Government takeover of home mortgage lenders

Government takeover of home mortgage lenders

Main article: Federal takeover of Fannie Mae and Freddie Mac

The United States director of the Federal Housing Finance Agency (FHFA), James B. Lockhart III, on September 7, 2008 announced his decision to place two United States Government sponsored enterprises (GSEs), Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), into conservatorship run by FHFA.^[18][19][20] United States Treasury Secretary Henry Paulson, at the same press conference stated that placing the two GSEs into conservatorship was a decision he fully supported, and said that he advised "that conservatorship was the only form in which I would commit taxpayer money to the GSEs." He further said that "I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction."^[18] The same day, Federal Reserve Bank Chairman Ben Bernanke stated in support: "I strongly endorse both the decision by FHFA Director Lockhart to place Fannie Mae and Freddie Mac into conservatorship and the actions taken by Treasury Secretary Paulson to ensure the financial soundness of those two companies."^[21]

[edit] Major financial firm crisis

The collapse of Lehman Brothers was a symbol of the global financial crisis

On Sunday, September 14, it was announced that Lehman Brothers would file for bankruptcy after the Federal Reserve Bank declined to participate in creating a financial support facility for Lehman Brothers. The significance of the Lehman Brothers bankruptcy is disputed with some assigning it a pivotal role in the unfolding of subsequent events. The principals involved, Ben Bernanke and Henry Paulson, dispute this view, citing a volume of toxic assets at Lehman which made a rescue impossible.^[22][23] Immediately following the bankruptcy, JPMorgan Chase provided the broker dealer unit of Lehman Brothers with $138 billion to "settle securities transactions with customers of Lehman and its clearance parties" according to a statement made in a New York City Bankruptcy court filing.^[24]

The same day, the sale of Merrill Lynch to Bank of America was announced.^[25] The beginning of the week was marked by extreme instability in global stock markets, with dramatic drops in market values on Monday, September 15, and Wednesday, September 17. On September 16, the large insurer American International Group (AIG), a significant participant in the credit default swaps markets, suffered a liquidity crisis following the downgrade of its credit rating. The Federal Reserve, at AIG's request, and after AIG has shown that it could not find lenders willing to save it from insolvency, created a credit facility for up to US$85 billion in exchange for a 79.9% equity interest, and the right to suspend dividends to previously issued common and preferred stock.^[26]

Money market funds insurance and short sales prohibitions

On September 16, the Reserve Primary Fund, a large money market mutual fund, lowered its share price below $1 because of exposure to Lehman debt securities. This resulted in demands from investors to return their funds as the financial crisis mounted.^[27] By the morning of September 18, money market sell orders from institutional investors totalled $0.5 trillion, out of a total market capitalization of $4 trillion, but a $105 billion liquidity injection from the Federal Reserve averted an immediate collapse.^[28][29] On September 19 the U.S. Treasury offered temporary insurance (akin to FDIC insurance of bank accounts) to money market funds.^[30] Toward the end of the week, short selling of financial stocks was suspended by the Financial Services Authority in the United Kingdom and by the Securities and Exchange Commission in the United States.^[31] Similar measures were taken by authorities in other countries.^[32] Some restoration of market confidence occurred with the publicity surrounding efforts of the Treasury and the Securities Exchange Commission^[33][34]

Global banking reshaped

Global banking reshaped

This multimedia snapshot brings together coverage of the mounting crisis and its impact on the markets through links to in depth packages, interactive maps, audio, video and blogs.

The rising defaults on subprime mortgages in the US triggered a global crisis for the money markets. Many of the world’s leading investment banks have collapsed as a result and the US government has proposed a massive bail-out.

The crisis has become one of the most radical reshapings of the global banking sector, as governments and the private sector battle to shore up the financial system following the disappearance of Lehman and Merrill as independent entities and the $85bn government rescue of AIG.

Dealing with recession

Dealing with recession

Most economic regions are now facing recession, or are in it. This includes the US, the Eurozone, and many others.

At such times governments attempt to stimulate the economy. Standard macroeconomic policy includes policies to

• Increase borrowing,
• Reduce interest rates,
• Reduce taxes, and
• Spend on public works such as infrastructure.

Borrowing at a time of recession seems risky, but the idea is that this should be complimented with paying back during times of growth.

Likewise, reducing interest rates sounds like there would be less incentive for people to save money, when banks need to build up their capital reserves. However, as the real economy starts to feel the pinch, reduced interest rates is an attempt to encourage people to take part in the economy.

