Mortgage giants in crisis — yet the public seems locked in ‘whatever’ mode

Secretary of the Treasury Henry Paulson on Sunday announces steps the Treasury and the Fed are prepared to take to help Fannie Mae and Freddie Mac.
REUTERS/Joshua Roberts
Secretary of the Treasury Henry Paulson on Sunday announces steps the Treasury and the Fed are prepared to take to help Fannie Mae and Freddie Mac.

What we need for these times is an anti-serenity prayer, a friend remarked over dinner last month.

He didn’t mean to detract from recovering alcoholics, frustrated parents and so many others who have held a grip on sanity by uttering the words, “God grant me the serenity to accept the things I cannot change.”

Instead, he was talking about a “whatever” attitude that is pervasive in America. Plenty of pressing problems could be corrected by tough-minded thinking and strong action. But despite campaign rhetoric, change is the hostage of an almost irrational complacency.

The Fannie and Freddie crisis confronting financial markets prompts fresh thinking, if not praying, about anti-serenity.

A sweeping bailout package
Anxiety over the giant mortgage finance firms Fannie Mae and Freddie Mac propelled the markets on a wild ride Friday. To fend off a colossal disaster, Treasury Secretary Henry Paulson Jr. took the unusual step of a Sunday night announcement of a sweeping government bailout package in which the taxpayers would back the mortgage giants with billions of dollars in loans and investments.

Congress and the White House expect to work out specifics of the plan this week. Meanwhile, reports of exactly what this means for the taxpayers are vague but ominous.

“Any move by the Fed or Treasury to provide assistance would be unprecedented and would open up an exposure for taxpayers that is potentially enormous,” the Washington Times reported

“Standard & Poors Corp. earlier this year estimated that a bailout of the mortgage giants could cost the government as much as $1 trillion and could even drag down the Treasury’s own gold-plated AAA credit rating,” the Times said.

The steps proposed on Sunday fall far short of that worst-case scenario. But they don’t erase it as a possibility down the treacherous road that has been the mortgage lending crisis.

New York Times business writer Gretchen Morgenson noted that because the federal government established Fannie and Freddie, investors have view them as backed, at least implicitly, by taxpayers. The companies gained huge advantages from the arrangement. For example, they made more money on their mortgages because they paid less to borrow in bond markets.

“These profits enriched Fannie and Freddie shareholders over the years and bestowed significant wealth on the companies’ executives,” Morgenson wrote. “Now it looks as if the bill for that largess is coming due. Of course, it will be borne by the usual bagholders: United States taxpayers. You and me.”


Where’s Ross?
Even the toughest critics are saying the government had no choice at this point but to rescue Fannie and Freddie. The fallout from their failure would have been catastrophic.

The anti-serenity piece for this picture is in the background. The government already is in debt to the tune of nearly $10 trillion, a level that would have been seen as a crisis in itself when President Bush’s father occupied the Oval Office in the early 1990s.

Now the White House plans to ask Congress to raise the debt ceiling for the Fannie-Freddie bailout.

It is so ’90s, but I’ll ask anyway: Where are the deficit hawks? If they had squawked as loudly during this decade, we would not be suffering such a profound sense of insecurity over the government’s ability to handle the Fannie-Freddie debacle.

The deficit-spending issue surfaced last week at a town-hall meeting the presumed GOP nominee, Sen. John McCain, staged in Denver.

“We must also get government’s fiscal house in order,” McCain said. “American workers and families pay their bills and balance their budgets, and I will demand the same of the government. A government that spends wisely and balances its budget is a catalyst for economic growth and the creation of good and secure jobs.”

Marc Ambinder, blogging on The, was not impressed.

“He just will ‘demand’ it,” Ambinder wrote. “And he sets no timetable. Right now, based on what McCain and the campaign have said, McCain proposes (PDF) more than $650 billion a year in tax cuts, which is equivalent to a third of domestic spending, and is offset by, first, $160 billion in unspecified domestic cuts. … The rest would come from economic growth after some sort of rapid sequence intubation of fresh optimism into the economy and large-scale reform of Medicare, Medicaid and Social Security.”

