US stocks erased gains to end lower as investors took profits following the approval of a $700bn (£394bn) plan to rescue the US financial system.My thoughts have been like this:
Investors had been anxious for the bill to pass but said uncertainty remained about how the economy would recover from the credit crisis. The plan involves using taxpayers' money to buy banks' bad debts. The Dow Jones Industrial Average ended down 157 points at 10,325, after earlier surging as much as 300 points.
However, concerns over the health of the US economy remain. US employers cut 159,000 jobs last month, the steepest decline in more than five years and the latest evidence that the economy may be entering a recession. "I think there are still a lot of questions as to whether or not this bill is going to save the economy anyway," said Tom Bentz, an analyst at BNP Paribas in New York.
This was an e-mail I sent to Morning Report four days ago.
Dear Team,
"We will get through this?" Geoff Robinson asks. The so-called rescue package was never going to work anyway, so its failure is but a mere hiccough in the tumbling of the house of cards that is the US and the world economy. All these economists and correspondents, and yourselves, are ignoring the fundamental fact that our economy is a wholly owned subsidiary of the environment, our planet, and not the other way round. The actual cause of our crashing economies is not crooked bankers, but the unreality of our economic aspirations colliding with the reality of the finiteness of our planet, oil depletion being the most urgent and important of these issues. Until we recognise this simple fact, that permanent growth on a finite planet is a physical impossibility, we are going to go through a process that will make the depression of the nineteen thirties look like a mildly inconvenient and innocent episode of last century's history.
Yours faithfully,
Earlier, on a BBC web page, a Jon Kelly blog entitled No Place Like Home, discussing the bursting of the housing bubble, I was replying to some postings many of which were blaming individuals for their house purchasing decisions for the bubble, which may be true, but it's like blaming diabetics for being fat, or smokers for their lung cancer, and leaving it at that. The fact is that the millions of people who did make these decisions did so so that others could enrich themselves, and those that are now content to blame these millions are quite entitled to do so, but it will be their money that is going to pay for these decisions. My thought is that having sufficient financial discipline in any economy would have saved people (society) from their own mistakes and avoided the bubble in the first place. I find this inability of so many people not to join the dots quite amazing; people, particularly American people it seems, would rather suffer their economy going down the gurgler than modify their stance on the basic tenet of capitalism, that we are free to make our own decisions, whether good or bad, and to hang with the consequences. To me, it's an absurd denial of the simple fact that we all of us live in a community, and what one person does in this community is bound to have ramifications for everyone else. I contend the question should be, "Was what is happening predictable, and was it avoidable?" I think the answer is yes to both questions. Many conservative (with a small "c") commentators and economists were highly and vocally concerned about this housing bubble and the explosion of credit, fuelled by greedy banks, finance companies, speculators, a corrupt and incompetent management of two giant mortgage suppliers, pork-barrel politics and kick-backs, and grossly inadequate monetary controls and an incompetent government and Federal Reserve. Some people posting seems quite happy to blame the house buyers, but that isn't helpful, because this housing bubble is now threatening the entire world economy. In other words, the healthy functioning of a national economy isn't just the province of the "market", but of government through effective regulation, with a long-term and sustainable strategy for the whole economy.Another e-mail sent by me to Kathryn Ryan follows an interview with Rod Oram a week ago.
The "credit crunch" (actually a solvency crunch) is a prime example of the absurdity that the "market" is the final arbiter of our national and international economies, and those very companies and executives who keep repeating ad-infinitum "keep government out of business" are the very ones now begging and screaming for government help to save them. And because bank and financial market failure could bring down the entire economy we are saving them, the rats are leaving with their multi-million dollar bonuses and retiring to the Bahamas, whilst the taxpayer, the ordinary citizen, the majority of them actually relatively poor, pick up the bill, hundreds of billions of dollars, trillions even, which could have gone instead to a health system in the USA that might actually work, or a railway system that might actually deliver a service or a renewable energy strategy that might begin to save our planet.
