagnation? The government is already burdened with a $9.5 trillion public debt, thanks primarily to debt service owed the banks and borrowing for costly imperialist wars and other military spending.

The government debt is concealed in a general fund, which is the recipient of all tax monies. The fund is guaranteed to cover two major areas before any other disbursements are made. What do they consider the top priorities? All interest payments must be made to the banks and all military expenditures must be covered. If anything is left over, maybe the government will meet some of its obligations to the people whose taxes keep it going.

Bank bailouts involve considerable risk for the government. The Federal Deposit Insurance Corp., which guarantees investors/depositors up to $100,000, has $53 billion set aside for this purpose. IndyMac alone will eat up at least $4 to $8 billion of that fund. The Federal Reserve has nearly $600 billion of debt on its books, based primarily on the global mortgage collapse. And under its legal statutes and obligations, it must provide funds to the government.

Printing money is one path to salvation but it debases the currency, causing hyper-inflation and driving down the value of the dollar in the global market. Letting banks and other capitalist entities fail is another path. That is also happening now.

These are dangerous times for the multinational working class and the oppressed nationalities. Even the 15 million union members are victims of stagflation and the vicious boom-and-bust cycles endemic to the capitalist system.

The bankers and the banking system itself are a leading cause of this capitalist crisis, responsible for the significant rise in hyper-speculation. No large-scale speculation in stocks, bonds and commodities like oil can take place without the banks. The banks supply the loans for speculation and accept all kinds of stocks and mortgages as collateral.

Déjà vu all over again?

The banks were the fundamental agent of the hyper-speculation that preceded the 1929 crash and the devastating economic collapse that followed. The banking crisis, which first developed during the “roaring twenties,” was cataclysmic. The banks were falling like trees in a tornado.

The first act of Democrat Franklin D. Roosevelt when he took office as president on March 4, 1933, was to proclaim a “bank holiday.” He shut down the entire banking system for four days—an unprecedented act that literally stopped the daily functioning of the capitalist system. Thus he began his dramatic restructuring of capitalism to save the system. And save capitalism he did.

The banking system is in crisis and is demanding the government put out the money to rescue the banks. Facing huge budget deficits in coming fiscal years, the government, whether led by Democrats or Republicans, will cut social programs to the bone—while health care is denied, jobs disappear, pensions are wiped out, and food and energy costs rise at an astronomical rate.

The prospects are for the capitalist crisis to grow deeper and more profound. It will propel the exploited and the downtrodden masses into struggle and has the potential to unleash worldwide revolutionary forces.

This is a profit-driven class system that enshrines the private ownership of the means of production. Yet it has developed these same productive forces to such a vast extent that they have outgrown the limitations of private ownership and become social in character.

The scientific-technological revolution has brought the means of production to such a level of development that they could feed, clothe, house and provide joyful lives for all of humankind. But a new system that socializes the ownership of the means of production must replace capitalism before they can be in synch with human needs. That system is socialism and it is objectively within reach.
Articles copyright 1995-2008 Workers World. Verbatim copying and distribution of this entire article is permitted in any medium without royalty provided this notice is preserved.

Workers World, 55 W. 17 St., NY, NY 10011
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