Settling the Bill

As a result of the current financial crisis and the recent bailout, we have reached a historic milestone: The people of the United States have finally paid reparations to the descendants of African slaves.

Admittedly, it was a stealth form of payment. It wasn’t a straightforward check written from the Treasury to the people involved. The voters weren’t consulted about the arrangement. It was something that just kind of happened.

Members of Congress didn’t actually vote for legislation ordering reparations — not as such. What they did was cobble together a “Christmas tree” of a bank bailout bill, one larded down with so much pork that it was guaranteed to squeak by and be signed by the President. No incumbent politician stood to benefit from a complete financial meltdown, so the Senators and Congressmen voted for the bailout in an attempt to save their sorry fundaments enhance their chances of re-election.

Election 08
Click to enlarge

The crafting of legislative sausages is not a process for the squeamish, even at the best of times, and the bailout required a massive collective suppression of our gag reflex. But after all the blood, entrails, gore, and ordure of the last few weeks, all we have to show for it is this shriveled little wiener with a $700 billion price tag. Nice sausage, guys!

I don’t know how many taxpayers there are in the USA (and I’m too lazy to look it up), but just for mathematical simplicity, let’s assume there are a hundred million of us. That averages out to $7,000 per taxpayer to rescue the banks and the financial institutions from the mess they got themselves into.

So what did you get for your seven grand, Mr. Joe Taxpayer? You can sleep better at night knowing that your money rescued AIG and innumerable other corporations from bankruptcy. Thanks to you, the officers of these corporations can continue to collect their munificent salaries and preserve their golden parachutes. Your generosity helped ensure that in future there will be no such thing as a “bad debt”, at least not as far as mortgages are concerned.

The subprime mortgage crisis started three decades ago, but didn’t reach its maturity until the last years of the Clinton administration. Civil rights leaders and well-meaning liberals noticed that members of minority groups were being turned down for mortgages much more frequently than white people. The only possible explanation was lingering discrimination — what else could it be? Despite all the affirmative action laws, the American financial system was riddled through with racism.

In order to rectify this injustice — and incidentally to comply with UN resolutions mandating “fairness” in lending — Congress pushed through a series of measures that in effect required banks to issue mortgages to minority borrowers who would not otherwise have qualified for them.

Anybody who is even semi-literate in the laws of economics could have predicted disaster, and a number of voices — including John McCain’s — were raised in objection to this foolishness. But democracy, alas, favors demagoguery and short-term profit over common sense. A lot of money could be made trading these subprime mortgages as securities, and a lot of congressmen dreaded the attention of Al Sharpton and Jesse Jackson. So the deal was cut, and it made complete political sense at the time.
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Now the chickens have come home to roost, as we all knew they had to. Banks lent money to people who — based on their income, assets, and prior credit history — could never reasonably be expected to pay it back. These profligate decisions were based solely on the color of the borrowers’ skin, with the hot breath of the federal government breathing down the bankers’ fiscal necks.

Now that Congress has decided to rescue the banks from the consequences of stupid decisions mandated by the same federal government, the effective result is an immense transfer of wealth from the US Treasury to the people who bought property and couldn’t pay for it. The Treasury doesn’t actually have that money — it’s already in hock up to the eye in the pyramid — so it will have to pull it out of the pockets of taxpayers, sawbuck by sawbuck, over the next few years or decades.

So we’ve paid our reparations at last, even if we didn’t agree to it or intend to do it.

Does that mean the argument about race in this country is over, and that we can finally talk about other things?

What do you think?

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Unfortunately, the fleecing of the American taxpayer is probably not quite done. The $700 billion price tag on the bailout bill is just a down payment. Some analysts estimate that the final price tag will be as much as seven times higher, to the tune of five trillion dollars. That’s $50,000 on average from each and every taxpayer. Since millions of taxpayers don’t pay that much federal income tax in five years, that means that the bloated plutocrats of the middle class are going to have to bear the brunt of the sacrifice. Middle America is going to have to tighten its belt.