Dear Kathryn and Team,
Following your discussion with Rod Oram - the likely total cost of the Iraq War is at least US$1.5 trillion and the latest rescue package is $1 trillion, plus another trillion or two for Fannie Mae and Freddie Mac. In the Scientific American in December 2007 a well researched article suggested that a government subsidy of about half a trillion dollars could build massive solar power facilities in the south-west of the USA which would provide about 69% of the US's total electricity needs and about 35% of total energy needs, enriching the economy and helping save the planet. This sort of calculation reveals the true opportunity cost of what has been happening in the US, and why governments should not be bailing out crooked investment companies and fighting illegal wars, and why they should be abandoning their present ruinous laissez-faire economic policies.
Your faithfully,
You might think that with the economic and fiscal crisis in the USA that no sefl-respecting American could possibly bring themselves to vote Republican in the forthcoming Presidential elections. But, guilty Republicans, Dominic Lawson, the British commentator for the Independent newspaper, comes to your rescue. This is what he recently wrote:
Dominic Lawson: Democrat fingerprints are all over the financial crisisNeedless to say, I took exception to this analysis:
The least well off are going to face the most stringent terms for mortgages
Friday, 3 October 2008
Of all the characteristics of a successful politician, none is more essential than bare-faced cheek. Never has this been more evident than in the past fortnight, as senior Democrat members of the US legislature have sought to lay all the blame for the country's financial crisis on the executive arm of Government and Wall Street.
Neither of these two institutions is blameless far from it. Yet when I see such senior Democrats as Barney Frank, Chairman of the House Financial Services Committee, and Christopher Dodd, Chairman of the Senate's Banking Committee, play the part of avenging angels well, I can only stand in silent awe at the sheer tight-bottomed nerve of it. These are men with sphincters of steel.
What is the proximate cause of the collapse of confidence in the world's banks? Millions of improvident loans to American housebuyers. Which organisations were on their own responsible for guaranteeing half of this $12 trillion market? Freddie Mac and Fannie Mae, the so-called Government Sponsored Enterprises which last month were formally nationalised to prevent their immediate and catastrophic collapse. Now, who do you think were among the leading figures blocking all the earlier attempts by President Bush and other Republicans to bring these lending behemoths under greater regulatory control? Step forward, Barney Frank and Chris Dodd.
In September 2003 the Bush administration launched a measure to bring Fannie Mae and Freddie Mac under stricter regulatory control, after a report by outside investigators established that they were not adequately hedging against risks and that Fannie Mae in particular had scandalously mis-stated its accounts. In 2006, it was revealed that Fannie Mae had overstated its earnings to which its senior executives' bonuses were linked by a stunning $9.3billion. Between 1998 and 2003, Fannie Mae's executive chairman, Franklin Raines, picked up over $90m in bonuses and stock options.
Yet Barney Frank and his chums blocked all Bush's attempts to put a rein on Raines. During the House Financial Services Committee hearing following Bush's initiative, Frank declared: "The more people exaggerate a threat of safety and soundness [at Freddie Mac and Fannie Mae], the more people conjure up the possibility of serious financial losses to the Treasury which I do not see. I think we see entities that are fundamentally sound financially." His colleague on the committee, the California Democrat Maxine Walters, said: "There were nearly a dozen hearings where we were trying to fix something that wasn't broke. Mr Chairman, we do not have a crisis at Freddie Mac and particularly at Fannie Mae under the outstanding leadership of Mr Franklin Raines."
When Mr Raines himself was challenged by the Republican Christopher Shays, to the effect that his ratio of capital to assets (that is, mortgages) of 3 per cent was dangerously low, the Fannie Mae boss retorted that "our assets are so riskless, we could have a capital ratio of under 2 per cent".
