Moon of Alabama Brecht quote
July 08, 2008

A New New Deal

Freddie Mac and Fannie Mae stocks took a dive yesterday. Both are now down 60% from the beginning of this year. These are congressional chartered companies that buy up mortgage loans and finance these through issuing bonds. These bonds have the implicit backing of the United States but it is unclear if this would hold when they default.

Many of the mortgages Freddie and Fanny bought over the last years are of dubious value and it is likely that the companies will lose a lot of money. Both will need fresh capital but I find it hard to see how anyone sane would invest in these. The U.S. taxpayer will have to jump in.

The last days made it clear to anyone that there will be no recovery this year and likely not even next year. The housing market will correct further down and take the country deeper into recession and possibly into a depression.

The whole problem is the result of false economic policies that started with Reagonomics and continued through Democratic and Republican presidencies.

Where is the political answer to this?

Schumer's housing bill will rescue some of the banks that finance his campaigns but it also puts even more burden on Freddie and Fanny. The rebate checks were used at the gas stations and did not ignite more economic activity. There were already calls for a second round of such checks.

Instead of financing further consumption any future program should put money were it really could induce more economic activities: creating new infrastructure especially for public transit, repairing bridges, changing suburbs into something that resembles towns and the like.

The program will have to be big. It will be a difficult fight to finance it as tax revenues will tank and liabilities  increase further through the wars that will continue to go on.

As the situation will get much worse over the next months, both presidential campaigns will have to present some new programs. McCain's current economic program of lowering taxes for the rich and corporations while claiming to balance the budget is just laughable. Obama's current program is much too small and consumption orientated.

The U.S. has structural problems that need structural answers, not some simple tweaking of economic screws here and there.

This chart (stolen from Krugman) shows the share of the richest 10 percent of the American population in total income. We are back in the gilded age and a new New Deal will be needed.

Could a possibly coming depression trigger the political will to introduce one?

Posted by b on July 8, 2008 at 13:58 UTC | Permalink

Comments

My totally uninformed and purely personal opinion: the rich who run the U.S. will be very very lucky if nothing more drastic than a new New Deal comes along. The New Deal was, after all, fathered by FDR, the great conservative. If the U.S. economy really does go into a 1930's grade depression, the logical political response would be much more far reaching reforms (in the favorable case) or something much more bloody (if things really go bad). France in 1789, Russia in 1917, Germany circa 1933, or even the U.S. itself in 1860 come to mind.

I agree with a thought expressed by a contributor to Pat Lang's SST blog that the crucial constitutional system of checks and balances has broken down in the U.S. It must be re-thought and updated for contemporary conditions, including, I believe, a neo-trust-busting component to reclaim government of, by, and for the people rather than of, by, and for corporate kleptocrats.

Of course, logic and politics are rarely wed, so a "great muddling through" is, perhaps, the likely outcome of the current economic distress and widespread disaffection with America's mal-functioning instituions.

Posted by: Hannah K. O'Luthon | Jul 8 2008 14:32 utc | 1

Could a possibly coming depression trigger the political will to introduce one?

Good question b, I believe controlled collapse has been the agenda all along...

Economic apartheid, financial terrorism...

Posted by: Uncle $cam | Jul 8 2008 14:32 utc | 2

changing suburbs into something that resembles towns and the like.

wouldn't that be glorious.

Posted by: annie | Jul 8 2008 15:12 utc | 3

I would only note that the first gilded age corresponds with the passing and enactment of the Federal Reserve act in 1913-14, the Income Tax act (which seemes not to have prevented an upward redistribution of wealth) and, most catastrophically, U.S. entry into WWI which brought about a century of evils that might have otherwise been avoided.

Posted by: Lysander | Jul 8 2008 15:36 utc | 4

The worse, the better. I hope the civilized world is taking steps to protect themselves from what will happen here. Taking the kind of steps they took to preserve their capital in October 87. And the kind of steps they took to isolate Germany until 1914.

Posted by: ...---... | Jul 8 2008 16:26 utc | 5

Nice graph. To me this one feels more permanent than the 1930s trial run.

Posted by: rapt | Jul 8 2008 18:24 utc | 6

I'm inclined to agree with rapt.

The real industry (that is, the wealth-production) in the US is military hardware. It won't go away when our insolvency takes its toll, though everything else will. If you'll permit the tired turn of phrase, I'd guess: the US is about to be the new post-Communist Russia. Wretched as hell, except for the gangster capitalists at the top. Mainly valued for all the guns we have lying around.

Posted by: Cloud | Jul 8 2008 21:18 utc | 7

'Some people say' there is another way to reduce that top 10% besides taxes...

When you consider how many working people were totally destitute in the Great Depression, reducing it down to 32% was just a haircut to the top ten.

Posted by: biklett | Jul 8 2008 23:39 utc | 8

Fed governor Poole agrees with me on Fannie and Freddie: link

Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.

``Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,'' Poole, 71, who left the Fed in March, said in an interview.

Posted by: b | Jul 10 2008 6:58 utc | 9

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