Tax reduction is something that most people favor, and yet during times of economic downturn it would seem that a reduction in tax would result in reduced government revenues just when they need it and then spending on health, education, etc, would be at risk. However, because higher taxes during downturns means more hardship for more people, increased borrowing is supposed to offset the reduction in taxes, hopefully affording people a better chance to weather the economic storm.

Finally it is at this time that public infrastructure work, which can potentially employ many, many people, is palatable. Often, under free market ideals, government involvement in such activities is supposed to be minimal. Even the other forms of “interference” is usually frowned upon. However, most states realize that markets are not always able to function on their own (the current financial crisis, starting in the US, being the prime example); pragmatic and sensible adoption of market systems means governments can guide development and progress as required.

Nonetheless, many governments have started to contemplate these kinds of measures. For example, South Korea reduced its interest rates, as has Japan, China, England, various European countries, and many others.

Many have looked to borrow billions or in some way come up with stimulus packages to try and kick-start ailing economies.

While these might be reasonably standard things to do, it requires that during economic good times, a reversal of some of these policies are required; interest rates may need to increase (one reason for the housing booms in the US, UK and elsewhere was that interest rates were too low during good times), borrowing should be reduced and debts should start to be repaid, infrastructure investments may not need to be as direct from government and private enterprise may be able to contribute, and most politically sensitive of all, taxes should increase again to offset the reduction in borrowing.

Some are also against government-based stimulus packages, arguing instead that tax cuts alone should do the job; individuals make better choices on consumption than governments. Nobel prize winner for economics, Paul Krugman addresses this noting the difference between private consumption and government stimulus:

But [private spending is] not what we’re talking about when we talk about stimulus spending: we’re not talking about the government buying consumption goods for the public at large. Instead, we’re talking about spending more on public goods: goods that the private market won’t supply, or at any rate won’t supply in sufficient quantities. things like roads, communication networks, sewage systems, and so on. And every Econ 101 textbook explains that the provision of public goods is a necessary function of government.

— Paul Krugman, Bad anti-stimulus arguments, New York Times, December 22, 2008

Each of these measures should no doubt come under scrutiny from opposition parties and the media, to ensure they are appropriate, but some, such as tax hikes during good times can be so politically sensitive, that governments may be afraid to make such choices, thus making economic policies during bad times even riskier as a result.

Even then, the severity of these economic problems means that these strategies are not guaranteed to work, or it may take even longer to take effect. For example, as quarterly figures for various companies start to come out, more and more companies are announcing losses, closures, layoffs or other problems; people are becoming very nervous about the economy and spending less.

The automobile industry in the US, for example, is feeling immense pressure with some of the largest companies in the world facing huge problems and are asking the government for some kind of bailout or assistance. Yet, the US public generally seems against this, having already bailed out the banks with enormous sums of money. If the automobile industry is bailed out, then other industries will all cry for more money; when would it stop?

In addition, as Joseph Stiglitz warns, some nations are turning to the IMF which is prescribing the opposite policies:

Many are already turning to the International Monetary Fund (IMF) for help. The worry is that, at least in some cases, the IMF will go back to its old failed recipes: fiscal and monetary contraction, which would only increase global inequities. While developed countries engage in stabilizing countercyclical policies, developing countries would be forced into destabilizing policies, driving away capital when they need it most.

— Joseph Stiglitz, Let’s throw away the rule book; Bretton Woods II must establish economic doctrines that work in emerging economies as well as in capitalism’s heartland, The Guardian, November 6, 2008

In Iceland, where the economy was very dependent on the finance sector, economic problems have hit them hard. The banking system virtually collapsed and the government had to borrow from the IMF and other neighbors to try and rescue the economy. However, Iceland has raised its interest rates to some 18%, partly on advice from the IMF. It would appear to be an example where high interest rates may be inappropriate. The economic problems have led to political challenges including protests and clashes.

It may be that this time round a more fundamental set of measures need to be considered, possibly global in scope. The very core of the global financial system is something many are now turning their attention to.

A crisis of poverty for much of humanity

Almost daily, some half of humanity or more, suffer a daily financial, social and emotional, crisis of poverty. In poorer countries, poverty is not always the fault of the individual alone, but a combination of personal, regional, national, and—importantly—international influences. There is little in the way of bail out for these people, many of whom are not to blame for their own predicament, unlike with the financial crisis.

