Thursday, June 09, 2011
It is gripping reading as well, and its explanations are clear enough that readers without any background in finance will have no trouble following the plot.
An unholy alliance between Wall Street, the Democratic establishment, community organizing groups like ACORN and La Raza, and politicians like Barney Frank, Nancy Pelosi and Henry Cisneros. (Frank got a cushy job for a lover, Pelosi got a job and layoff protection for a son, Cisneros apparently got a license to mint money bilking Mexican-Americans of their life savings in cheesy housing developments.)
If the GOP can make this narrative mainstream, and put this picture into the heads of voters nationwide, the Democrats are toast. The party will have to reinvent itself (or as often happens in American politics, be rescued by equally stupid Republican missteps) before it can flourish.
If Morgenstern and Rosner are to be believed, the American dream didn’t die of old age; it was murdered and most of the fingerprints on the corpse come from Democratic insiders. Democratic power brokers stoked the housing bubble and turned a blind eye to the increasingly rampant corruption and incompetence at Fannie Mae and the associated predatory lenders who sheltered under its umbrella; core Democratic ideas may well be at fault.
This is catnip to Republicans, arsenic to Dems. If Morgenson and Rosner are right, there is someone the American people can blame for our current economic woes and it is exactly the cast of characters that a lot of Americans love to hate. Big government, affirmative action and influence peddling among Democratic insiders came within inches of smashing the US economy.
The Morgenson/Rosner story is a simple and easily grasped one. It is made for campaign ads. The Great Villain, the man who almost ruined America according to the book, is James Johnson, long one of the most important members of the Democratic establishment. He ran Walter Mondale’s campaign. He chaired John Kerry’s search for a vice-president — the brilliantly executed search that chose the revered anti-poverty warrior John Edwards.
Barack Obama, impressed by this track record of discernment, reportedly asked him to lead Obama’s search in 2008 — though Johnson withdrew when word got out that he benefited from the disgraced and disgusting Angelo Mozilo’s corrupt program of ‘special’ mortgages for political friends. (Mozilo was the head of Countrywide, a massively fraudulent and predatory lender which benefited hugely from its business connections with Fannie Mae.) He is a director of the much hated Goldman Sachs, a former director of Lehman Brothers, has chaired the board of the Brookings Institution, is a major Democratic Party fundraiser who bundled several hundred thousand dollars for President Obama, helped bring old Clinton friends into the Obama organization, and has been at the center of Democratic finance and politics for a generation.
Named CEO of Fannie Mae (a government backed mortgage corporation) Johnson decided to make untold wealth by making and securitizing junk housing loans and by massaging the financial reports to ensure that he qualified for the obscenely generous maximum bonus no matter what was actually happening to the company under his care.
Fannie Mae, a historically staid and predictable government linked company, needed to turn into a cutting edge speculative growth engine to make the hundreds of millions Johnson wanted. Since taxpayers stand behind Fannie Mae’s debts, Johnson needed to get the politicians to back his desire to turn this milkwagon into a Porsche. Fortunately for him — and unfortunately for the country and the world — he found a way.
Fannie Mae would adopt the goal of increasing the percentage of Americans who owned their own homes, targeting the inner city poor who, allegedly, were blocked from home ownership by racial discrimination. (A bogus study to this effect was widely circulated; devastating criticisms and rebuttals quietly ignored.) This is where such luminaries of the American political scene as ACORN and La Raza get into the act. They served as cheerleaders for Johnson’s self-enrichment plan, camouflaging a Wall Street rip-off by hymning its benefits for the poor.
The purpose of no doc, no money down loans wasn’t, Heaven forbid, to generate rich fees and high interest rates for mortgage brokers and Wall Street. No, the smarmy defenders of the Great American Rip-off told us, those features were necessary to make sure that poor people (so cruelly, unfairly locked out of mortgages because they didn’t qualify for the stuffy old-fashioned kind) could participate in the American Dream. Anybody who opposed Jim Johnson’s get rich scheme was a racist who hated the poor. Political correctness married Wall Street chicanery as Maxine Waters, Chris Dodd and Barney Frank led the band; crooked accountants and clueless rating agencies performed the ceremony; big government dowered the couple with a debt guarantee and bankers dressed as flower girls showered the happy pair in a confetti of junk mortgages and junk bonds.
Fannie Mae and the housing market were off to the races — and where Fannie Mae led the way, the financial markets followed. Regulators were captured by the interests they were supposed to regulate; favors were dispensed with a lavish hand; taxpayer-provided money was used to assemble a vast lobby focused on extracting more money from hapless taxpayers to make James Johnson even richer. In the process, millions of financially unsophisticated low income people were stuck with obscenely unfair mortgages, honest whistle blowers were subjected to savage personal attacks, home prices lost all touch with reality, taxpayers were stuck with losses that may approach one trillion dollars, and financial markets were poisoned almost beyond repair.
House in Foreclosure, 2008 (Source: Wikimedia Commons)
But there’s a bright side. Mondale-Kerry-Obama confidant Johnson made a boatload of money, and Fannie Mae was able to pay many of his personal bills — at least until it went broke.
