Max Fraad Wolff, economist and writer. He is an instructor at the Graduate Program in International Affairs, New School University. He is a frequent contributor to Huffington Post, Asia Times and The Indypendent.
The US government has seized control of the mortgage finance companies Fannie Mae and Freddie Mac in what could become the largest corporate bailout ever. The Treasury Department has pledged to provide as much as $200 billion as the two quasi-public companies deal with heavy losses on mortgage defaults. We speak with economist and writer, Max Fraad Wolff. [includes rush transcript]
This is a rush transcript. Copy may not be in its final form.
AMY GOODMAN: The US government has seized control of the mortgage finance companies Fannie Mae and Freddie Mac in what could be the largest corporate bailout ever. The Treasury Department has pledged to provide as much as $200 billion as the two quasi-public companies deal with heavy losses on mortgage defaults. Fannie Mae and Freddie Mac own or guarantee just under half the country’s $12 trillion in mortgage debt. Treasury Secretary Henry Paulson announced the bailout.
HENRY PAULSON: Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in the financial markets here at home and around the globe. This turmoil would directly and negatively impact household wealth, from family budgets to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation. That is why we have taken these actions today.
AMY GOODMAN: Wall Street investors were buoyed by the news. On Monday, gains were posted on the Dow Jones, the Standard & Poor 500 and the NASDAQ exchange. Both Republican and Democratic presidential nominees John McCain and Barack Obama are supporting the bailout. But Obama said the government needs to take steps to guard against Fannie Mae and Freddie Mac ultimately profiting from the government assistance.
SEN. BARACK OBAMA: We have to protect taxpayers, not bail out the shareholders and management of Fannie Mae and Freddie Mac. It is a challenging situation that’s been festering for a long time. There are some community and regional banks with potential exposure, including those serving low-income communities. We’re going to have to carefully address those situations, but we must not allow government intervention to protect investors and speculators who relied on the government to reap massive profits.
AMY GOODMAN: Many critics that support the move say it could still have been avoided with better regulation of the housing market. Robert Reich, the former Labor secretary under President Bill Clinton, calls the bailout “socialized capitalism.” He continues: “Along with making lots of money for investors and their executives, Fannie and Freddie corrupted our political process. They blocked any attempt to reign in the risks. Their lobbyists were and are the most sophisticated and among the most ubiquitous in Washington.”
Well, Max Fraad Wolff joins me here in the firehouse studio. An economist and writer, he’s an instructor at New School University, a frequent contributor to the Huffington Post, Asia Times and The Indypendent.
Welcome to Democracy Now!
MAX FRAAD WOLFF: Thanks for having me.
AMY GOODMAN: What do you think of the bailout?
MAX FRAAD WOLFF: Well, I think that it’s a little bit like the Bear Stearns “bailout,” quote-unquote, which is, it’s a little bit more funky and a little bit more complicated than it probably needs to be and than it’s generally represented in the media. So what the government has done is take control and assume all the risk associated with these two gigantic financial companies without fully taking them over, in a classic sense, and without fully offering as much protection as they’re telling the world they offer.
And I do think it’s a watershed moment in the history of American homeownership, and it’s a watershed moment in the relationship between financial firms and the government — another. They’ve been coming fast and furiously in the last thirteen months, as the credit crisis intensifies and drags out. But it’s a big change in the way American homes will be financed down the road, and it’s a big change in who’s to blame and who has to ultimately pay back for the mistakes of the housing bubble.
AMY GOODMAN: Max, step back. How did these institutions get established, and why?
MAX FRAAD WOLFF: OK, well, they were established for reasons that will be immediately interesting to your audience, I’m sure. In 1938, Fannie Mae, the older, larger, was born, and it was born to do two things, which I think we can relate to now: reduce the number of foreclosures and increase the amount of homeownership by middle-class Americans. Before Fannie Mae, a relatively smaller percentage of more affluent Americans owned their homes. So, in 1938, only about 40 percent, a little over 40 percent, of Americans owned their own home, whereas last year 68 percent of Americans owned their own home. So it did work, on some level.
Freddie Mac started in 1970 to give competition to Fannie Mae. And Fannie Mae was taken out of the government and privatized in 1968. So, in 1938, Fannie Mae is born; in 1968, it’s privatized; in 1970, Freddie Mac is introduced to compete. Their basic function has been, with — the way it’s done has changed a bit — but to act as an intermediary between banks loaning to households and financial markets to make more loans available at lower prices to more Americans.
AMY GOODMAN: Senator Christopher Dodd of Connecticut says he did not know this was going to happen — well, at least as quickly as it did.
MAX FRAAD WOLFF: Mm-hmm.
AMY GOODMAN: He’s in charge of banking.
MAX FRAAD WOLFF: Senate Banking Committee, yeah. He did authorize a lot of the moves that were made on Sunday and earlier congressional activity, so it’s hard to believe that he couldn’t have imagined something like this was happening. And I don’t believe he wasn’t privy to five weeks of emergency Treasury-Federal Reserve meetings on this subject.
AMY GOODMAN: Who was privy?
MAX FRAAD WOLFF: Well, the Treasury was certainly there. OFHEO, the Office of Federal Housing Enterprise Oversight, the group that’s done such a stellar job in regulating Fannie and Freddie over years past, they were there. Some representatives of various other government agencies, the Office of Thrift Supervision, Office of the Controller of the Currency, and select members of the House and Senate, as well as, at least by his stories, Obama’s people were in the meeting and were at least allowed to sit in, possibly to contribute. I believe — and I don’t know if this is correct — that McCain’s people were not there but were also invited.
AMY GOODMAN: So the campaigns were invited to be part of this. Why?