If President Obama is inaugurated in January with a comfortable Democratic majority in Congress, it’s a safe bet that even more will be added to the tax burden. Mr. Obama has ambitious plans for the country — nationalized health care, expanded social programs, aid to education, job training, child care, etc., etc. — and none of them comes cheap. He’s already promised to raise taxes — only on the “rich”, mind you — and the extra trillions required by the bailout will necessitate further increases.

And all of this in the face of a likely recession. Lean times are ahead.

The net result of the whole mess is that the American economy has now been socialized. Maybe not to the level customarily found in European countries, but much more socialized than it has ever been before, beyond the wildest dreams of Franklin Delano Roosevelt.

If the stock market reacts positively to the bailout — results have been mixed so far — it will be pricing the futures of socialized financial instruments. That is, if there’s no such thing as a bad debt, the market will never penalize those businesses that lend (or borrow) foolishly.

Unfortunately, with that kind of distorted information flowing through the system, the wealth-generating capabilities of American capitalism will be significantly reduced. We will all be poorer for it.

But, hey, that’s a small price to pay if you want to combat racism, right?

32 thoughts on “Settling the Bill

  1. Still peddling this racist crapola, Baron?

    The Community Reinvestment Act was passed in 1977. Subprime lending didn’t begin in earnest until 2001.

    Mortgage lenders didn’t start doing this in 2001 because they were altruists, or because they were scared of UN bureaucrats and Jesse Jackson-wannabes. They started it because they were greedy and because they thought that real estate values would always go up.

    And even so, the reason these securities are valueless now is not because of the underlying mortages – only 3% of all mortgages in the U.S. today are in default and even among the subprime category the numbers aren’t greater than 50%.

    The reason these securities are valueless is that they were sliced and diced and tranched into so many little pots that no one can figure out what they are worth. And a security that no one knows the value of is a worthless security.

    So stop spinning this whole crisis, sordid as it is, for your own sordid racist ends.

  2. The rules were rewritten so that nobody, white or black or any color of the rainbow, would have to demonstrate ability to repay. Those were the only rules—no rules at all—that would permit the banks to meet their minority quotas without discriminating against everybody else.

    Everybody else got into the game. As demand for housing soared, prices soared too. That stimulated further demand. It was evidently a game where everybody came away a winner. Mr. Ponzi would have been proud.

    The post isn’t racist, though perhaps it downplays the role played by a flood of white money chasing second homes etc. There’s blame enough to go around.

    There can be no fiscal stability while the laws mandating suicidal lending policies remain on the books. Now that Fannie and Freddie are out of the game, no bank can afford to write such loans. Since CRA remains on the books, no bank can legally refrain from writing such loans. Catch 22. Except, of course, what if the bank won’t lend to anybody? Then they aren’t discriminating.

    How’s that gonna work?

  3. gordon,

    what exactly is racist in this post? i cannot comment on the relative validity of your and the baron’s claims about the underlying causes of the current crisis, but it is not clear to me that the baron is maligning any ethnic group or groups here. his anger is directed, as far as i can make out, at would-be social engineers (presumably overwhemingly white) and greedy politicians and business leaders.

    gordon, i used to think you commented at this site in good faith. there is room for an annoying gadfly or two, if they make useful objections to the positions of others. but accusing the baron of having ‘sordid racist ends’ over a disagreement of this nature is over the top.

    i have noticed a degradation in the quality of your comments during your brief re-emergence of late. more attacks, a more obvious desire to confound others, a nastier tone. i used to actually quite enjoy your contrary positions, and consider your points thought-provoking at their best. now you come across as being a rather spiteful little attention-seeker. your moniker, whether you coined it yourself or not, is indicative of a conviction that some special status accrues to you, as an online iconoclast of some distinction. gosh, he was banned from LGF! how remarkable! he must be ten feet tall!

    as for the baron’s points, the notion that the politically-motivated diversion of vast sums of money to unreliable borrowers played a large part in the current problems is one that many are discussing quite seriously. there must be many complex derivatives on the market, yet they are not all being implicated in the crash.

    could i ask you to explain to me why thomas sowell also pins a large portion of the blame for the current crash on political meddling designed to secure credit for those unlikely to be able to pay it back? is he a racist too? hmm?

