The 2008 election has many unusual aspects, but none is more bizarrethan the sorry spectacle of the bailout for Fannie Mae and Freddie Mac.
American voters are like the lambs being led to slaughter and at thevery height of the presidential campaign. Yet not a peep of protest fromJohn McCain and Barack Obama, not even a hint of the righteous angerinjured taxpayers will rightly feel as they figure out the deal forthemselves. The rescue of the two giant mortgage firms is another hugeexpenditure of the public's money--one or two hundred billion dollarsthis time--to reassure bankers and financiers the government stands bythem in their troubles, whatever the costs.
Think about it. Candidates Obama and McCain are wagging theirfingers at the governing system in Washington, both warning they intendto make big changes if elected. Meanwhile, business-as-usual doesn'twait for the next president. The financial system needs the capitalright now, and so Treasury Secretary Henry Paulson has opened up the spigot. Obama and McCain meekly bless the deal. This sequence of events makes themlook look the political goats, their grand talk of change pushedaside by what Wall Street demands. The 2008 election may be close, butit looks like the status quo has already won.
There is a lot more pain and embarrassment to come. The nation is in themidst of an historic financial crisis--more bank failures are ahead andprobably another bailout of even larger scale. Yet the two major partiesact as though this subject is too complicated for ordinary Americans tounderstand. Neither candidate has found the nerve (or decency) toexplain the full dimensions of what the country is facing. Both men areno doubt told to say as little as possible, for fear of touching offmore panic among investors. Voters can safely be left in the dark.
Facing the crisis honestly would not fit very well with the flag-wavingcampaign themes. The United States is financially busted and utterly dependent onlending from foreign powers--both friends and rivals around the world.The government rescue of Fannie Mae and Freddie Mac could not be put offuntil after the election, as insiders had hoped, because foreigncreditors were beginning to back away from lending any more capital tothe two failing US firms. The major creditors are led by China, Japanand other Asian nations, plus oil-rich Arab states and even Russia. TheBank of China has reduced its $376 billion in lending to Fannie andFreddie by 25 percent since July and other nations threaten to do thesame.
So the Treasury arranged a deal that throws Fannie and Freddieshareholders over the side, but promises to protect the creditors,foreign and domestic. Bill Gross, chief investment officer of PIMCO, themammoth bond house in California, issued an ominous warning in advance.If Washington didn't "open up the balance sheet of the US Treasury" andpump lots of public money into the ailing financial firms, the majorlenders would sit by and let the great deflation of Wall Street proceed to its ruinous climax. Without the big lenders, credit would dryup through the US economy and the destruction could prove bloodyhistoric for all. The Treasury Secretary heard the message.
How much more capital does Wall Street need to get well? Maybe as muchas $500 billion, some experts estimate. What's frightening is that eventhat great amount might not provide a cure for anytime soon for the realeconomy, where unemployment rises along with mortgage foreclosures.Thus, Washington puts up unlimited billions for financial repair, buthas been rather penny-pinching about paying for economic stimulus aimedat work and production. Obama now proposes a new stimulus package, butthe pitiful sum of $50 billion. McCain talks up more corporate tax cuts.
If Americans had a functioning democracy, both of these guys would becompeting furiously to get real.