There are some grand strategies to try and address global poverty, such as the UN Millennium Development Goals, but these are not only lofty ideals and under threat from the effects of the financial crisis (which would reduce funds available for the goals), but they only aim to halve poverty and other problems. While this of course is better than nothing it signifies that many leading nations have not had the political will to go further and aim for more ambitious targets, but are willing to find far more to save their own banks, for example.

A global food crisis affecting the poorest the most

While the media’s attention is on the global financial crisis (which predominantly affects the wealthy and middle classes), the effects of the global food crisis (which predominantly affects the poorer and working classes) seems to have fallen off the radar. The two are in fact inter-related issues, both have their causes rooted in the fundamental problems associated with a neoliberal, one-size-fits-all, economic agenda imposed on virtually the entire world.

Poor nations will get less financing for development

The poorer countries do get foreign aid from richer nations, but it cannot be expected that current levels of aid (low as they actually are) can be maintained as donor nations themselves go through financial crisis. As such the Millennium Development Goals to address many concerns such as halving poverty and hunger around the world, will be affected.

Almost an aside, the issue of tax havens is important for many poor countries. Tax havens result in capital moving out of poor countries into havens. An important source of revenue, domestic tax revenues account for just 13% of low income countries’ earnings, whereas it is 36% for the rich countries.

A UN-sponsored conference slated for November 2008 to address this issue is unlikely to get much attention or be successful due to the recession fears and the financial crisis. But this capital flight is estimated to cost poor countries from $350 billion to $500 billion in lost revenue, outweighing foreign aid by almost a factor of 5.

This lost tax revenue is significant for poor countries. It could reduce, or eliminate the need for foreign aid (which many in rich countries do not like giving, anyway), could help poor countries pay off (legitimate) debts, and also help themselves become more independent from the influence of wealthy creditor nations.

Politically, it may be this latter point that prevents many rich countries doing more to help the poor, when monetarily it would be so easy to do so.

A crisis that need not have happened

This problem could have been averted (in theory) as people had been pointing to these issues for decades. Yet, of course, during periods of boom no-one (let alone the financial institutions and their supporting ideologues and politicians largely believed to be responsible for the bulk of the problems) would want to hear of caution and even thoughts of the kind of regulation that many are now advocating. To suggest anything would be anti-capitalism or socialism or some other label that could effectively shut up even the most prominent of economists raising concerns.

Of course, the irony that those same institutions would now themselves agree that those “anti-capitalist” regulations are required is of course barely noted. Such options now being considered are not anti-capitalist. However, they could be described as more regulatory or managed rather than completely free or laissez faire capitalism, which critics of regulation have often preferred. But a regulatory capitalist economy is very different to a state-based command economy, the style of which the Soviet Union was known for. The points is that there are various forms of capitalism, not just the black-and-white capitalism and communism. And at the same time, the most extreme forms of capitalism can also lead to the bigger bubbles and the bigger busts.

Quoting Stiglitz again, he captures the sentiments of a number of people:

We had become accustomed to the hypocrisy. The banks reject any suggestion they should face regulation, rebuff any move towards anti-trust measures — yet when trouble strikes, all of a sudden they demand state intervention: they must be bailed out; they are too big, too important to be allowed to fail.

…

America’s financial system failed in its two crucial responsibilities: managing risk and allocating capital. The industry as a whole has not been doing what it should be doing … and it must now face change in its regulatory structures. Regrettably, many of the worst elements of the US financial system … were exported to the rest of the world.

— Joseph Stiglitz, The fruit of hypocrisy; Dishonesty in the finance sector dragged us here, and Washington looks ill-equipped to guide us out, The Guardian, September 16, 2008

Some of these regulatory measures have been easy to get around for various reasons. Some reasons for weak regulation that entrepreneur Mark Shuttleworth describes include that regulators

• Are poorly paid or are not the best talent
• Often lack true independence (or are corrupted by industries lobbying for favors)
• May lack teeth or courage in face of hostile industries and a politically hostile climate to regulation.

Given its crucial role, it is extremely important to invest in it too, Shuttleworth stresses.

However, this crisis wasted almost a generation of talent:

It was all done in the name of innovation, and any regulatory initiative was fought away with claims that it would suppress that innovation. They were innovating, all right, but not in ways that made the economy stronger. Some of America’s best and brightest were devoting their talents to getting around standards and regulations designed to ensure the efficiency of the economy and the safety of the banking system. Unfortunately, they were far too successful, and we are all — homeowners, workers, investors, taxpayers — paying the price.

