MORTGAGE CRISIS CAUSED BY PROLETARIAT, NOT SOLELY BANKS

Below is a letter from Dr. Peter Dreier to Brian Charles of the Pasadena Star News that asserts that Charles is mistaken as to the causes of the Bank Panic of 2008 and resulting financial meltdown.  Below Dreier’s letter is a recent article by David P. Goldman, former Head of Research for Bear Stearns and Bank of America that, contrary to Dr. Dreier, documents that the “proletariat” caused the mortgage crisis, not necessarily the banks. 

Letter to Brian Charles, Pasadena Star News from Dr. Peter Dreier

Brian:

Your column comparing the mortgage crisis and Pasadena’s pension problem is like comparing apples and oranges. They aren’t the same.

The mortgage crisis is about greedy bankers, private mortgage companies, investment banks, and rating agencies all engaging in risky and sometimes illegal behavior to make a profit, often at the expense of unwitting consumers. It is also about the finance industry using its political clout – campaign contributions, lobbyists, the revolving door between Congress and K Street – to get Congress to deregulate the industry so they can engage in these irresponsible practices.  The result, as you point out, is hedge fund managers, top executives (with Mozillo being a good examples), and others making exorbitant salaries and bonuses at the expense of their institutions and the consumers – and, ultimately, the entire economy.  See the Oscar-winning film “Inside Job,” or read Michael Lewis’ “The Big Short,” for the ugly details.  I’ve written about this in many journal articles and columns, including these:

http://prospect.org/cs/articles?article=the_conservative_origins_of_the_subprime_mortgage_crisis

http://departments.oxy.edu/uepi/publications/Foreclosing%20on%20the%20Free%20Market.pdf

 http://www.huffingtonpost.com/peter-dreier/how-to-fix-the-mortgage-m_b_130481.html

The pension situation is about the shortage of tax revenue to fulfill obligations to retired government employees. You point out that the 275 Pasadena government retirees are owed about $4,400/month. That’s $52,800/year. That is a middle class income, not an exorbitant sum.  That’s enough to live on but hardly cushy.  Compared with retirement pensions in other countries, including Canada and Europe, it is quite modest.  It is certainly not on the same order of magnitude of the bankers, etc ripping off the system to pay themselves millions.  Our pension system may be broken, but it isn’t because retired government employees are too greedy.   It is absurd that each city, including tiny cities and poor cities (think Compton or Maywood), have to pay pensions out of their revenues.  For the same reason that states now account for most of education spending, or that the federal government pays for Social Security out of payroll taxes, it is ridiculous to have a crazy-quilt system where retired employees of one city get a bigger or small pension that their counterparts (with the same jobs and skills) in other cities.  Creating a state system like CALPERS was supposed to make the system more rational, but the state has its own fiscal crisis to deal with.  Why? The reason so many cities and states have unfunded pension liabilities is because (a) corporations and the wealthy don’t pay their fair share of taxes, and (b) economic free-fall, caused by Wall Street (described above) has created fiscal chaos and instability in states and cities.  Retired cops, firefighters and others deserve a decent pension. They are not, like Mozillo, the hedge fund managers, and the Wall Street bankers, ripping off the system to make millions at others’ expense.  At some point we may want to raise the retirement age, or increase the payroll tax so that millionaires pay more, or some other fixes, but let’s not blame hardworking firefighters, cops, EMTs, teachers, social workers, secretaries, and other public employees for the fiscal crisis and the pension quagmire. That doesn’t make it easier for our City Council and city manager to fix the problem, but let’s not blame-the-victim either.

That is why your comparison of the Wall Street mess and the pension problem is off base.

RESPONSE to Dr. Dreier:

The people's Ponzi scheme

By Spengler 8/16/11 - Asia Times

David P. Goldman - former head of research or Bear Stearns and Bank of America who left banking over conflicts with his employers that led to the Bank Panic of 2008.  

"What happened to Obama?," asks a psychology professor in an August 6 op-ed in the New York Times. Our brains, he avers, require stories to make sense of things, and in 2009, "Americans needed their president to tell them a story that made sense of what they had just been through, what caused it, and how it was going to end."

