A curious madness seems to have infected the world. By happenstance, I have been doing more reading about what caused the financial collapse of the Western World four years ago, and it seems clear to me that we are no closer to fixing the problem today than we were when it came home to roost.
The story, according to New York Times reporter Gretchen Morgenson and housing expert Joshua Rosner, begins with a Minnesotan who grew up 100 miles from here. James Johnson, originally from Benson, cut quite a swath in Washington. Had Walter Mondale been elected president in 1984, Johnson was the odds-on favorite to become his chief of staff.
That didn’t happen, so, Morgenson and Rosner report in their book “Reckless Endangerment,” the well-connected Johnson became the CEO of Fannie Mae.
Over nine years, Johnson took home an estimated $100 million. Fannie Mae, being a quasi-government agency — meaning it could make money for profit, but taxpayers were on the hook for its losses — let lending standards deteriorate while playing political hardball with any member of Congress who had the temerity to ask questions. Johnson and his crew made campaign contributions themselves and provided lucrative jobs to congressional family members and former staff. Any member of Congress who didn’t play get-along, go-along, was warned in no uncertain terms, say Morgenson and Rosner.
Meanwhile, Clinton Treasury Secretary Robert Rubin pushed for repeal of the Glass-Steagall Act that separated commercial from investment banking. After leaving the Treasury, Rubin became vice president of Citigroup and pocketed $100 million, while his protege, Tim Geithner (who today is Obama’s treasury secretary), as the head of the New York Federal Reserve, reduced its oversight of Wall Street.
Lest you think I’m just picking on the Democrats, in 1999, after leaving Fannie Mae, Johnson joined the board of Goldman Sachs, the same year that Henry Paulson (who later became Bush’s treasury secretary) became Goldman’s CEO. Paulson was in charge when Goldman created some of its most catastrophic securities while Geithner’s Fed looked the other way.
To date, the American taxpayers have paid $153 billion to save Fannie Mae and Freddie Mac.
Maybe they didn’t commit any statutory crimes, but if the concept of a “public trust” actually existed, one would think these guys would at least be shamed out of positions of influence. Instead, with Geithner now serving as their poster boy, they remain influential members of the Washington-Wall Street establishment.
What makes it all seem like an enduring madness, however, came after reading “Boomerang” by Michael Lewis. He describes what happened in other nations while the group above was plundering America.
Iceland used to be a volcanic rock inhabited by fishermen and a few farmers. Then they discovered investment banking. One hedge fund manager explained it this way, Lewis writes: “You have a dog, and I have a cat. We agree that each is worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners but Icelandic banks, with a billion dollars in new assets.”
And with that, they went on a buying binge across the globe, using false assets to create false prosperity.
In Greece, which has the entire western economy teetering on the brink, the average government worker makes three times what anybody makes in the private sector. The national railroad has annual revenues of $100 million euros, a wage bill of $400 million and other expenses totalling $300 million.
In 2009, an election year, tax collection came to a halt for fear of offending voters. Meanwhile, Lewis writes, it is widely believed that all 300 members of the Greek parliament cheat on their taxes.
Lewis writes, “The structure of the Greek economy is collectivist, but … its real structure is every man for himself.”
Yet the Greeks blame everybody but themselves for the mess.
In Ireland, like in the U.S., a housing mania took hold. When it collapsed, leaving acres of half-built housing tracts, the pro-business politicians weren’t blamed like they were elsewhere. Without complaint, the Irish allowed the government to bail out the banks. Lewis writes that Americans are more likely to reveal personal problems, while the Irish remain tight-lipped. Centuries of hardship will do that to a people.
Germany meanwhile remains the most stable ship in the Western World. Its banks were burned by some bad bets on U.S. mortgage bonds, Lewis writes, mostly because the Germans thought there were rules — like thinking AAA-rated bonds were “risk free,” but few Germans walk away from their debts, so their banks remain healthy. They are now demanding that the Greeks change their national character in exchange for a bailout. Good luck.
Paul Krugman, the New York Times liberal columnist, keeps saying Americans don’t understand debt, and that the government needs to keep spending borrowed money to save the economy.
That requires an act of faith, but when one realizes that the madness is far more widespread than just the U.S., one has to wonder how much is enough, and how will it all be repaid. Spoiled by prosperity, we are still talking about what we are all entitled to instead of thrift. The tsunami of red ink may still be a hundred yards out, but I don’t think we are building a breakwater fast enough.
Tom West is the editor and general manager of the Record. He may be reached at (320) 632-2345 or by e-mail at [email protected].