McCain and the Mortgage Meltdown

Robert Scheer is the editor of Truthdig, where this article originally appeared. His latest book is The Pornography of Power: How Defense Hawks Hijacked 9/11 and Weakened America(Twelve).

Ignorance is bliss, which perhaps explains Gov. Sarah Palin being so confidently wrong about the root cause of the federalization of most of the nation's mortgage market. But what is Senator John McCain's excuse? Both act as if the financial meltdown of the US economy has nothing to do with the policies of the political party they represent--but she at least may not know any better.

Distracted momentarily from her campaign revelries of maverick opposition to the "bridge to nowhere," which she had supported until it became a public relations debacle, and congressional earmarks for which she, as a small-town mayor, had hustled piggishly at the federal trough, Palin made the mistake of dealing with an unscripted subject.

Referring to the government's bailout of Fannie Mae and Freddie Mac, Palin opined that the two had "gotten too big and too expensive to the taxpayers," displaying abysmal ignorance of the fact that only now will those privately owned banks become a huge taxpayer obligation, as the federal government takes them over. Nor can the meltdown of home values be traced to those two beleaguered institutions, because they did not make the original subprime mortgage commitments.

The housing bubble was the result of the Ponzi-scheme antics of those other financial entities: commercial banks, stockbrokers and hedge funds, which were allowed in a GOP-deregulated market to get into the "swap" business. Through the rampant reselling of loans, the obligation to collect on a loan was divorced from the act of selling it in the first place, so who cared if the recipient of the loan was not at all qualified or the appraisal of the property value was inflated, as long as the paper was traded away, or insured, before the moment of foreclosure?

As with any Ponzi scheme, the perps, who included the legislators as well as the bankers who exploited the loopholes they provided, expected to bail long before the bubble burst. The role of the legislators, Republican-led but with far too many Democratic running dogs, was critical to the success of the scam.

The mortgage swaps distancing the originator of the loan from the ultimate collector were made legal only as a result of the Commodity Futures Modernization Act, which former Senator Phil Gramm, R-Texas, pushed through Congress just hours before the 2000 Christmas recess. Gramm, until recently co-chair of the McCain campaign, also had co-authored the Gramm-Leach-Bliley Act, which became law in 1999 with President Bill Clinton's signature. That gem, which Gramm had pushed for years with massive financial industry lobbying, destroyed the Depression-era barrier to the merger of stockbrokers, banks and insurance companies. Those two acts effectively ended significant regulation of the financial community, and no wonder we have witnessed an even more rapid and severe meltdown in housing values than during the Great Depression.

Not surprisingly, Gramm was rewarded for his service upon retirement as a senator and as head of the Senate Banking Committee with a top position at the Swiss-based UBS bank, which is close to drowning in the subprime mortgage nightmare he helped create. These folks have no shame, as was evidenced when the senator's wife, Wendy, was named a director of Enron, whose roiling of the energy market had been made possible only through yet another provision of Gramm's Commodity Futures Modernization Act.

While neophyte Palin can claim ignorance of such matters, that would be particularly difficult for McCain, who as a senator consistently lined up with Gramm in his deregulation crusade. Clearly McCain had not learned much from his previous involvement with the savings-and-loan debacle about the risks to consumers in unregulated banking.

McCain served as chair of Gramm's abortive 1996 presidential campaign, and Gramm returned the favor, providing critical support for McCain with the hard-line Republican base, including the editorial board of the Wall Street Journal. It was assumed in the business press that Gramm was the front-runner to be Treasury secretary in a McCain Administration. Gramm left his role as the top economic person near McCain only after he made an embarrassing statement blaming the current economic downturn on "whiners," an awkward reference to the victims of his disastrous legislation.

Amazingly, the turmoil in the housing market, which has led to the socialization of the nation's revered homeownership market in a massive expansion of the role of big government, has apparently not troubled McCain's conservative supporters. As I said, ignorance is bliss, and evidently not just for the newbie Palin.

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