Sweet Bernanke-Paulson's Baadassss Song

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In 1971 appeared a new wave, X-rated, black exploitation film titled Sweet Sweetback’s Baadasssss Song. Financed by its director (Melvin van Peebles) as a labor of love on a shoestring budget of $50,000, it told the story of its hero, a male prostitute named Sweet Sweetback.

Bernanke and Paulson have now sung their very own baadassss song. They have sold out themselves and the American people in a futile attempt to keep two burnt-out cases, Fannie Mae and Freddie Mac, alive and nubile. They are the male prostitutes in this real-life drama. In a state of intellectual darkness, these leaders of Fed and Treasury have engineered a rape. It is a rape of helpless American taxpayers, the shenanigans of their benighted political financial leadership being well beyond their control.

Fannie Mae and Freddie Mac are known as "Government sponsored enterprises" or GSEs. Because of their ability to raise funds at advantageous rates, due to the government sponsorship, they over-stimulated the housing market to unheard of heights by buying mortgages originated by banks nationwide. Now, as these hallmark institutions of government manipulation of the housing market fail, the failure of government itself becomes ever more evident. The attempt to restore the GSEs cannot hide their failure from anyone who looks. That failure is already registered in the financial markets. Once a $90 stock, FNM is now a $10 stock. And FRE has fallen from over $70 to $7. The stocks have drastically slumped because of the bad investments of the GSEs in mortgages, investments urged on and subsidized by longstanding policies of the Federal government.

On July 13, 2008, Fed and Treasury announced steps to shore up the two mortgage giants. These steps include access to the Fed’s lending at a preferential rate of 2.25 percent, greatly increased access to credit from the U.S. Treasury, and the purchase of stock in these companies by the U.S. Treasury. Between them, the Fed and the U.S. government are nationalizing Fannie Mae and Freddie Mac.

The recommended measures, being hustled through Congress, have several negative consequences. (1) The GSEs are to be kept in the business of being the major end-buyers of housing loans. This maintains the same system that has led to the current mortgage market woes and does nothing at all to rectify the situation. (2) By maintaining the system and opening both the Fed and the Treasury to the GSEs, the latter can actually become even larger. (3) They will also be even more beholden and responsive to the political forces surrounding the housing business.

(4) The Fed will provide the GSEs with money loans, on either Treasury or a GSE’s own debt as collateral. That is directly inflationary and amounts to printing money and placing it at the disposal of the GSEs. (5) If money has to be created for the GSEs, there is less that can be created for all the other many banks that are in trouble. The Fed is less likely to discount their bad paper. This may be one reason (beyond the Indymac failure) why regional bank shares fell so sharply on the news (an index was down more than 8 percent.).

(6) Feeding the GSEs taxpayer dollars from the Treasury is a pure bailout. It rewards them for financing too many mortgages and too many mortgages of low quality. It means that Congress intends business as usual. (7) More government money and government stock ownership enlarge the GSEs while worsening the control and financial structures of the company. Any control by the government is going to enhance politically-motivated conflicts about the company policies and retard taking politically unpopular measures. The GSEs become even more of a political football than they already are.

(8) Another negative result is that the uncertainty surrounding the financial crisis will be prolonged. (9) Instead of the Fed and Treasury strengthening the GSEs, the GSEs will weaken the Fed and Treasury, that is, weaken the government. The government debt will rise. This jeopardizes other government programs, which is likely to end up either being inflationary or mean higher taxes. The Fed is basically losing a degree of independence while kowtowing to the dominant political forces, which weakens it and raises the odds of higher inflation. (10) Giving the GSEs taxpayer monies weakens the country’s productivity. It takes capital out of the private sector and transfers it to an industry that is already overbuilt.

Bernanke is destroying the independence and the balance sheet of the Fed. Whatever independence it may have had is being compromised as it becomes more and more a creature of the national government. The reason for this seems to be Bernanke’s fears. He has little or no confidence in the ability of the capital markets to recover, in a short timeframe at least. In this respect, he is a Keynesian. Bernanke has exaggerated fears of declines in asset prices, especially stock prices. He overreacted and caved in the Bear Stearns case. He has made clear his anxieties and apprehensions about the banking system, derivatives, and investment banks. But price declines are just what is needed to place depreciated assets in the hands of those willing to shoulder the risks of owning them. Price declines will raise the expected rates of return on assets to proper levels. By creating a stock price bubble, inflation lowered rates of return below their appropriate levels. This had numerous bad consequences which include more corporate scandals, more accounting peccadilloes, and more investments that destroy value rather than create it. A stock market decline is just what is needed to lead to a resolution of these and other such financial problems caused by the earlier inflation. Now Bernanke fears the demise of the GSEs. The result seems to be that Paulson, who is strongly statist and a stronger figure, is ruling the roost.

It would not be difficult to transform the GSEs into completely private enterprises, but Bernanke and Paulson have spurned the many options to do that. At one time, the steel industry in Britain was fully nationalized. It was fully a creature of the government, but the government managed to denationalize steel in the 1950s. Our system, by contrast, is moving in the opposite direction. Fed and Treasury are giving us the nationalization of the GSEs, which is bound to produce even worse results from their lending activities.

This treatment of the banking crisis is one more proof that the American political system is not working. It is producing more and more dysfunctional results, such as wasteful wars, destruction of civil liberties, limits on speech, resurrected and huge agricultural subsidies, pork barrel projects, diversion of corn to ethanol, destruction of the dollar, a failing Medicare system, etc. The system hasn’t worked for a very long time; but the problems caused by government are simply so huge today that anyone can see them who cares to look; anyone, that is, except the mass media.

Democracy is premised on an educated and informed public. But the mass media have been co-opted by the political system. Consequently, they are not looking and not reporting, and that spells eventual disaster. What we need to see is a bevy of mass media columnists who not only discern these obvious problems but tell the American public in plain English where they come from, namely, a government with greatly excessive powers to tax and legislate. And furthermore that the solution lies in a new frontier, which is that of free markets.

Such tectonic shifts in the mass media show no signs of happening. Consequently, the public and taxpayers will not, en masse, understand the import of the Bernanke-Paulson Baadassss Song. In headlines, they will read such words as rescue, plan, overhaul, and bolster. When they hear bailout, they will think it is a good thing. They will not even realize that they are the victims of a crime.