Foreclosure Phil
Years before Phil Gramm was a McCain campaign adviser and a lobbyist for a Swiss bank at the center of the housing credit crisis, he pulled a sly maneuver in the Senate that helped create today's subprime meltdown.
Who's to blame for the biggest financial catastrophe of our time? There are plenty of culprits, but one candidate for lead perp is former Sen. Phil Gramm. Eight years ago, as part of a decades-long anti-regulatory crusade, Gramm pulled a sly legislative maneuver that greased the way to the multibillion-dollar subprime meltdown. Yet has Gramm been banished from the corridors of power? Reviled as the villain who bankrupted Middle America? Hardly. Now a well-paid executive at a Swiss bank, Gramm cochairs Sen. John McCain's presidential campaign and advises the Republican candidate on economic matters. He's been mentioned as a possible Treasury secretary should McCain win. That's right: A guy who helped screw up the global financial system could end up in charge of US economic policy. Talk about a market failure.
Gramm's long been a handmaiden to Big Finance. In the 1990s, as chairman of the Senate banking committee, he routinely turned down Securities and Exchange Commission chairman Arthur Levitt's requests for more money to police Wall Street; during this period, the sec's workload shot up 80 percent, but its staff grew only 20 percent. Gramm also opposed an sec rule that would have prohibited accounting firms from getting too close to the companies they audited—at one point, according to Levitt's memoir, he warned the sec chairman that if the commission adopted the rule, its funding would be cut. And in 1999, Gramm pushed through a historic banking deregulation bill that decimated Depression-era firewalls between commercial banks, investment banks, insurance companies, and securities firms—setting off a wave of merger mania.
But Gramm's most cunning coup on behalf of his friends in the financial services industry—friends who gave him millions over his 24-year congressional career—came on December 15, 2000. It was an especially tense time in Washington. Only two days earlier, the Supreme Court had issued its decision on Bush v. Gore. President Bill Clinton and the Republican-controlled Congress were locked in a budget showdown. It was the perfect moment for a wily senator to game the system. As Congress and the White House were hurriedly hammering out a $384-billion omnibus spending bill, Gramm slipped in a 262-page measure called the Commodity Futures Modernization Act. Written with the help of financial industry lobbyists and cosponsored by Senator Richard Lugar (R-Ind.), the chairman of the agriculture committee, the measure had been considered dead—even by Gramm. Few lawmakers had either the opportunity or inclination to read the version of the bill Gramm inserted. "Nobody in either chamber had any knowledge of what was going on or what was in it," says a congressional aide familiar with the bill's history.
It's not exactly like Gramm hid his handiwork—far from it. The balding and bespectacled Texan strode onto the Senate floor to hail the act's inclusion into the must-pass budget package. But only an expert, or a lobbyist, could have followed what Gramm was saying. The act, he declared, would ensure that neither the sec nor the Commodity Futures Trading Commission (cftc) got into the business of regulating newfangled financial products called swaps—and would thus "protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century."
Subprime 1-2-3
Don't understand credit default swaps? Don't worry—neither does Congress. Herewith, a step-by-step outline of the subprime risk betting game. —Casey Miner
Subprime borrower: Has a few overdue credit card bills; goes to a storefront lender owned by major bank; takes out a $100,000 home-equity loan at 11 percent interest
Lending bank: Assuming housing prices will only go up, and that investors will want to buy mortgage loan packages, makes as many subprime loans as it can
Investment bank: Packages subprime mortgages into bundles called collateralized debt obligations, or cdos, then sells those cdos to eager investors. Goes to insurer to get protection for those investors, thus passing the default risk to the insurer through a "credit default swap."
Insurer: Thinking that default risk is low, agrees to cover more money than it can pay out, in exchange for a premium
Rating agency: On basis of original quality of loans and insurance policy they are "wrapped" in, issues a rating signaling certain slices of the cdo are low risk (aaa), medium risk (bbb), or high risk (ccc)
Investor: Borrows more money from investment bank to load up on cdo slices; makes money from interest payments made to the "pool" of loans. No one loses—as long as no one tries to cash in on the insurance.
It didn't quite work out that way. For starters, the legislation contained a provision—lobbied for by Enron, a generous contributor to Gramm—that exempted energy trading from regulatory oversight, allowing Enron to run rampant, wreck the California electricity market, and cost consumers billions before it collapsed. (For Gramm, Enron was a family affair. Eight years earlier, his wife, Wendy Gramm, as cftc chairwoman, had pushed through a rule excluding Enron's energy futures contracts from government oversight. Wendy later joined the Houston-based company's board, and in the following years her Enron salary and stock income brought between $915,000 and $1.8 million into the Gramm household.)