MAX FRAAD WOLFF: The senior financial markets and economic people. Well, because a lot of what this, again, bailout does is kick the can down the road. So despite the fact that Paulson, the Treasury Secretary, has said that he’s very happy to have not passed this forward, it’s such a large series of commitments were made on Sunday, and they’re so ambiguous that this is going to be an issue going forward as more money is spent and more actions are required deep into the next administration.
AMY GOODMAN: So, what do you mean, McCain people weren’t there?
MAX FRAAD WOLFF: As far as the story that I heard, both parties were invited, but McCain’s people were unable to attend.
AMY GOODMAN: I wanted to go to a comment of Sarah Palin. She is, of course, the Republican vice-presidential nominee, made what’s being called her first major campaign gaffe Saturday, when she claimed Fannie Mae and Freddie Mac have become too big and too expensive for taxpayers. She was speaking before the government bailout.
GOV. SARAH PALIN: John McCain has been calling for years to reform things and cut bureaucracy, even at the lending agencies that our government supports. The fact is that Fannie Mae and Freddie Mac, they’ve gotten too big and too expensive to the taxpayers.
AMY GOODMAN: Your response to what Governor Palin said?
MAX FRAAD WOLFF: I’d say that if she waited another six months, she might have been right, or at least another few days. But so far, they haven’t actually been just expensive to taxpayers, and even if they were, they wouldn’t be the only thing that’s expensive to taxpayers. And so, it would be more interesting to hear her say this if she was opposed to n number of other things on which we’re busy spending, like the war in Iraq and other things.
AMY GOODMAN: But the taxpayers aren’t footing the bill, until now, until this announcement.
MAX FRAAD WOLFF: Now they’re going to. And, by the way, her campaign officially likes the idea of the taxpayers taking on $200 to $500 billion in risk liability, and they’re going to spend —- the US government is going to -—
AMY GOODMAN: What do you mean, they like it?
MAX FRAAD WOLFF: The US taxpayers are going to spend somewhere between $100 and $300 billion before this is all over, with this new arrangement where they bring Fannie and Freddie under their wing and assume the debts. So her campaign, her included, officially like this “bailout,” quote-unquote “bailout,” which suddenly makes the taxpayers pay for Fannie and Freddie, which they hadn’t before. So, she thinks in the past that Fannie and Freddie were a burden. They weren’t. But she thinks making them a burden to the taxpayer in the future is a great idea, because she and her campaign endorse making them a burden, even though they didn’t used to be.
AMY GOODMAN: How did it come to this?
MAX FRAAD WOLFF: Well, I mean, a lot of things. I think it’s a watershed moment that nobody wants to talk about. But the single biggest reason that the Treasury moved now and that Fannie and Freddie are now under conservatorship and no longer independent is that foreign central banks and foreign investors started to sell off their debt that they bought from Fannie and Freddie. And we watched this for the last three or four months, those of us who watch this. Foreign interests, particularly foreign central banks in East Asia and the Middle East, owned $1.4 trillion worth of instruments, debt, backed by Fannie and Freddie, and they began to sell it off.
AMY GOODMAN: Why?
MAX FRAAD WOLFF: Because it’s simply too risky. Owning large amounts of mortgage bonds in US dollars with a falling dollar — it’s reversed lately, but generally speaking, a falling dollar over many years — of an unknown credit quality is just not desirable.
And I think some of them are politically worried that they’re going to have to go back to their general public and tell them, “OK, I’m sorry, folks. We lost hundreds or tens of billions of dollars supporting the American middle class, while not supporting you.”
The flipside of that, which I think no one’s mentioned, which is pretty interesting, is that the federal government is going to be in the business now of making sure to collect home mortgage payments from Americans, who are not doing so well, and take that money and give it to investors, who they just bailed out, and take that money and give it to foreign investors, who they just bailed out. So the US government is going to take over some of the collection agency duties otherwise done by banks and other intermediaries and help make that money available to affluent investors and foreign investors.
AMY GOODMAN: How does the bailout contradict Bush’s so-called free market policies?
MAX FRAAD WOLFF: I mean, we’re watching the death of the free market ideology. It hasn’t been announced. But increasingly, the policies, the way we talk, the way we make legislation all but formally abandons the notion that the market can do it right, the government will do it wrong, and that government intervention is a bad idea. It turns out that government intervention is a bad idea, unless you want and need money from the government, in which case it becomes a fine idea, and bring on the government cash. So it might be unfortunate when somebody who’s having a tough time in their life wants a free piece of cheese, but when a bunch of executives want a free $100 billion, it turns out that’s the kind of government intervention we can all get behind, we can all believe in.
AMY GOODMAN: Where is the government intervention on behalf of struggling homeowners?
MAX FRAAD WOLFF: It’s pretty meek. The Treasury, the same group that did the takeover of Fannie and Freddie, has set up meetings with various creditors and has pressured banks and creditors to renegotiate and to be more flexible and more, quote-unquote, “understanding” to allow homeowners in distress, if they meet certain criteria, to renegotiate their loans and to get temporary protection from foreclosure.
But basically, the approach we’ve had from the federal government to helping homeowners has been to help the banks and the bankers and hope and pressure them to pass that help along. And just to give you an idea of how stunningly successful that was, in the second quarter, the second three-month period of 2008, 500,000 US houses were either in foreclosure or entering foreclosure. So, a half-million households slipped through the cracks in the three-month period. One can get the idea that this is not exactly airtight, this method of help.
AMY GOODMAN: Max Fraad Wolff, I want to thank you for being with us, economist, writer, instructor at the Graduate Program in International Affairs at New School University, writes for Huffington Post, Asia Times and The Indypendent here in New York.
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