— Joseph Stiglitz, The fruit of hypocrisy; Dishonesty in the finance sector dragged us here, and Washington looks ill-equipped to guide us out, The Guardian, September 16, 2008

Paul Krugman also notes the wasted talent, at the expense of other areas in much need:

How much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?

— Paul Krugman, The Madoff Economy, New York Times, Opinion, December 19, 2008

The wasted capital, labor and resources all add up.

British economist John Maynard Keynes, is considered one of the most influential economists of the 20th century and one of the fathers of modern macroeconomics. He advocated an interventionist form of government policy believing markets left to their own measure (i.e. completely “freed”) could be destructive leading to cycles of recessions, depressions and booms. To mitigate against the worst effects of these cycles, he supported the idea that governments could use various fiscal and monetary measures. His ideas helped rebuild after World War II, until the 1970s when his ideas were abandoned for freer market systems.

Keynes’ biographer, professor Robert Skidelsky, argues that free markets have undermined democracy and led to this crisis in the first place:

What creates a crisis of the kind that now engulfs us is not economics but politics. The triumph of the global “free” market, which has dominated the world over the last three decades has been a political triumph.

It has reflected the dominance of those who believe that governments (for which read the views and interests of ordinary people) should be kept away from the levers of power, and that the tiny minority who control and benefit most from the economic process are the only people competent to direct it.

This band of greedy oligarchs have used their economic power to persuade themselves and most others that we will all be better off if they are in no way restrained—and if they cannot persuade, they have used that same economic power to override any opposition. The economic arguments in favor of free markets are no more than a fig leaf for this self-serving doctrine of self-aggrandizement.

— Bryan Gould, Who voted for the markets? The economic crisis makes it plain: we surrendered power to wealthy elites and fatally undermined democracy, The Guardian, November 26, 2008

Furthermore, he argues that the democratic process has been abused and manipulated to allow a concentration of power that is actually against the idea of free markets and real capitalism:

The uncomfortable truth is that democracy and free markets are incompatible. The whole point of democratic government is that it uses the legitimacy of the democratic mandate to diffuse power throughout society rather than allow it to accumulate—as any player of Monopoly understands—in just a few hands. It deliberately uses the political power of the majority to offset what would otherwise be the overwhelming economic power of the dominant market players.

If governments accept, as they have done, that the “free” market cannot be challenged, they abandon, in effect, their whole raison d'etre. Democracy is then merely a sham. … No amount of cosmetic tinkering at the margins will conceal the fact that power has passed to that handful of people who control the global economy.

— Bryan Gould, Who voted for the markets? The economic crisis makes it plain: we surrendered power to wealthy elites and fatally undermined democracy, The Guardian, November 26, 2008

Despite Keynesian economics getting a bad press from free market advocates for many years, many are now turning to his policies and ideas to help weather the economic crisis.

We are all Keynesians now. Even the right in the United States has joined the Keynesian camp with unbridled enthusiasm and on a scale that at one time would have been truly unimaginable.

… after having been left in the wilderness, almost shunned, for more than three decades … what is happening now is a triumph of reason and evidence over ideology and interests.

Economic theory has long explained why unfettered markets were not self-correcting, why regulation was needed, why there was an important role for government to play in the economy. But many, especially people working in the financial markets, pushed a type of “market fundamentalism.” The misguided policies that resulted — pushed by, among others, some members of President-elect Barack Obama’s economic team — had earlier inflicted enormous costs on developing countries. The moment of enlightenment came only when those policies also began inflicting costs on the US and other advanced industrial countries.

…

The neo-liberal push for deregulation served some interests well. Financial markets did well through capital market liberalization. Enabling America to sell its risky financial products and engage in speculation all over the world may have served its firms well, even if they imposed large costs on others.

Today, the risk is that the new Keynesian doctrines will be used and abused to serve some of the same interests.

— Joseph Stiglitz, Getting bang for your buck, The Guardian, December 5, 2008

Some of the world’s top financiers and officials are reluctantly accepting that the version of capitalism that has long favored them may not be good for everyone.