But the Enron loophole was small potatoes compared to the devastation that unregulated swaps would unleash. Credit default swaps are essentially insurance policies covering the losses on securities in the event of a default. Financial institutions buy them to protect themselves if an investment they hold goes south. It's like bookies trading bets, with banks and hedge funds gambling on whether an investment (say, a pile of subprime mortgages bundled into a security) will succeed or fail. Because of the swap-related provisions of Gramm's bill—which were supported by Fed chairman Alan Greenspan and Treasury secretary Larry Summers—a $62 trillion market (nearly four times the size of the entire US stock market) remained utterly unregulated, meaning no one made sure the banks and hedge funds had the assets to cover the losses they guaranteed.
In essence, Wall Street's biggest players (which, thanks to Gramm's earlier banking deregulation efforts, now incorporated everything from your checking account to your pension fund) ran a secret casino. "Tens of trillions of dollars of transactions were done in the dark," says University of San Diego law professor Frank Partnoy, an expert on financial markets and derivatives. "No one had a picture of where the risks were flowing." Betting on the risk of any given transaction became more important—and more lucrative—than the transactions themselves, Partnoy notes: "So there was more betting on the riskiest subprime mortgages than there were actual mortgages." Banks and hedge funds, notes Michael Greenberger, who directed the cftc's division of trading and markets in the late 1990s, "were betting the subprimes would pay off and they would not need the capital to support their bets."
These unregulated swaps have been at "the heart of the subprime meltdown," says Greenberger. "I happen to think Gramm did not know what he was doing. I don't think a member in Congress had read the 262-page bill or had thought of the cataclysm it would cause." In 1998, Greenberger's division at the cftc proposed applying regulations to the burgeoning derivatives market. But, he says, "all hell broke loose. The lobbyists for major commercial banks and investment banks and hedge funds went wild. They all wanted to be trading without the government looking over their shoulder."
Now, belatedly, the feds are swooping in—but not to regulate the industry, only to bail it out, as they did in engineering the March takeover of investment banking giant Bear Stearns by JPMorgan Chase, fearing the firm's collapse could trigger a dominoes-like crash of the entire credit derivatives market.
No one in Washington apologizes for anything, so it's no surprise that Gramm has failed to issue any mea culpa. Post-Enron, says Greenberger, the senator even called him to say, "You're going around saying this was my fault—and it's not my fault. I didn't intend this."
Whether or not Gramm had bothered to ponder the potential downsides of his commodities legislation, having helped set off an industry free-for-all, he reaped the rewards. In 2003, he left the Senate to take a highly lucrative job at ubs, Switzerland's largest bank, which had been able to acquire investment house PaineWebber due to his banking deregulation bill. He would soon be lobbying Congress, the Fed, and the Treasury Department for ubs on banking and mortgage matters. There was a moment of poetic justice when ubs became one of the subprime crisis' top losers, writing down $37 billion as of this spring—an amount equal to its previous four years of profits combined. In a report explaining how it had managed to mess up so grandly, ubs noted that two-thirds of its losses were the fault of collateralized debt obligations—securities backed largely by subprime instruments—and that credit default swaps had been "key to the growth" of its out-of-control cdo business. (Gramm declined to comment for this article.)
Gramm's record as a reckless deregulator has not affected his rating as a Republican economic expert. Sen. John McCain has relied on him for policy advice, especially, according to the campaign, on housing matters. The two have been buddies ever since they served together in the House in the 1980s; in 1996, McCain chaired Gramm's flop of a presidential campaign. (Gramm spent $21 million and earned only 10 delegates during the gop primaries.) In 2005, McCain told a Wall Street Journal columnist that Gramm was his economic guru. Two years later, Gramm wrote a piece for the Journal extolling McCain as a modern-day Abraham Lincoln, and he's hailed McCain's love of tax cuts and free trade. Media accounts have identified Gramm as a contender for the top slot at the Treasury Department if McCain reaches the White House. "If McCain gets in," frets Lynn Turner, a former chief sec accountant, "we'll have more of the same deregulatory mess. I like John McCain, but given what I know about Phil Gramm, I wouldn't vote for McCain."
As a thriving bank exec and presidential adviser, Gramm has defied a prime economic principle: Bad products are driven out of the market. In John McCain, he has gained an important customer, so his stock has gone up in value. And there's no telling when the Gramm bubble will burst.
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I respect and enjoy David Corn's writing and analytical skill. In the last sentence of the second paragraph, he mimics the language used to push bad legislation, "...decimated Depression-era firewalls." This should more accurately read ,,,decimated New Deal firewalls. Gramm is a Bad Samaritan and McCain is a subprime candidate.
Here we go the patriot Phil Graham has single-handedly driven our financial system to the ground. John McCain, who does not know much about economics, rewards his body by making him his economic guru and advisor. Had this happened in the Banana Republic, the citizens of the Banana Republic would have taken to the street in indignation and outrage.
Here in America, the press is totally impervious to the story, many thanks to Mother Jones for reporting it. What our mainstream press is overwhelmed with is whether Obama hanging a flag lapel on his shirt or not and whether his great uncle was at Auschwitz or Buchenwald.