That at least is the story of Reckless Endangerment. No doubt Johnson’s memoirs will tell the story in a different way. The housing bubble and the financial market meltdown were very complex phenomena, many cooks were required to spoil this broth and the arguments over what caused the crash may never end.
Truth is one thing; politics is another. Politically, this story is a killer app for the GOP. It demonizes Dems, lends itself to attack ads, divides Democrats between their Wall Street and union bases, and combines GOP hate figures in ways calculated to unify the GOP and heighten the intensity of the faithful.
The story illustrates everything the Tea Party thinks about the corrupt Washington establishment and the evils of big government. It demonstrates the limits on the ability of government programs to help the poor. It converts a complicated economic story into a simple morality play — with Dems as the villain. It allows Republicans to capitalize on public fury at the country’s economic problems. It links the Democrats to Wall Street — the one part of the private sector that the Republican base loathes. It exposes that mix of incompetence and arrogance that is the hallmark of the modern American liberal establishment and links this condescending cluelessness to the real problems of real American families. It links President Obama (through appointments, associations and friendships) with the worst elements of the Clinton legacy and it blunts some key Democratic talking points.
The story can also be a devastating wedge issue. The Democratic Party today is a fragile coalition of elite liberals, traditionally Democratic ethnic blue collar whites, African Americans and Hispanics. The Fannie Mae story is essentially a story of how liberal Wall Streeters raped every one else — and how the organized leadership of the other groups colluded in the attack. Hammering this picture home will demoralize and divide the Democratic Party, reducing enthusiasm among minorities and pulling swing white ethnic votes toward the GOP.
The story builds GOP unity even as it divides the Democrats, allowing GOP populists and establishment figures to find some common ground. For one thing, it builds the idea that Wall Street is a liberal Democratic institution rather than a conservative Republican one. In fact, Wall Street is in love with power and cuts deals with whoever can make them, but for years Democrats have prospered by making running on Franklin D. Roosevelt’s platform against ‘the malefactors of great wealth’. There are many powerful Wall Street figures who are closely linked to the Democrats, however, and the James Johnson story puts a face on that alliance. Socially and culturally, most of Wall Street stands closer to the Democratic establishment than to the Republican Party these days; linking the Democrats to Wall Street, teacher unions and race hustlers is an easy and compelling way to push the Democrats closer to the cliff even as it allows GOP candidates to lace their speeches with populist anti-Wall Street rhetoric without embracing anti-business policy.
The story doesn’t just attack a failure of Democratic policy execution; it exposes a key flaw in New Democratic thinking. The Third Way as dreamed up by Bill Clinton and Tony Blair sought to harness the power of financial markets to a public service agenda. Old style command and control liberalism believed in directly mandating business to do what politicians thought should be done. AT&T had to serve rural communities, but in exchange it had a phone monopoly and regulators made sure that it made a good profit. The airlines and bus companies had to service unprofitable routes, but regulators made sure that their route networks as a whole were profitable.
As competition became more global and the inflexible regulations of the old liberalism proved less workable, a new and updated liberalism appeared. Instead of old fashioned mandates, liberals would use new approaches that capitalized on the power of the market. Use cap and trade schemes rather than command and control to control carbon through the market — and by creating an international market that will make money for financial firms. Tweak the mortgage regulations to spread home ownership to the poor. Both Britain and the US are looking at fun new ideas like ‘infrastructure banks’ that can fund projects that liberals like without putting large new debts on the public accounts. Private profits can grow even as the public interest is served: this was the Clinton-Blair dream that was billed as liberalism’s response to the Thatcher revolution. Additionally, liberal politicians like Al Gore and James Johnson were well placed to capitalize on the new arrangements. Bill Clinton and Tony Blair have both become much wealthier after leaving office than old style liberals like Harry Truman ever could.
The story also undercuts what little is left of the credibility and the moral authority of the American establishment. What is especially shocking in this story is that the higher up and more powerful people are usually the most venal and corrupt. Low level researchers and bureaucrats are constantly raising questions and preparing devastating reports that expose the flawed premises behind Fannie Mae’s policies. They are being constantly slapped down by the well connected and the well paid. The American establishment does not have the necessary moral strength and intellectual acuity to run the affairs of this country; Tea Party believers will find much in this book that confirms their worst fears.
Republicans of course have a few financial scandals of their own that Democrats can take out and rattle. But because Fanniegate offers a clear storyline, identifiable villains linked to specific disasters that have hit tens of millions of Americans in the pocketbook, and is overwhelming a story of Democratic abuses of Democratic ideas, it is potentially a game changing event. It is also an issue that a GOP candidate for the nomination can use to break away from the field; it is an issue a contender could ride all the way to the White House.
Paul Krugman once told me that he thought that Enron would have a greater impact on American politics than 9/11. He was wrong about that scandal, but if the GOP plays its cards right, Fanniegate could push this country into a new political era.