  4. The Community Reinvestment Act was passed in 1977. Subprime lending didn’t begin in earnest until 2001.


    The subsequent amendments to the act had subprime lendiing a major problem well before 2001.

    Bush did not help avert the problem, but there were many hands involved.

    Obama’s ties to Madeline Talbott and ACORN are a good place to start.

    Try googling it and ignore Gordon’s blather.

  5. “gordon,

    what exactly is racist in this post? “

    It hints at the reality of inherited IQ. Which for soft-socialist Gordon is A priori false and the product of malevolent psychology.

    “even among the subprime category the numbers aren’t greater than 50%.”

    Pity Gordon.

    “Subprime lending didn’t begin in earnest until 2001.”

    His partisan sniping is so outrageously stupid that he always gets responded too nonetheless.

    Nevertheless George Bush made a speech that is a good example of how Liberalism becomes Socialism when “Freedom” is structuralized or “Statist” or a “Right” (He did this with Iraq, remember?) :

    “All of us here in America should believe, and I think we do, that we should be, as I mentioned, a nation of owners. Owning something is freedom, as far as I’m concerned. It’s part of a free society. And ownership of a home helps bring stability to neighborhoods. You own your home in a neighborhood, you have more interest in how your neighborhood feels, looks, whether it’s safe or not. It brings pride to people, it’s a part of an asset-based to society. It helps people build up their own individual portfolio, provides an opportunity, if need be, for a mom or a dad to leave something to their child. It’s a part of — it’s of being a — it’s a part of — an important part of America.

    To open up the doors of homeownership there are some barriers, and I want to talk about four that need to be overcome. First, down payments. A lot of folks can’t make a down payment. They may be qualified. They may desire to buy a home, but they don’t have the money to make a down payment. I think if you were to talk to a lot of families that are desirous to have a home, they would tell you that the down payment is the hurdle that they can’t cross. And one way to address that is to have the federal government participate.”

    It smacks of State Socialism. From a Marxist point of view this is done to demoralise and placate the workers movement. But in America there is no particularly strong workers movement. So I stick with my theory that is caused Liberalism.

    Barry O is really a continuation of George Bush. Only more extreme, which is “change” in the dry sense of the word.

    A lot of things have gone into this crisis. This is Post-modern cyber Economy.

  6. You can’t get tax dollars out of people who have poor credit or no credit at all. You get tax dollars out of people who work and make money. How many tax dollars are going to be taken away from those who probably didn’t pay much in tax dollars in the first place. Not only did people become purchasers of homes they could not afford or even deserve to own, they won’t even be on the hoof to help fund the bail out.

    Just another way of looking at it…..screwed in all orifices.

  7. Subprime loans didn’t begin in earnest until 2001?
    What a bald faced lie. That year is chosen, not at random, but to perpetuate acute BDS. Even Bill Clinton admitted it was the donk’s fault for resisting every attempt at reform or increased control over GSEs.
    As for subprimes and their origins, a name mentioned on this forum before, Penny Pritzker, reemerges.
    “It all stems from the questionable practices of Penny Pritzker and the Superior Bank of Chicago. Prtizker, by the way, is a major bundler for the Obama campaign. Indeed, the scion of one of Chicago’s wealthiest families has raised between $200,000 and $500,000 for Barack Obama’s Presidential bid. Her family also donated over $40,000 to Obama’s 2004 Senate campaign. Now wonder why Obama is opposed to interest rate freezes and a moratorium on sub prime mortgages: most of his campaign cash is from those who have shamelessly profited from our current economic collapse.”
    Credit, where credit is due.

    As for the alleged fix to this problem, what has been socialized is debt. The free market with only rewards, and no risks, is a creature unlike any I’ve ever seen.

    As for any claims of racism in this post, I harken back to the modern definition.
    “The modern definition of ‘racist’ is someone who is winning an argument with a liberal.”
    Peter Brimelow.