While the average Joe is busy wrapping himself with the flag and watching the trash that the corporate-owned media is tossing at him every night to keep him pacified. At the meantime, Uncle Phil Graham and his junta are busy fleecing America; enriching themselves, their spouses and their corporate masters.
Simple question to the hard-working, less educated white men who are contemplating voting for machismo McCain, who for sure will take us to another war with Iran:
Which is less patriotic; to stick a flag lapel on your shirt, or to bankrupt America by waging needless wars? Which is less patriotic; to go to Rev. Wright's Church or to make billions by stealing our manufacturing jobs and shipping them to china?
Until the hard working, less educated Joe wakes up, smells the coffee and set his priorities straight, Patriots like Phi Graham, his patriot friend McCain, and their corporate masters will drive all of us to an unknown abyss, having our flag lapels on our shirts or not.
The principle that "Bad products are driven out of the market" applies to the current swap market and sub-prime mortgage bundling. They are ripping through the financial markets.
The only reason any of these products were even created, however, is that our banking system has been so heavily cartelized through the Federal Reserve.
Progressives need to wake up. The Federal Reserve is the epicenter of fascism in America. It is the financial heart of the system that allows people like McCain, Gramm, and Bush to flourish.
Please note that Bush just last month has started the push to make the privately owned, ultra-secret Federal Reserve THE regulatory entity for America's financial system. People have to begin to understand what the Fed is.
It funds the immoral and unconstitutional war through monetary pumping, it debases our currency, and it destroys the average American's wealth, causing our standard of living to decrease each year.
Progressives need to start to understand their real enemies. There is no bigger enemy to the little guy than the Federal Reserve.
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Remember the old saying "Left eye open, right eye blind"? Since the advent of the Savior From Illinois, it has been right eye open, left eye blind.
Obama's second largest contributor: UBS.
Yes, yes (I can hear you saying) -- but that's different.
No it isn't.
To Joseph Cannon - UBS is actually, as of May 28, his 3rd largest contributor, at $364,806 in bundled money from employees, not from the PAC. For perspective, that represents about 0.10% of his total $264,493,051 raised to date. (Source: OpenSecrets.org http://www.opensecrets.org/pres08/summary.php?cycle=2008&cid=N00009638)
To quote Jim Rogers a REAL financial giant, "Ben should resign and then abolish the Federal Reserve" Once that is accomplished the financial system will eventually come into balance.
Not so long ago I got worried that Mother Jones would lose its edge. I am glad to see
guys are able to cope with financial and
economic matters after all.
In case of further interest in Swiss banks
and how they are doing, google:
"Swiss banks assets under management"
and then click on (Google) NEWS. There
are plenty reports corroborating above
article.
What is still missing is an article on
the media, and the role they played. Zack below is right in his comment mentioning them.
Great article. Makes me wonder why the so-called mainstream media dropped the ball on this one? Maybe Rupert Murdock thinks it's too close to home? I wonder...
I have to admit that
I have to admit that mainstreaming media are really doing bad things by spreadin g false information! garage plans
the ejaculation trainer
Gramm is yet another good ole boy Texas politician doing what they do best--set policies that benefit their cronies to the detriment of the rest of us.
You MJ editors are clueless about the WHO, the WHY and the HOW of the West's financial dismantlement. Read and learn, then teach the truth:
#######
#######
You'll not get any closer to
the truth about what's afoot with
Bush's GLOBALIZATION and
and this LOOMING FOOD CRISIS
than my below thoughts and links
((copy and send to friends and colleagues;
and note that I REPEAT MY PREMISE
OVER AND OVER AGAIN, TO DRIVE
HOME THE POINT)):
The Third-Way push of
socialism/capitalism to
equalize the world's
economies has caused
this looming food
crisis, NOT CAPITALISM.
Socialist/communist leftists
have captured capitalism
and enslaved it to EQUAL/
"FAIR" outcomes.
Of course, you'll have to
think more deeply to find
the truth.
Read and learn the truth:
What we are facing in 2008
is a Third-Way (socialist/
communist/capitalist)
conspiracy to equalize the
world's economies, as preface
to installing one-world
government; a plan hatched
during the 1940s GATT
formulations, which were
socialist/communist, in
effect.
Keep in mind that there is
no PEAK OIL crisis, only a
decades-long, purposeful
cap on searching and drilling
and refining for oil, in order
to put the world in crisis-mode.
Using food to produce fuel
is part of the conspiracy to
generate food riots, in order
to destabilize governments;
and this so-called "war on
terror" is also part of the
secret plan, although its
primary beneficially is Israel
in the exchange of blood
and treasury for oil--as
payoff for protecting Israel
from an ever-threatening,
encircling Islamic Arabism.
The secret plan?: to create
one-world government under
GLOBAL ECONOMIC SOCIALISM.
