New Enemies of the State: Bankers

After a number of banks that received bailout money started handing out bonuses, people were furious that their tax money was being used by big bankers to turn a profit. The man who enabled all of this, President Obama, was rightfully embarrassed, and declared a need for a new tax on bank bonuses which would only affect about the 50 largest banks.

However, as recently as December, Obama was claiming that there would not be losses from the banking side of the bailout program. Rather, it’s the corporate acquisitions by the government that are turning massive losses.

So what exactly is Obama hoping to accomplish by imposing this massive tax on bankers? They’re not the ones losing the government’s money, so why does Obama want to punish them instead of GM and Chrysler?

Although, the banks are the ones who embarrassed Obama politically. And that’s where Obama’s true motivation becomes clear. Obama is upset about how a few bankers turned his own political machinations against him, and so the bankers at the 50 largest lending institutions, many of whom have not received any bailout money at all, are to be punished.

And so, not withstanding any constitutional checks against bills of attainder, Obama feels he can use taxes punish those who do not act the way he wants them to. Fear will keep the local companies in line. Fear of new taxes.

I think this is the first time I’ve ever heard a President of the United States threatening their own citizens:

“What I’d say to these executives is this. Instead of sending a phalanx of lobbyists to fight this proposal, or employing an army of lawyers and accountants to help evade the fee, I’d suggest you might want to consider simply meeting your responsibilities and I’d urge you to cover the costs of the rescue not by sticking it to your shareholders or your customers or fellow citizens with the bill, but by rolling back bonuses for top earners and executives,”

A notable quote comes to mind:
“I’ve altered the deal. Pray I do not alter it any further.”

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Government Buyouts and Bailouts to Become Permanent Policy?

The Democrats of the House of Representatives recently passed a bill which would give the President and the Federal Reserve Board members that he appoints the authority to take over and/or liquidate any financial company deemed “in danger of default,” so long as failure of the company may cause “adverse effects” to the economy or to the welfare of minorities. The language of the bill is actually that vague.

The process of acquiring a company goes something like this:

Step 1: The Secretary or Chairman of the Federal Reserve Board requests a vote by the Board (all of these people are appointed by the President) on whether or not the default of a financial company poses some risk to the economic “conditions or stability” of the United States, or to the economic “conditions or stability” of minorities.

Step 2: The Secretary of the Federal Reserve (who originally requested the vote) takes the recommendations and goes to deliberate with the President (who appointed all these people to begin with). Together, the President and Secretary make a determination as to whether the financial company is “in danger of default” and whether this default would have “adverse effects on financial stability or economic conditions in the United States.” Together, they determine what to do about the company.

Step 3: At this point the Secretary appoints a “Corporation” which takes financial control of the company, eliminates its management, and liquidates it, as seen with GM. This Corporation expires after a year, but there is no bar against the Secretary appointing a new one, extending the time frame of its control indefinitely.

All of this information can be found in sections 1603 and 1604 of H.R. 4173 at the Library of Congress Database.

With the language as to what constitutes a “danger of default” and what constitutes “adverse affects” left so vague and entirely at the discretion of the President and his appointees, under this bill, the President could hypothetical engineer the liquidation of any company which does not adhere to some set of policies. This leaves absolute control of the policies of financial institutions in the hands of the President. Control of all financial lending institutions means control over anyone who would ever want to take out a loan, which is pretty much everyone.

“What’s that? Your business doesn’t engage in affirmative action hiring? Well, we’re just going to have a conversation with your lenders, who might be in danger of default. Might you want to reconsider your hiring practices?”

“Oh? Your media station is going to criticize our administration? Well, let’s see what your lenders and investors have to say about that.”

“Well, we’ve decided that the voting record of your demographic poses a threat to the State, so financial institutions aren’t going to be letting you take out mortgages anymore.”

Signing of this bill into law would truly mean a total government takeover of our nation’s economy, and by proxy, our lives. Absolute control of everyone would be in the hands of the President. This would be Fascism.

On Greed and Recessions

Whenever I try to discuss the causes of this recession that we’re in, I always get the same answer: Greed did it. Banks and corporations got greedy and started offering risky loans to people who couldn’t pay them off in the hopes of making a profit off the poor. It was predatory.

But that doesn’t make sense to me. You see, greed is a constant. Greed is what leads banks to want to find people who will actually pay off their loans. Subprime loans are dangerous, and most banking institutions would be very cautious about offering them, absent of any external stimulus. So if banks were always greedy, why were so many risky loans issued all of a sudden? Why had subprime loans never crashed the market before? Something had to have changed to cause such a massive upset of the economy.

Something did change, and it wasn’t greed.