Short on specifics

McCain’s plan is short on specifics for which federal programs he would chop down, Ambinder said.

“Aside from oil and ethanol subsidies, we don’t know how he’d cut corporate welfare or even how he defines corporate welfare,” he wrote. “And then there’s the war, the cost of reconfiguring DoD for new threats, etc.”

The Center for Tax Policy summed up (PDF) McCain’s economic plan this way: “McCain’s reduced individual and corporate rates could improve economic efficiency and increase domestic investment, but the larger future deficits would reduce and could completely offset any positive effect.”

For his part, Sen. Barack Obama, the presumed Democratic nominee, said McCain’s plan doesn’t add up.

Easy for Obama to say. “It’s not a goal he’s even trying to reach,” according to analysis by the Associated Press.

Obama and the deficit
Not only does Obama say he won’t eliminate the deficit in his first term, the AP said, he frankly says he’s not sure he’d bring it down at all in four years, considering his own spending plans.

“I do not make a promise that we can reduce it by 2013 because I think it is important for us to make some critical investments right now in America’s families,” Obama told reporters when asked if he’d match McCain’s pledge.

Obama plans to raise $100 billion annually by increasing taxes on Americans making more than $250,000 a year. That money would be used under his plan to pay for health care and tax cuts for low- and middle-income earners. He has said ending the Iraq war would generate about $80 billion a year, but he’s not using that to pay down the deficit either, AP said. Instead, he said that money could help pay for more government programs like health care, education, housing and public safety.

The truth is that the rising costs of Social Security, Medicare and Medicaid trap both candidates in a fiscal box where there is little room to maneuver while also helping hard-hit families through tough economic times.

Still, deficit reduction is one valid strategy for economic recovery. The question is whether voters even care after years of numbingly empty deficit-cutting rhetoric.

Don’t blame the politicians. They would rush to action in response to overwhelming demand from voters. Ross Perot rattled serenity over deficit spending in the 1990s. Voters chimed in. The budget eventually was balanced. But it took sacrifice. Taxes went up here and there. Some benefits were slashed.  

Looking for the author

The serenity prayer made news in its own right last week after a Yale Law School librarian raised doubts about its origins. It had long been attributed to Protestant theologian Reinhold Niebuhr. But Fred Shapiro, the librarian, said he had found usage that pre-dated 1943, when the Niebuhr family thinks the theologian, a prominent public speaker, first used it, Reuters reported.

I wonder if there is an author in our midst for the anti-serenity prayer that could galvanize Americans — not only on fiscal discipline, but also on global warming, energy conservation and a long list of other pressing challenges.

No more whatever.

Sharon Schmickle writes about foreign affairs and science. She can be reached at sschmickle [at] minnpost [dot] com.

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Comments (2)

  1. Submitted by John N. Finn on 07/14/2008 - 12:46 pm.

    James Kunstler’s Monday morning blogs are always entertaining, if not conducive to serenity. Today’s comments include ones on Fannie and Freddie.

  2. Submitted by Bernice Vetsch on 07/14/2008 - 11:43 am.

    At least Obama is honest about the Bush deficit debacle. It may take a decade to pay them off and AT LAST the wealthy will be asked to pay something approaching their fair share.

    For “McCain’s large-scale reform of Medicare, Medicaid and Social Security,” read privatization, destruction, completion of transfer of country’s wealth from the poor and middle classes to the rich and too bad if you get sick, old, widowed or disabled. Pull up those bootstraps, doggonit. We are all in this alone, as Woody Allen says.

    Moreover, McCain says we must stop crippling business with our onerous regulations. (I guess he didn’t notice that the lack of same, due to legislation FORBIDDING regulation of lenders that his economic advisor, Phil Gramm, let Wall Street lawyers write in the year 2000 is the basic reason for both Enron and the current housing crisis.)

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