This is a conspiracy-driven
dismantlement of the West's
financial underpinnings,
for a certain purpose: TO
EQUALIZE GLOBAL ECONOMIES,
for future installation of
one-world government.
I've provided all the details
in my essay, "Planned
Destruction of America"
(linked below), which is my
report on Lt. Col. Archibald
Roberts' 1968 booklet: "The
Anatomy of a Revolution".
Planned Destruction of America
http://planneddestructionofamerica.blogspot.com/
Corporate America: What Went Wrong?
http://corporateamericawhatwentwrong.blogspot.com/
This one helps to confirm efforts to PURPOSELY trash America's
financial underpinnings:
http://www.321gold.com/editorials/engdahl/engdahl031808.html
Study my essay, then write as
if we're all being led down
a path to hell on Earth by
secretive, elite movers and
shakers on the Left and Right
(path to hell aka "Third-Way
Global Economic Socialism").
Read and learn and teach:
The EU and the coming North
America Union are products of
the 1940s GATT formulations,
and very few analysts are
aware of it ((GATT, NAFTA,
and CAFTA are socialistic
attempts at equalizing global
economies, in order to in-
stall one-world government
under THIRD-WAY Global
Economic Socialism)).
-Deacon
P.S.
Read my missive to Ron Paul's
staff, regarding my view that
this financial crisis is not
by happenstance nor
mismanagement, but BY
DESIGN!:
The Honorable Ron Paul is
ignorant of an ongoing conspiracy
to topple, financially, the West,
in order to equalize the world's
economies; for building one-world
government under GLOBAL ECONOMIC
SOCIALISM. // The conspiracy
began in the 1940s with the GATT
formulations. // Ask why Greenspan
had violated his chairmanship
duties by advising prospective
home buyers to take out an ARM.
// Ask why Greenspan had sent out
fed regulators to warn banks that
they'd be charged with RACISM
if they didn't loosen home
loans for minority, HIGH RISK
home buyers. // Ask why Greenspan
recently, TRAITOROUSLY, had
advised OPEC oil producers to
de-link from the U.S. dollar. //
Greenspan - the FEDERAL RESERVE
- has embarked on a purposeful
set of monetary policies designed
to destroy the West's financial
underpinnings.
#######
#######
=================================================
#######
#######
Western civilization has been under assault
from two forces: ZIONIST JEWS and MARXIAN
JEWS, from the late 1800s forward. And while
both camps are in conflict on many levels,
they both have in common the destruction
of Christian males' civilization.
Zionist Jews' machinations ought to be
obvious to you, such as using the U.S.
as a PROXY COMBATANT for defending
Israel:
===
Oil is payoff for the West's efforts at
providing PROXY COMBATANTS for
Israel--for protecting Israel from expanding,
encircling Islamic Arabism; a Jewish nation-
state having supporters throughout the West
willing to destroy the entirety of Western
civilization for Israel's sake.
That's the gut-wrenching truth of why
Western democracies are sacrificing
blood and treasury in the Middle East;
especially the U.S., which has enough
off-shore and on-land oil reserves to
last 300 years at her present rate of
consumption, and which reserves were
PURPOSELY capped and/or not drilled
because Israel's supporters poured
millions of dollars into ENVIRONMENTAL
MOVEMENT groups' coffers, to work at
keeping America from oil/energy
independence and tied to Israel's
interests in the Middle East.
That's the truth you'll NEVER see nor hear
reported in Western mainstream news media,
because Israel's supporters control what's
fit to be said or printed about why the
West wars with Islamic Arabism.
===
#######
#######
Am I the only one that thinks Phil Gramm looks like Yertle the Turtle? This sack of human garbage belongs in a federal penitenitary, not making millions suckling off the teat of a foreign bank and doing doodley squat.
By the way, don't look know, but this Deacon guy who posted upthread is crazier than a [deleted]house rat - I'm just sayin...
Make that - crazier than a runover dog. Thank you.
None of this matters when the Federal Reserve System is owned by private "self serving" interests who will fix the problem with the printing press (and you are calling on them to regulate you and solve these "problems"). The "weight" and/or "value" of a gallon of gas or a loaf of bread has never changed. The observed "change" we see today in cost/price is because our dollar (medium of purchase since we stopped trading cattle and corn) is worth less. Everyone in America stores their wealth in dollars (everyone in the world). Of course, Halliburton was clever enough to move to Dubai and get . Should make you think. Try to figure out exactly who owns and controls Fed.
In times like these I must regress to first principles: Life is not so much predator/prey but parasite/host in functionation. Thus it is that periodically you will be reaped, or parasitized but hopefully not by a parazoid for then there is no recovery.
Also dont be too dismissive of the Deacon for all entities (creatures) seek only to preserve themselves (by whatever means necessary).
Greenspan did it helping the neocon pro zionist Bush with the rigged 911 lowering rates to 50 yr lows propping up his economy like a sand castle so he could begin and sustain the final solution using thier demented brain damaged cokehead drunk silver spoon idiot puppet they smelled coming 10k miles away since they have a keen smell for feces and always have since thye have to live with themselves.