  8. No2liberals, if you look at a curve of housing prices, you’ll find that the subprime market indeed did get started for real in 2001. That’s when the bubble started.

    A different thing, leading up to the bubble, was more leanient lending terms to non-white minorities. This was poison for the system. But interstingly, that did not really reflect itself in housing prices until, well, 2001.

    There are two different issues at play here. Good to know them both.

  9. Is this guy even right?

    And Iceland? If Iceland suddently turns poor (say, like Argentina did) then this is happening to fast.
    The RTS index in Moscow, just crambled 20%.

    Maybe this is just a warning. I am expecting the worse to happen in or around 2012. Then, we’ll not able to act in the Economy, the monster will be to big.

    Also, worth of mentioning is the Nationalisations (oe should I say E.U isations) os some European banks.
    Especially Fortis in Holland. I think that the crisis will be felt more in the Benelux…

    But, is this guy even right?

  10. Not EUisations. Actually those nationalisations breach EU rules, as do the guarantees various governments are providing for depositors at these big banks.

    A few years ago Richard North and his chums at EU Referendum predicted that the Euro and the EU wouldn’t survive a genuine financial shock. Seems they were right. The moment something threatens the member states the drop the pretence of european unity and rush to protect themselves. The EU will naturally try and prevent this by attempting to create a “unified response” which naturally will drag down the economies of Europe with more regulation and red tape without addressing the structural defects that have made this problem so hard to deal with for the european economies – defects introduced by the EU, in fact.

  11. I worked in banking in the 1980’s and 1990’s. Banks were scared to death of the CRA. And yes, CRA WAS designed to get more loans to blacks. It was one of “this isn’t a quota”, but if you don’t meet this magic percentage of loans to blacks you won’t ever be able to merge with or buy another bank.

    CRA was one of those laws that everyone with a brain knew was ridiculous and dangerous in the long run but everyone was too scared to say anything and lose their job.

    It was sad, too. A good loan is a good loan, no matter what the color of the borrower. Bank LOVE to make good loans! It was only thanks to the intrusion of the idiots in the federal monster that screwed this up.

  12. henrik,
    I wasn’t addressing housing prices, but the actual practice of issuing subprime mortgages. It began long before 2001. Lenders were coerced into making loans irrespective of sound fiduciary practices.
    Housing prices are a different story altogether. There is even a fascinating video on the subject.
    The year 1995 is particularly noteworthy, as the beginning of the subprime debacle.

  13. Here are some statistics to go with your pre-conceived notions, from the end of 2006.

    The dreaded subprime mortgage market consists of only 14% of all loans. Note the two most long-term set of “reparations to African Slaves” as the Baron so elegantly puts his naked racism – FHA and VA subsidized loans, which actually had lower foreclosure rates than previously.

    And the rate of foreclosure for such loans is, shall we say, WELL below the alarmist numbers put out by those, like the commenters on this site, eager to stoke the fires of racism.

    Here are some more facts from 2008: The highest foreclosure rate in the U.S. is in Nevada, with about 2% of all mortgages in foreclosure.

    I don’t usually throw around charges of racism carelessly. But in this situation the Baron’s naked blame of the whole mess on “indirect reparations to the descendants of African Slaves” is just too outrageous to let pass. It is a racist statement, pure and simple, unadorned with anything but an iota of truth to it.

    Gates of Vienna plays a valuable role in the fight against International Muslim Jihad, particularly in its assault on Europe. But forays into naked racism such as this must be called out for what they are.

  14. Many things have gone into this crisis. I think we ight be looking at the end of the Postmodern economy, and with it Postmodernism. No one can say for certain what the future will bring, but it will likely be penitence.

  15. Gordon,

    Baron was not being “racist”.

    If the crisis had to do with the behaviour of a different ethnic group or the especial “rights” granted to them, or in name of them, then, criticising it is not racist.

    And for what I read, Baron is criticising more the overwhelming white elite than the blacks who only grabed the venom white people gave to them. Right?

    “commenters on this site, eager to stoke the fires of racism.”