Maxine Walters' complaint about previous attempts to bring the great state-sponsored housing finance bodies under stricter control was partly a reference to Bill Clinton's efforts. Last week the former President acknowledged that "responsibility" for the absence of proper regulation rested "with Democrats who were resisting any efforts of Republicans in Congress, and earlier when I was President and tried to impose tighter standards on Fannie Mae and Freddie Mac". Then, as now, members of his own party saw all such initiatives as unwonted attacks on the chances for low-earners, and particularly African-Americans, to own their own homes.
From its inception in 1938 Fannie Mae (and later Freddie Mac) was designed to make housing finance available to "ordinary Americans". This was a noble aim. In the 1970s another Democrat President, Jimmy Carter, introduced legislation which demanded that such bodies enhance their lending to minorities. Again, this was based on a noble idea: to stamp out racism in the mortgage market. Thus by 1998 you had the Federal Reserve Bank of Boston producing a document entitled "Closing the Gap: a Guide to Equal Opportunities Lending", which instructed banks that an applicant's "lack of credit history should not be seen as a negative factor" in obtaining a mortgage. As Stephen Malanga of the Manhatta *Institute notes: "Of course the new federal standards couldn't just apply to minorities. If they could pay back loans under these terms, then so could the majority of loan applicants. Quickly, these became the new standards in the industry. As the housing market boomed, banks embraced these new standards with a vengeance. Between 2004 and 2007, Fannie Mae and Freddie Mac became the biggest purchasers of subprime mortgages from all kinds of applicants, white and minority, and most of these loans were based on lending standards promoted by the Government." One of the few journalists to see where this would lead was Jeff Jacoby, of the Boston Globe. Last week he reminded his readers what he had written in 1995: "Our banks are knowingly approving risky loans to get the feds and the activists off their backs... When the coming wave of foreclosures rolls through the inner city, which of today's self-congratulating bankers, politicians and regulators plans to take the credit?". Jacoby adds now: "Barney Frank doesn't. But his fingerprints are all over this fiasco."
It's true that the improvident lending was not initiated by Fannie and Freddie: their role in this was to buy these loans and sell them on but then the music stopped. Cynical students of the American political system will note that the biggest recipient of campaign contributions from the munificent duo of Fannie and Freddie over the past 20 years was one Christopher Dodd, Democrat Chairman of the Senate's Banking Committee.
Rather surprisingly, given that he has only been in the Senate for four of those years, the second biggest beneficiary was Barack Obama. In August the Washington Post reported that Obama's presidential campaign team had sought the advice of Franklin Raines "on mortgage and housing policy matters". Perhaps Mr Obama's team just wanted to know where all the bodies are buried there are rather a lot of them.
The saddest outcome of all this within America apart from the crippling cost to the nation's taxpayers is that the very people the Democrats had intended to help will be the biggest victims: for many years to come banks will demand the most stringent terms for mortgages to the least well off.
In the meantime, let us praise Congressman Artur Davis of Alabama, who confessed this week: "Like a lot of my Democrat colleagues I was too slow to appreciate the recklessness of Fannie and Freddie when in retrospect I should have heeded the concerns raised. I wish my Democrat colleagues would admit that we were wrong." I fear Congressman Davis will not go far with this attitude but at least he will be able to look at himself in the mirror.
This article is a pointless and unseemly tirade against the Democrats - there's a very dirty kettle here, and a somewhat tarnished pot. So the Democrats foiled some efforts to rein in FMae and FMac - not a good idea. But Dominic Lawson, in his haste to blame the Democrats for everything that's gone wrong, seems completely blind to the sheer cosmic scale of malfeasance in the US financial and business institutions, under eight years of the most corrupt and incompetent Republican administration the US has probably ever suffered.
So, other Americans than Republican share some of the blame for this crisis, of course they do, but you know, there was a President once who used to have a small, framed notice on his desk, "The buck stops here". Dominic, you wish to see some contriteness in Democrats, fine, but if mea culpas are to become the fashion, then the whole stinking mess of the Republican administration should be flagellating themselves and the blood should be dripping on the floor.