Greenspan is the main culprit and Bush the main tool. Sure Grahamm is a [deleted]ing moron of the now infamous Republic party in cahoots with the DNC and both bought and paid for by AIPAC.
Bush better be worried about his own neck after he exists after all he did to destroy America as the zionist puppet trump card killing and maiming millions of muslims and destroying America to the core making Hussein Obamas glide to the presidency as easy as slicing off a head with a machete.
Bush and his neocons heads will be cut off and paraded throughout the arab world as trophies as their corpses will be sent to taxidermys to be forever enshrined in infamy there. Gonna be real bad.
But Gramm’s most cunning
But Gramm’s most cunning coup on behalf of his friends in the financial services industry — friends who gave him millions over his 24-year congressional career — came on December 15, 2000. It was an especially tense time in Washington. Only two days earlier, the Supreme Court had issued its decision on Bush v. Gore. President Bill Clinton and the Republican-controlled Congress were locked in a budget showdown. It was the perfect moment for a wily senator to game the system. As Congress and the White House were hurriedly hammering out a $384-billion omnibus spending bill, testking ccna Gramm slipped in a 262-page measure called the Commodity Futures Modernization Act. Written with the help of financial industry lobbyists and cosponsored by Senator Richard Lugar (R-Ind.), the chairman of the agriculture committee, testking pmp the measure had been considered dead — even by Gramm. Few lawmakers had either the opportunity or inclination to read the version of the bill Gramm inserted. “Nobody in either chamber had any knowledge of what was going on or what was in it,testking a+ ” says a congressional aide familiar with the bill’s history.
It’s not exactly like Gramm hid his handiwork-far from it. The balding and bespectacled Texan strode onto the Senate floor to hail the act’s inclusion into the must-pass budget package. But only an expert, or a lobbyist, could have followed what Gramm was saying. The act, he declared, would ensure that neither the sec nor the Commodity Futures Trading Commission (cftc) got into the business of regulating newfangled financial products called swaps — and would thus “protect financial institutions from overregulation” and “position our financial services industries to be world leaders into the new century.”
It didn’t quite work out that way. For starters, the legislation contained a provision — lobbied for by Enron, a generous contributor to Gramm — that exempted energy trading from regulatory oversight, allowing Enron to run rampant, wreck the California electricity market, and cost consumers billions before it collapsed. (For Gramm, Enron was a family affair. Eight years earlier, his wife, Wendy Gramm, as cftc chairwoman, had pushed through a rule excluding Enron’s energy futures contracts from government oversight. Wendy later joined the Houston-based company’s board, and in the following years her Enron salary and stock income brought between $915,000 and $1.8 million into the Gramm household.)
The US federal government are all crooks, most of them belonging to crime families. Not a one of them will die without having serious karma to pay. Unfortunately, the half awake people of the US are complete idiots, just a bunch of fat, lazy, sadistic, drug taking, drunken swine. It truly is amazing how far the goyim have fallen in this country.
Well put. part of the blame surely lies with the swollen electorate. My mom even asked (a life long Republican) how stupid were we to elect him twice? Unbelievable.
There is absolutely nothing wrong with having foxes in the hen house. Innocent and naive hens are natural food for foxes to fatten and strengthen them. Let nature take its course. It is much too risky to you interfere with nature and build fences of arbitrary rules and regulations. And besides fat foxes won't abide them anyway. They always find a way around or under or over them! Fences would allow there to be too many hens and not enough fat foxes around to keep the balance between the eaters and the eaten. If Levitt's conscience didn't make him such a big chicken he wouldn't be so afraid of what those foxes can do.
MoJo: You've got to take it one step deeper. You know what is going on. Report it. Don't worry about offending anyone. The offenders don't. Besides you are gonna die anyway.
You are correct Jim, you have hit the nail on the head. It is the sleeping Goyim of America which allowed a gang like the Neocons to exploit American blood and money to the advantage of another country. They count on the Goyim to remain deceived and unaware while they continue stealing and spying on America.
Mr. Corn, I enjoy your pieces immensely but I must express a small cavil with this one about Gramm and McBush. You made no mention sover of McBush's OWN bank busting escapade with the "Keating Five" scandal. Although an ethics panel ruled McBush's involvement minimal, why was he involved at all? For a good account see: http://rationalrevolution.net/war/bush_family_and_the_s.htm
i shake my head and laugh when i read articles like the one above (which i completely agree with)- but as a texan who enjoyed the good life in houston during the 60s and 70s and one who paid attention to what was going on - nothing you can tell me about gramm, tower, either bush, baker, and a host of others would surprise me - they bent us over a barrel and did it to us -but don't despair washington is full of "scott mcclaines"
This whole mess demonstrates better than anything I can say about why the right-wing canard about "free markets will solve xyz problem" is a pack of crap.