    Oh boy, I’ve been commenting less and less here those last few days just because I am still colding my head from an event that happened, few meters from my home. I tell you, if I did that just to not “stoke fires of racism”…

    Shame on you.

  16. Good post Baron. I copied it to a word document and emailed it to quite a few folks. It should be noted too, that Carter was the president in 1977 and which political party was dominating the Legislature in those days? ……

  17. So, have you heard about the SNL skit from this past Saturday, that got yanked by NBC?
    It can’t be found on youtube or NBC’s website any longer, but it can be found here. View and/or download it fast!
    Who are the Sandlers? Close friends of Soros, with the same aim, and made billions on subprime mortgages.

  18. Sung to the Dr. Pepper theme,

    Im a racist, your a racist, she’s a racist, he’s a racist, what does it take to be a racist too?

    Answer: Being born white and drawing breath.

  19. Former Gordon puts his own spin on things:

    “Mortgage lenders didn’t start doing this in 2001 because they were altruists, or because they were scared of UN bureaucrats and Jesse Jackson-wannabes. They started it because they were greedy and because they thought that real estate values would always go up.”

    Wrong. They started it because the Democratic Congress demanded it.

    There are some nice videos on YouTube. Quite a few. Just search for ‘fnma’.

    FNMA, Democrats, Payoffs

    FNMA hearings

    … in which the Republicans tried to impose regulation and oversight, and the Democrats, led by Maxine Waters, Rep. Meeks, Rep Lacy, Rep. Davis, and everybody’s favorite, Rep. Barney Frank – all saying “there is no problem – Mr Raines is doing a brilliant job – nothing is wrong.”

    By the way, Franklin Raines is one of Obama’s top economic advisors.

    ” I think we might be looking at the end of the Postmodern economy, and with it Postmodernism.”

    We’ll all be better off without postmodernism (except, of course, for the academics trying to keep the corpse alive).

  20. Gordon, can you tell me why are you going to vote Obama?

    Because, if you no something about American politics and society, I know nothing or very few.

    I will be surprised if Obama gets more than 35% so you can see how little I know. Why are people (you, for instance) about to vote for him?

  21. Former Gordon, if you hate this blog so much, why don’t you go somewhere else to pollute the blogosphere with your rants about ‘racism’?

    Thanks in advance.

  22. I guess this little snippet from HUD would be considered “racist”?

    HUD: Five Million Fraudulent Mortgages Held by Illegals
    Email article | Print article

    Some five million fraudulent home mortgages are in the hands of illegal aliens, according to the U.S. Department of Housing and Urban Development.

    It’s not known how many of those have contributed to the subprime housing mortgage meltdown, but it has affected every state, including Arizona.

    The problem began years ago when banks were forced to give mortgages without confirming social security numbers or borrower identification. As a result, illegal immigrants were able to obtain home mortgages which they could not afford.

    One illegal alien was arrested this year in Tucson after allegedly using a stolen social security number to buy two homes and rack up over $780,000 in bad debt.

  23. Thanks, Bordergal, for taking the Baron’s (and others on this thread) racist premise, and ratcheting it up a notch.

    Here are some actual facts, as opposed to the racist witchhunt propagated by the Baron:

    Some choice snippets:

    The Community Reinvestment Act applies to depository banks. But many of the institutions that spurred the massive growth of the subprime market weren’t regulated banks. They were outfits such as Argent and American Home Mortgage, which were generally not regulated by the Federal Reserve or other entities that monitored compliance with CRA. These institutions worked hand in glove with Bear Stearns and Lehman Brothers, entities to which the CRA likewise didn’t apply. There’s much more. As Barry Ritholtz notes in this fine rant, the CRA didn’t force mortgage companies to offer loans for no money down, or to throw underwriting standards out the window, or to encourage mortgage brokers to aggressively seek out new markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on packages of subprime debt.

    Many of the biggest flameouts in real estate have had nothing to do with subprime lending. WCI Communities, builder of highly amenitized condos in Florida (no subprime purchasers welcome there), filed for bankruptcy in August. Very few of the tens of thousands of now-surplus condominiums in Miami were conceived to be marketed to subprime borrowers, or minorities—unless you count rich Venezuelans and Colombians as minorities.