Stiglitz observed this remarkable resignation at the annual Davos forum, usually a meeting place of rich world leaders and the corporate elite, who usually together reassert ways to go full steam ahead with a form of corporate globalization that has benefited those at the top. This time, however, Stiglitz noted that

[There was a] striking … loss of faith in markets. In a widely attended brainstorming session at which participants were asked what single failure accounted for the crisis, there was a resounding answer: the belief that markets were self-correcting.

The so-called “efficient markets” model, which holds that prices fully and efficiently reflect all available information, also came in for a trashing. So did inflation targeting: the excessive focus on inflation had diverted attention from the more fundamental question of financial stability. Central bankers’ belief that controlling inflation was necessary and almost sufficient for growth and prosperity had never been based on sound economic theory.

… no one from either the Bush or Obama administrations attempted to defend American-style free-wheeling capitalism.… Most American financial leaders seemed too embarrassed to make an appearance. Perhaps their absence made it easier for those who did attend to vent their anger. Labor leaders working for the … business community were particularly angry at the financial community’s lack of remorse. A call for the repayment of past bonuses was received with applause.

— Joseph Stiglitz, Fear and loathing in Davos, The Guardian, February 6, 2009

Some at the top, however, have tried to play the role of victim:

Indeed, some American financiers were especially harshly criticized for seeming to take the position that they, too, were victims … and it seemed particularly galling that they were continuing to hold a gun to the heads of governments, demanding massive bailouts and threatening economic collapse otherwise. Money was flowing to those who had caused the problem, rather than to the victims.

Worse still, much of the money flowing into the banks to recapitalize them so that they could resume lending has been flowing out in the form of bonus payments and dividends.

— Joseph Stiglitz, Fear and loathing in Davos, The Guardian, February 6, 2009

And as much as this crisis affects wealthier nations, the poorest will suffer most in the long run:

… This crisis raises fundamental questions about globalization, which was supposed to help diffuse risk. Instead, it has enabled America’s failures to spread around the world, like a contagious disease. Still, the worry at Davos was that there would be a retreat from even our flawed globalization, and that poor countries would suffer the most.

But the playing field has always been uneven. If developing countries can’t compete with America's subsidies and guarantees, how could any developing country defend to its citizens the idea of opening itself even more to America’s highly subsidized banks? At least for the moment, financial market liberalization seems to be dead.

— Joseph Stiglitz, Fear and loathing in Davos, The Guardian, February 6,

Alcohol problems:

How to stop drinking

You can take steps today to stop drinking. Your first step might be to see your doctor, contact a support group, or set a date in the near future to stop. While some people can stop drinking on their own, others need medical help to manage the physical process of withdrawal.
If you think you have an addiction to alcohol, talk to your doctor about whether you need to withdraw from alcohol under medical supervision. Your doctor can give you medicine that will help you safely withdraw from alcohol. Other medicines might be prescribed later to help you stay sober. With a doctor's help, withdrawal from alcohol is safer.
Stopping alcohol use can:
Prevent or reduce health problems that are made worse by alcohol use, such as liver damage.
Prevent harm to your unborn baby if you are pregnant.
Reduce related family concerns or relationship problems.
Increase your ability to be productive at work, school, and home.
Reduce legal problems that you might have as a result of misuse of alcohol.

WHY MUST I STOP ALCOHOL.

Stopping your use of alcohol can improve your general health and quality of life. It can also increase the quality of life of the people you live with and those who care about you. You decrease your chances of developing serious health problems associated with alcohol abuse or dependence. You reduce your chances of injuring yourself or others in alcohol-related accidents. You might also improve relationships with your parents, children, and spouse or other close loved ones. Not drinking also is a good way for you to model responsible behavior for younger people, particularly children and teens.
You can take steps today to stop drinking. Your first step might be to contact a support group, see your doctor, or set a date in the near future to stop. While some people can stop drinking on their own, others need medical help to manage the physical process of withdrawal.
If you think you have an addiction to alcohol, talk to your doctor about whether you need to withdraw from alcohol under medical supervision. Your doctor can give you medicine that will help you safely withdraw from alcohol. Other medicines might be prescribed later to help you stay sober. With a doctor's help, withdrawal from alcohol is safer.

DECIDE NOW

So you’ve come to the decision to stop drinking alcohol. Maybe you’ve tried a few times to just cut down, and drink more sensibly like others around you seem to.
But you’ve had limited success, perhaps you manage it for a week or so, then you’re drinking more again. Then the blackouts and awful hangovers start. Finally you decide its time to quit.