This market was "freed up" by Gramm and his idiot friends in the Congress along with McCain. Now the taxpayers are footing the bill. Yet again. But only to bail out the big boys who were running this Ponzi scheme.
No where does Gramm or McCain have any sympathy for the poor homeowners who were sold a bill of goods by the banking industry and are now losing their homes along with any equity they had - and along with whatever miniscule amount of credit they had managed to get over the years.
Thanks for nothing. FREE MARKETS EITHER AREN'T FREE - OR THEY DON'T WORK. Period.
Deacon, you use an awful lot of words to say nothing of merit. Get real dude.
CNN MONEY October 7, 2002: Phil Gramm joins UBS Warburg Texas Republican, who fought corporate reform act, to advise clients on corporate finance issues.
His academic and business profile is not of a man who is a neophyte to the world of business and its workings, no on the contrary his background as an economics professor and an economic advisor reeks of knowing the intent of his labors. Did Gramm have the prescience to see the effect of his 262 page anti-regulation insertion in today’s world? No! His needs and abilities were greed primordial as the title of his book aptly states. Gramm, William P. "Laissez-Faire and the Optimum Quantity of Money”. Economic Inquiry 12 (March 1974): 125-133.
Brilliant and Honest - a very rare combination in the times of double-speak.
If I here one more so-called "progressive" looney repeat this ridiculous idea that the Fed is privately owned I'm going to throw up on my copy of "Who Killed Kennedy?". The Fed is not privately owned. Every bank who wants to be part of the Federal Reserve system is REQUIRED to contribute capital to the Fed. These are the mythologized "private owners". They don't own anything. They have no voting control. They can't do anything with their so-called shares. It's basically a tax on banks to give the Fed the funds it needs to carry out it's regulation and to carry out it's monetary policy operations. It is what makes the Fed not cost taxpayers any money, unlike most government programs. The banks get paid interest on the capital which they are forced to contribute, and then any revenues the Fed generates beyond its expenses goes back to the U.S. Treasury. The banks don't have any ability to share in the profits of the Fed. If the Fed makes a profit in the course of carrying out monetary policy (which is easy to do when you have an unlimited balance sheet, which a central bank does) then that money is handed over to the Treasury to be spent on highways or M16s or food stamps. And that doesn't mean the Fed finances our wars either. The money from the Fed is nothing relative to our annual budget. The point is that no "private owners" are profiting from the Fed and the Fed finances itself by forced loans from member banks, as opposed to taxes from working folks. So yes, progressives need to wake up. They need to wake up and realize that most of the people posting here are only slightly less insane than Deacon.
They also need to understand that MoJo does not in fact report on financial issues very well. Credit default swaps had little to do with the housing bubble, the basic subprime mess or homeowners losing their homes. That happened because we the people were buying houses as if they were Dutch tulip bulbs, and the banks were lending to anybody who asked because no bank wanted to be the bank that didn't have record mortgage revenues when every other bank was reporting record mortgage revenues. That's really the main story. CDO's made it even easier for lenders to make subprime loans, but CDO's are not the same thing as credit default swaps. And while some CDOs made limited use of bond insurance, bond insurance is not the same thing as credit default swaps either. Credit default swaps made the whole thing worse for the financial system once the housing bubble burst, but in mostly indirect ways and only marginally so. If credit default swaps never existed, you still would have had a housing and mortgage lending bubble and we would still be pretty much right where we are now.
Unfortunately for hardline progressives, the financial system has not collapsed yet. It still could. And if it does, it may very well be connected to credit default swaps, but David Corn badly overreaches in this article in a clumsy attempt to discredit McCain, via Phill Gramm, via the subprime mess, via a pretty much non-existent connnection between the real subprime mess and credit default swaps. You'll have to wait a year or two and hope for a massive increase in corporate loan and bond defaults to see if the credit default swaps market can really crater the financial system. I doubt it. But it's worth worrying about, if you like to worry about those things. Then you will at least have a reasonable basis upon which to overreach and blame Phil Gramm for all the world's financial woes.
Intentionally misleading and sloppy. It's as if Corn knew nothing about modern finance before getting his talking points from the Obama campaign earlier this week. (It doesn't take a genius to see an orchestrated campaign here, with Gramm at the heart of the current attack on McCain.) Here's one example: Corn says that "In 1998, Greenberger's division at the cftc proposed applying regulations to the burgeoning derivatives market. But, he says, "all hell broke loose. The lobbyists for major commercial banks and investment banks and hedge funds went wild. They all wanted to be trading without the government looking over their shoulder.""
Yes, all hell broke loose. As in Levitt's SEC opposed the initiative, and Treasury Secretary Rubin opposed the initiative. They even put out a joint statement on the topic, which Corn would know if he knew anything about this topic or cared enough to research the topic.
The article if full of this sort of crap. Energy trading wasn't made exempt from regulatory oversight; it was exempt from a particular kind of regulatory oversight. Credit default swaps weren't deregulated; they weren't regulated prior to the act. And so on--I only have so much time for this. Don't trust Corn.