In 1977, US President Jimmy Carter signed into law the Community Reinvestment Act (CRA), a vague declaration of the power of the federal government to oversee and regulate financial institutions and ensure they uphold their “continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.” The act makes clear that race and sex of loan recipients may used as factors in determining whether or not financial institutions are “meet[ing] the credit needs of the local communities.” Essentially, affirmative action in financial loans and mortgages was established to be enforced at the federal level.

In 1995, President Bill Clinton asked CRA regulators to revise their standards to make them more consistent and “focused on results.” This meant establishing specific quotas that lending institutions had to fill in order to receive passing ratings under the CRA. Up to 50% of an institution’s rating would be based on the quantity, effectiveness, and “innovation” of loans to low- and moderate-income individuals and neighborhoods. At the time, the Cato Institute, a libertarian think-tank adamantly warned of the dangerous consequences of the proposed regulations. Most notably, Cato Institute Chairman William A. Niskanen testified that, “The proposed regulation would override any concern about bank soundness,” in its emphasis on helping poor communities. Essentially, banks would be required to provide many overly risky loans (many of them subprime) to people who couldn’t necessarily pay them back in order to meet CRA quotas.

Debate continued through Clinton’s second term as to the real effect of the CRA on financial institutions. Republicans complained that the Act was detrimental, whereas Democrats claimed it wasn’t going far enough. Thus, as a compromise, Congress passed the Gramm-Leach-Bliley Act, expanding the authority of the CRA to other types of financial holding institutions while requiring “a comprehensive study of CRA to focus on default and delinquency rates, and the profitability of loans made in connection with CRA.” This study would be delivered to Congress in March 2000.

The study concluded that nearly 50% of CRA-related home purchase or refinance loans were either unprofitable or barely profitable, compared to 28% for non-CRA loans. This, of course, would be due to the riskiness of the loans being issued. Clinton’s solution to this foreseeable unprofitability was to urge Fannie Mae and Freddie Mac, two government-sponsored mortgaging enterprises (GSEs) which had come under the CRA requirements with the passage of the 1999 Act, to start collecting these risky loans. This was meant to both increase the number of CRA loans available and to provide some insurance for CRA-regulated financial institutions by pooling risky mortgages (similar to the way the FDIC insures savings). Once the full scope of the problem was revealed in the March 2000 report, Fannie Mae and Freddie Mac redoubled their efforts.

And here we have the recipe for disaster. The CRA had filled the veins of the financial lending industry with these risky subprime loans, this poison, which Fannie Mae and Freddie Mac, the liver and kidneys of the system, were gathering up and trying to neutralize. All it took was a small shrug in the housing market to make enough of those bad loans in Fannie Mae and Freddie Mac turn to poison and kill these protective organs. With the liver and kidneys gone, the rest of the body suffered as people bankrupting from the Fannie Mae and Freddie Mac disaster defaulted on loans from other banks. Hence, we had the bank crash, and later, the automaker crash as large-investment segments of the economy fell apart.

So really, it wasn’t greed that caused this recession that we’re in now. It was humanitarianism. It was affirmative action. It was the government’s attempts to redistribute wealth by applying harsh regulations with the CRA.

This wasn’t the first time government regulation and interference in the market caused a recession. Tariffs throughout the 1920’s weakened the US economy by pushing away trading partners and decreasing gains from overseas trade. Finally, speculation started to become pessimistic in September 1929, as Senate committee debates over the Smoot-Hawley Tariff Act became public. This Act would drastically increase tariffs and protectionist measures, effectively placing a 60% tax on any farmer who bought equipment from overseas. The next month, the stock market crashed. In June 1930, despite the pleading of economists and businessmen such as Henry Ford and partners of J. P. Morgan, Hoover signed the bill into law, and US foreign trade started rapidly declining. Nations around the world responded by putting tariffs on their own goods to counter the effects of US tariffs. The Great Depression had begun.

The government cannot be trusted to take control of an economy for what it believes to be “the greater good.” When innovation and individual choice is allowed to flourish, we succeed together. When law forces us into bad choices, even when some realize how bad it could be, that is what causes us to fail together.

EDIT 4/10/16: The 2011 Financial Crisis Inquiry (FCI) Report includes a dissenting view (page 441-538) that fully corroborates my description of events as written here in 2009. Alternate link. Apparently, the majority opinion in that report tries to absolve the CRA of any responsibility, citing this paper by Fed economists Neil Bhutta and Glenn Canner to claim that “only 6% of subprime loans were in any way related to the CRA.” However, that paper completely ignores the role of the GSEs in creating an expansive market for subprime loans through their attempts to insure CRA-regulated institutions by buying up risky assets. This role is a historical fact, proven by the quote from HUD on page 497 of the 2011 FCI report, rendering the conclusions of Bhutta and Canner entirely baseless.