The story the country awaited from Barack Obama, according to Professor Drew Westen, went like this: "This was a disaster, but it was not a natural disaster. It was made by Wall Street gamblers who speculated with your lives and futures. It was made by conservative extremists who told us that if we just eliminated regulations and rewarded greed and recklessness, it would all work out."

The trouble is that "Wall Street gamblers" didn't do the speculating. The American public did. This was a Ponzi scheme by the people, of the people and for the people, the most democratic crony-capitalist scam in the history of humankind. Households made more money than the bankers during every year of the bubble, and ended up better off than they were before the bubble, while the bankers got wiped.

Take two gauges of wealth: real estate assets owned by American households, against the value of bank stocks (using the KBW index of American bank equities). The price of bank stocks measures the value of institutions as well as the net worth of the highest-paid bankers, who take most of their bonuses in equity.

Household real estate assets rose nearly two-and-a-half times from around $9 trillion in 1998 to $23 trillion at the peak of the bubble in 2006. Bank stocks had a smaller bounce, from around 80 on the KBW index to a 2006 peak of 117, a gain of less than 50%.

That's not surprising, for households could buy a house with 5% or 10% down, and deduct the mortgage interest from their taxable income. A homeowner who bought a US$100,000 home with a $5,000 down payment doubled his original stake every year as home prices rose 10% per annum. Return on equity of 100% to 200% was common for homeowners; Goldman Sachs' return on equity never made it above the mid-30% range.

The contrast is clearer if we index 1998 to 100 in order to put the two gauges on the same scale Household real estate wealth remains 70% higher than it was in 1998, even after the crash in home prices. Bank stocks, by contrast, are worth half of what they were in 1998. Many of the big banks are much worse off. Bank of America is trading at less than a third of its 1998 price, and Citigroup is at barely a tenth of its 1998 level.

By no means do I excuse the banks. Until 2005, I headed fixed-income research for Bank of America, and resigned for what the bank and I agreed to call "philosophical differences". On leaving, I sold every share I owned. Years before (1993-1996) I worked for Bear Stearns, and stayed in touch with such old colleagues as Ralph Cioffi. He ran the firm's mortgage head fund. The July 2007 failure signaled the crisis to come. The federal government charged Ralph with malfeasance in the hedge fund's demise, but a jury rightly acquitted him; from what I could tell, he was guilty of nothing more than being wrong about the market.

In July 2007, I warned Larry Kudlow's national audience on CNBC about a "trillion-dollar AAA asset bubble". Even though I left the financial industry because I disagreed with its direction, and alerted the public early on, one admits such past affiliations with trepidation. Before the likes of Professor Westen, an ex-banker feels like Charles Darnay explaining his pedigree to Madame Desfarges.

In general, Wall Street remained stolidly sanguine about the bubble until it was too late. There were exceptions - Goldman Sachs and the John Paulson hedge fund, among others - who took short positions on subprime. But there had to be a long position on the other side, and the destruction of institutional and personal wealth among the top tier of bankers exceeded the balance-sheet damage to American households.

Wall Street was the enabler, but Main Street was the addict. Americans stopped saving as long as home prices rose; when home prices started to fall, they started saving again.

That is why the national narrative that Westen proposes is ill-informed, innumerate, vituperous, malicious and false. American households levered a $6 trillion net inflow of foreign savings during the decade 1998 through 2007 into a bubble that benefited them far more than it did Wall Street. The impact of the bubble on the household balance sheet exceeds the growth in real-estate assets, moreover, because most small business expansion followed the housing bubble.

Americans, as I argued on August 2 (The collapse of America's middle class Asia Times Online, August 2) must adapted to a technology-driven global economy, after a decade and a half of riding the crest of the savings tsunami that flooded American markets during the bubble years. Whatever they do, it will not be easy. The bankers got no more than they deserved, to be sure, but there is not much left to beat up in the exsanguinated financial industry. To propose a national witch-hunt against "Wall Street gamblers" is a stupid and wicked thing to do.

 

Comments

[Sterling W.]

Prosecute those on Wall Street who broke the law. They are many. If that is a "witch-hunt" then so be it. We are a nation of laws. Let us see them enforced.

[Billy]

Thank !I really love to read this post