60% of foreclosures on subprime borrowers were caused by borrowers losing their jobs. The Fed raised rates eight times in 2005-2006 in order to raise the unemployment rate.
(Search google for "wayne jett countrywide foreclosures" and read the first article.)
That's why it happened. David Corn's attack on Gramm is typical progressive hate of bankers, but the aim is off, in this case at least.
>>>>They don't own anything. They have no voting control.
--- Don't the banks vote on you gets to be on the Fed's board of governors?
The banks make money like all politically connected people make money, by inside information from their friends on the board. That way they know when to buy low and sell high.
No the banks don't vote on who gets to be on the Feds Board of Governors. More mythology. The 7 member Board of Governors, which really has the power to control everything the Fed does, are appointed by the President and must be confirmed by the Senate. They are appointed for 14 year terms, and cannot be re-appointed so that once on the board they can be as independent as they like. The executive branch has no power to ratify Fed decisions. Then there are 12 regional reserve banks. They are mostly an operational (national payments system) and regulatory (supervise the member banks in their region) and data gathering (provide regional data for the Board of Governors) institutions. Each regional bank has a 9 member board, 6 of whom cannot be bankers, bank employees or bank shareholders. They represent the public. The other 3 are are bank executives representing the banks. 6 of the 9 are voted on by all the member banks in that region. 3 of the 9 are appointed by the Board of Governors. The most powerful member of a regional bank is the bank President. The President is nominated by the 9 member board, but must be approved by the Board of Governors. The main decisions about interest rates and bank reserves are made by the Federal Open Market Committee (FOMC) which consists of the 7 members of the Board of Governors and 5 of the 12 regional bank presidents, serving rotating 1 year terms on the FOMC except for the President of the New York Fed who is always on the FOMC. So the 12 member committee who really control what the Fed does is made up of 7 people appointed by a string of Presidents going back 14 years and confirmed by the Senate and 5 people nominated by boards dominated by non-bank members, but more importantly, ultimately approved by the other 7 members, the Board of Governors. For that group of 12 people to be stooges of the banking industry is pretty far fetched. Beyond that, the entire Federal Reserve Bank System is really controlled by Congress. It exists by an act of congress. What it can and can't do is legislated and has been changed by Congress. And if Congress so desired and so voted, it would cease to exist tomorrow.
Tell your friends. The truth will set you free. Free from spending all your time fantasizing about a secret privately owned bank posing as the central bank of the United States.
Also the Fed is about as good at predicting what is going to happen next in the economy and markets as anybody else, which is not that good. The Fed has inside information for maybe a week or two at a time, mostly from the time a government statistic is compiled until it is released to the public. And each one of those little peices of information are largely meaningless on their own anyway. The banks are taking an absolute beating right now because they bought high and are being forced to sell low a whole host of loans, mortgages and asset backed securities. So much for the Fed telling the banks when to buy and when to sell.
Excellent expose, I hope there are a few more sensible Republicans left who will read or learn about his, as the lack of govt regulation has led to so much massive corruption and financial disasters, but the instigators, under Bush et al, have almost all got off scott free. But the biggest bequeath of economic disasters in world history to future generations are the massive double deficits, internal and external, due to the combination of the Iraq war and tax cuts on the rich who have acquired unprecedented wealth under W. And now China and other countries own a big chunk of the US to boot. The press still doesn't get it.
Gramm and his wife were a dynamic duo as her role in our current economic meltdown is outlined in a Globe and Mail, Business report article May 31,2008 entitled
"Who is responsible for the global food crisis?"
By SINCLAIR STEWART and PAUL WALDIE
The banks get to vote on the Federal Reserve regional bank presidents.
Is Jay one of those bank clerks who believes he works in an ivory tower? To write such a convincing note to himself, to go on blindly without investigation, to then try to deceive others is the height of ignorance. Or, is it a CYA so that the plutocrats can continue their grand deception. Maybe its a Feudal system or Plantation system Jay wants to support for himself and friends in the casino!
The banks get to vote on the Federal Reserve regional bank presidents.
