Wow, I haven’t touched politics for … what? Two days? So it must be time to delve into it again, right?
You all know, by now, that I’m not an Obama fan. It’s not a case of being a McCain fan either. And I’m frankly surprised by the outpouring of wonderfulness that seems to follow Obama around. Looking from the outside, what I saw in the presidential elections were four high-profile, vehemently anti-war candidates (Ron Paul, Mike Gravel, Cynthia McKinney and Ralph Nader) and two vehemently pro-war candidates (Barack Obama and John McCain). And Americans, who said they were against war, voted overwhelmingly for a pro-war candidate. My own working hypothesis, then, is that the American people actually want someone to wage war on the rest of the world.
[ASIDE: If you actually believe that Obama is an anti-war dude, then you haven't been paying attention to his own words. Obama, to his credit, never deceived anyone on this. He quite clearly stated, time and time again while running for President, that he was for withdrawing most (but not all) troops in Iraq (the "bad" war), only to shift them to Afghanistan (the "good" war). He made that very clear right from the start. Just a shift -- and not a total one, at that -- not a stop.]
But I don’t want to talk about war today. I want to talk about something much more deadly. Finance. And it may be that, as an interested bystander, I can see the flow a little more clearly than those stuck in the partisan currents. I’ll try to be concise.
After the Great Depression, the decision was made within the United States to put walls between commercial banks and investment banks, so their purposes remained separate. This occurred in 1933. Sure, it made life boring, but it meant that commercial banks could concentrate on the nuts-n-bolts business of lending money to borrowers and accumulating funds from depositors and making sure that the amount lent out never exceeded the capital reserves to cover. And investment banks could handle all the risk they wanted without having a huge pool of depositor cash to use as poker chips. All hail the Glass-Steagall Act II of 1933.
When Democrat Bill Clinton was at the helm, the Gramm-Leach-Bliley Act of 1999 was passed. Under this Act (under the guise of “opening up competition”), the walls were broken down as this Act specifically repealed Glass-Steagall II. So, now, investment banks were able to use all that lovely deposited money of a commercial bank to go gamble on the financial primary and secondary markets to their hearts’ content. Nobody said “boo”.
When George Bush, Jnr, came along, he protected the banks. Now, here’s where I disagree with people who say that “bad” borrowers should sink or swim on their own abilities. It’s very well documented that banks deliberately targetted certain segments of the population with bogus claims and outright lies when peddling their sub-prime scams. I saw the same mechanism at play with some Australian banks toying with 120% mortgages, where they would lend out 120% of the stated valuation of a home. Now, if that kind of thing isn’t predatory, I don’t know what is.
But, back to the story, and to the USA. All fifty states of the Union saw these predatory loans as a bad idea. Every state regulatory body opposed them. But the Bush administration, invoking a dusty clause from a half-forgotten act, stopped every single state from enacting local consumer protection laws when it came to national banks. The consumers were unprotected, the banks deceived them, the ratings agencies colluded, and so here we are. In case you missed it, the upshot was, even if people complained, there was nothing anyone could do because the consumer protection laws were voided. Think upon that for a second and now try to blame the borrowers again.
Thus, we have the situation of Clinton doing the set-up, and Bush following through.
Now, Obama. He has let Geithner have his head over a ludicrous scheme, not to scrap all bogus securities (optimistic valuations have them worth 30 cents for every dollar of face value) and let free-market capitalism fall where it may, but to pimp these securities on the open market and subsidise buyers at the rate of 85:15. That is, if somebody wants to buy these securities (assuming they think they’ll appreciate in value anytime soon), for every $1 million they bid, the US government (i.e. the American taxpayer) will pay up $850,000, leaving the bidder with a risk of only $150,000 on a $1 million investment. What do you think will happen? Well, if you thought that that will make the loser banks even bolder, you’re right. Citi and Bank of America are buying up as many worthless securities as possible that they can flog at Geithner’s Bazaar, so they can offload them and pocket the profit. And the bidders will be emboldened to bid ever higher amounts for the securities because they’re only risking 15% of the price. Everybody wins … oh, except the taxpayer.
[ASIDE: As for the "regulator" that Obama has appointed (Schapiro), don't make me laugh. The woman hasn't yet met a question she couldn't wriggle out of answering. (See here (from the WSJ, for Chrissakes!) and comments here at the footnoted business blog.)]
Can you see the trend? Regardless of whether they’re Democrat or Republican, the same strategy has been playing out for more than a decade. It doesn’t matter who is the President, or who has the majority in Congress. Don’t be fooled by the meaningless variations between parties. I’m seeing this in Australia as well, where Labor is implementing past-administration Liberal policies (the great firewall of Australia, being one highly visible example). And yet Kevin Rudd has a 60+% approval rating. For executing what Howard planned for. Obama has an equally stratospheric approval rating. For executing what Bush planned for. And I don’t even want to get into the swamp that is New Labour in the UK.
When it comes to this — when, regardless of who’s in power, (bad) continuity remains — you have to realise that you don’t live in a democracy any more. Your country has morphed into something else.