    Lending money to poor people and minorities isn’t inherently risky. There’s plenty of evidence that in fact it’s not that risky at all. That’s what we’ve learned from several decades of microlending programs, at home and abroad, with their very high repayment rates. And as the New York Times recently reported, Nehemiah Homes, a long-running initiative to build homes and sell them to the working poor in subprime areas of New York’s outer boroughs, has a repayment rate that lenders in Greenwich, Conn., would envy. In 27 years, there have been fewer than 10 defaults on the project’s 3,900 homes. That’s a rate of 0.25 percent.

    On the other hand, lending money recklessly to obscenely rich white guys, such as Richard Fuld of Lehman Bros. or Jimmy Cayne of Bear Stearns, can be really risky. In fact, it’s even more risky, since they have a lot more borrowing capacity. And here, again, it’s difficult to imagine how Jimmy Carter could be responsible for the supremely poor decision-making seen in the financial system. I await the Krauthammer column in which he points out the specific provision of the Community Reinvestment Act that forced Bear Stearns to run with an absurd leverage ratio of 33 to 1, and which instructed Bear Stearns hedge-fund managers to blow up hundreds of millions of their clients’ money. Perhaps Neil Cavuto knows which CRA clause required Lehman Bros. to borrow hundreds of billions of dollars in short-term debt in the capital markets and then buy tens of billions of dollars of commercial real estate at the top of the market. I can’t find it. Did AIG plunge into the credit-default-swaps business with abandon because Association of Community Organizations for Reform Now members picketed its offices? Please. How about the hundreds of billions of dollars of leveraged loans—loans banks committed to private-equity firms that wanted to conduct leveraged buyouts of retailers, restaurant companies, and industrial firms? Many of those are going bad now, too. Is that Bill Clinton’s fault?

    Investment banks created a demand for subprime loans because they saw it as a new asset class that they could dominate. They made subprime loans for the same reason they made other loans: They could get paid for making the loans, for turning them into securities, and for trading them—frequently using borrowed capital.

    Lending money to poor people doesn’t make you poor. Lending money poorly to rich people does.

  24. Henh, what a pathetic attempt at placing blame, Gordon.
    What about these people, the Sanders? Good and loyal liberals.
    A prime snippet.
    The collapse was primarily caused by the GDW purchase, which became an albatross around Wachovia’s neck soon after the purchase. “Wachovia found itself in ARM’s Way” was the headline of a recent Wall Street Journal article. A huge percentage of these Wachovia ARMs were made to deep subprime borrowers with very poor credit scores. Most of these were “inherited from its ill-timed acquisition of Golden West” at the end of the housing boom in 2006.”
    Then from W. Ketchup(by subscription).
    “In 1977, President Jimmy Carter signed the Community Reinvestment Act to force banks to lend money to low income communities. In 1995, President Clinton dramatically expanded the Act, requiring greater lending to low income, inner city populations, and allowing radical community groups to exact fees from banks for marketing these risky loans. The quasi-government institutions Fannie Mae and Freddie Mac bought many of these loans from local banks, repackaged them, and sold them to Wall Street firms.

    In 1999, after the Clinton expansion of the Act had taken effect, Steven A. Holmes wrote: “In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.” Last month Congress bailed out Fannie and Freddie at a potential taxpayer cost of $200 billion.

    Bill Zachary, Chairman of W Ketchup, commented: “It should not be any wonder that a housing bubble occurred as Congress forced banks to make risky loans and Greenspan lowered interest rates to 1.25%. Politicians have blamed Wall Street greed for this financial crisis, but on Wall Street greed is balanced by fear, and the market soon erases excesses. For Washington politicians, greed has no restraint since Congress can confiscate money from taxpayers at will.”

    President Bush twice tried to restrict the dangerous lending banks were required to make under the Act, and in 2005 Senator John McCain proposed reform legislation. Democrats blocked the reform efforts.”

    So call me a racist, so we will know you have lost another argument.

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