Posted by:wellbasicallyMay 31, 2008 11:19:29 PM
Not exactly. The banks get to vote on SOME but not all of the members of the boards of the Fed regional banks. And those board members in turn get to vote for the president of the regional bank. But the choice of president still has to be approved by the Board of Governors, so ultimately it's the Board of Governors who really decide. These are the facts. There is simply no question that the Fed is structurally controlled by bureaucrats not bankers and that it is an arm of the government, not a privately owned bank. I'm not saying there is no corruption in banking or that it is theoretically impossible for powerful bankers to use their money and influence to occasionally persuade some Fed officials to push a certain policy. I'm just refuting a serious deception that conspiracy theorists like to perpetuate that the Fed is in fact not part of the government and that it is a privately owned bank structurally controlled by bankers. This is simply not true. To believe that the Fed is ultimately controlled by bankers you would pretty much have to demonstrate that the FOMC, clearly dominated by bureaucrats not bankers, are systematically and continuously bribed to do the bankers bidding, and that somehow this is either kept secret from the entire Congress or the entire Congress is part of the conspiracy. The myth of the privately owned Fed comes from the fact that unlike most government agencies, it is not part of the executive branch and unlike most government agencies it is not financed from general tax revenues. But this is because it was created as sort of a punishment for the banking industry so the banking industry MUST put in the money the Fed needs to operate, and be subject to the Feds regulation and oversight. The Fed was also created to be as apolitical as possible, so it was setup to be independent of the executive branch and not dependent on annual appropriations from Congress. So it is directly financed by banks, but it is not controlled by banks. And it is certainly not independent of Congress. Congress created it to be independent of annual appropriations battles, but Congress still makes all of the Fed's rules and decides whether it will exist or not. Those are the facts. I have no agenda. Good luck.
The truth of the matter is that in the realm of politics/governance that there is just about the only thing that I can imagine being worse than the Moron and the Tyrant that currently are the titular President and Vice President of what used to be the United States of America. That one thing would be John McSame/McBush and the string of appointees that he would choose to occupy the Oz/Washington, DC he envisions (or more correctly hallucinates) under his doddering and irrational administration.
Phil Gramm, whom so many claim to have admired, being in the Cabinet or on the staff of some future
Republican 'administration' has been a nightmare of mine for decades.
The Middle Class, such that it is, would disappear completely under the financial policies of the Treasury under a whack-job like Phil Gramm. Gramm in his own way is even more dangerous than was Cheney, and that is saying something.
Why is it that there are people that actually work for their livings that stand in the crowds waving their signs and banners as John McBush holds forth spewing his demonstrated bellicosity and his general confusion and lack of understanding about almost every subject?
Yeah folks, that's just about another one-half of a good idea. Namely, putting Phil Gramm in charge of the U.S. economy!
unchecked capitalism self destructs.
witness to it now
it takes time first the middle class has to decline to very low levels
then one per cent of the population owns 80 per cent of the wealth
the have mores are smart very smart
in a declining economy they must move towards deregulation to maintain their wealth.
reagan economics pure genius.
bye bye middle class
they even lined up to vote for reagan's trickle down theory and deregulation.
Excellent article on one of the most serious, yet misunderstood issues of this campaign. Phil Gramm may be the most frightening thing, and there are quite a few others, about the possibility of electing John McCain. Unfortunately, this issue is so difficult to understand it will probably not get the attention it deserves. But hopefully a President Obama or Clinton will bring to bear the lessons of the great depression and promote legislation and regulation to save the capitalists and the rest of us from the costs of their reckless greed. They most certainly need to be regulated. Perhaps the regulations need to be updated, but they need to be there. This massive deregulation of the financial industries
is one of the biggest problems in the country and will be a serious challenge for the new president. Don't let it be John McCain.
Why is it that high housing prices are good and falling prices bad?I'm almost 60 years old.I'd like to be able to afford a home before I leave this planet.I'm hoping for a re-run of the 1930's.
Thomas, the gist of the story is that the consequence of Phil Gramm's self-regulating, unrestricted free market legislation has been financial chaos. No one held a gun to John McCain's head and told him to make Phil Gramm his economic advisor and presidential campaign co-chair. Here is a link to the SEC's written statement opposing the CFTC's proposed regulation of swaps and hybrids ( www.sec.gov/news/testimony/testarchive/1998/tsty0698.txt ). Readers can examine and assess it for themselves. Corn's article notes that Gramm, in his infinite wisdom, subsequently prevented both the SEC and the CFTC from regulating these instruments. Additionally, Corn didn't say that credit default swaps were de-regulated, he said that they remained unregulated. [ PS, I think we can all agree that there was insufficient oversight of Enron ]
It continuies to be imbarasing to be a American , when loosers and con men continue to run and ruin our country.
The American people should be imbarased but ther are too ignorant.
Sorry about my spelling.
Thanks for the big picture. Let me tell you about the smaller, yet more important one.
I sold homes in St. Louis Missouri for over 20 years. When Phil Gramm and his friends in finance changed the rules and brought in "no-doc" and "low-doc" loans the picture of who could buy homes changed completely. People closed on houses with 105% loans and with not the most stable credit histories. Problem with regulators taking their eyes off the ball is that lenders could make big money off poor credit risks by charging them more interest or approving them for interest-only loans that only work as long as the real estate market is moving upward.
Then, when the borrowers all bailed in a down market, and because they had no stake in the game, the government had set itself up to bail these fools out.
It was a lose/lose situation for the American taxpayer. Congratulations to Phil Gramm for making money off the misery of many and by bilking the government,taxpayers, and homeowners at the same time. Sort of a Republican hat trick.
