As the Roaring Twenties were sowing the seeds of the Great Depression, the chronicler of that age, F. Scott Fitzgerald, famously remarked, "The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function." By this measure, President George Bush’s Treasury Secretary, Henry Paulson, apparently is an "A" student.
In the run up to the Federal Reserve Board’s decision Sunday to essentially finance the takeover of collapsing investment bank Bear Stearns Cos. by J.P. Morgan Chase & Co., the president, Secretary Paulson, and other top Bush administration officials adamantly told us that aid to neighborhoods devastated by foreclosures would be an unacceptable bailout of lenders and would remove necessary market discipline from punishing the sins of “speculative” homeowners.
In fact, their comments suggested that the current free fall in home prices resulted mainly from excessive individual risk taking and bad bets by individuals—and that these speculators should suffer the consequences of their decisions. In Paulson’s March 3 statement to the National Association of Business Economists, for example, he spoke dismissively of government intervention.
"We know that speculation increased in recent years; a resulting increase in foreclosures is to be expected and does not warrant any relief,” he said. “People who speculated and bought investment properties in hot markets should take their losses just like day traders who speculated and bought soaring tech stocks in 2000.”
Just yesterday, on ABC News’ This Week program, Paulson again dismissed as ill advised the growing number of proposals in Congress to head off rampant foreclosures, instead arguing that "what’s going on right now is an inevitable decline, and a necessary decline, in home prices." Asked about help for homeowners, the Treasury Secretary was clear: "I’m looking very carefully at any proposal. But all the ones I’ve seen, which call for much more government intervention, raise more problems and do more harm than they would do good."
So it would be unthinkable, wouldn’t it, for the Treasury Department to throw taxpayer dollars into the breach while riding to the rescue of one of the central players on Wall Street responsible for originating, promoting, and selling billions of dollars of speculative overvalued mortgages? And surely the disciplinarian-minded Bush administration would never agree to open the Treasury to benefit other Wall Street firms holding mortgage-backed securities on which they already made record profits? Think again.
Defending the Federal Reserve’s dramatic decision Friday to guarantee 28-day loans by JP Morgan to Bear Stearns to avert a liquidity crisis, Secretary Paulson asserted without a hint of irony: "We’re very aware of moral hazard. But our primary concern right now, my primary concern, is the stability of our financial system." He then backed up those words on Sunday when supporting the Fed’s decision to guarantee the value of Bear’s entire loan portfolio after JP Morgan agreed to buy the investment bank for only $2 a share, and then to throw open the Fed’s discount window to the rest of Wall Street’s prime brokerages.
An awful lot of normal finger wagging about the hazards of bailing out those who make bad decisions from their consequences melted away in the face of Paulson’s primary concern—the health of Wall Street investment banks amid the greatest credit crisis since the Great Depression.
“The beneficiary of this bailout, remember, has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach,” noted New York Times reporter Gretchen Morgenson. “And as one of the biggest players in the mortgage securities business on Wall Street, Bear provided munificent lines of credit to public-spirited subprime lenders like New Century (now bankrupt). It is also the owner of EMC Mortgage Servicing, one of the most aggressive subprime mortgage servicers out there."
Now Bear’s “difficult to value” assets—our mortgages repackaged in pools—are guaranteed by the Fed, and ultimately U.S. taxpayers. Maybe it is not so mysterious, though, that the Bush administration could simultaneously scold defaulting homeowners for the sin of striving to join the "ownership society" promoted so vigorously by the president until recently, while reversing course to drop all pretense of personal responsibility when a large financial house is at the brink. It seems to be all a question of vision, of who matters in the end in the priorities of an ideology-driven White House.
Bear Stearns is too important to allow to fail, but millions of homeowners can end up on the street when home prices plummet sharply. The Wall Street holders of overvalued mortgage pools are too important to fail, but homeowners drowning in debt are told to keep paying not matter what.
Or consider that big oil company tax breaks are too integral to our energy plan, but relief for millions of drivers squeezed by rising gasoline prices would be bad economic policy. Or that eliminating the estate tax is promoted as tax fairness, but vetoing the expansion of health care to millions of children through the State Children’s Health Insurance Program as too expensive is prudent budgetary management. The list goes on and on.
There are many good reasons, of course, to act to avert a Bear Stearns bankruptcy when one considers the ultimate impact on millions of Americans and around the world of a Wall Street collapse. But the reasons are no less compelling when the devastation hits individual Americans directly—home by home, block by block, neighborhood by neighborhood—instead of mainly in the boardroom circles in which F. Scott Fitzgerald traveled, and which have changed so little since the Roaring Twenties.
It’s time for President Bush and Secretary Paulson to widen their vision and see the root causes of the problems afflicting Wall Street—under-regulated, bad lending practices that have left homeowners overly in debt. There is still time to act to correct the problem at its source, while doing something worthwhile for both American families and the financial markets. Averting a worsening global credit crisis requires action to restructure bad mortgage loans, put families into sustainable mortgages, buy up foreclosed properties that are ruining solid neighborhoods, and rebuild communities–not just seeing everything through the world of finance.
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David M. Abromowitz