If you want to understand what’s going on with the economy. . .

Then read this article at CounterPunch : “Why the Bail Out of Freddie Mac and Fannie Mae is Bad Economic Policy” by Michael Hudson. I’m not familiar with the author, but looking at the descriptions of a few of his books (Super Imperialism and Global Fracture: The New International Economic Order), he sounds right up my alley.

Here a central passage from the article:

For lawmakers there are two possible policy responses. The first and seemingly most logical response would be to re-set bad debts at levels that can be paid. This write-down would be in keeping with the direction of legislation since the 13th century to favor debtors more than creditors. After all, bankruptcy laws have replaced debtors’ prisons, enabling debtors to make a full start. Truth-in-lending laws, anti-usury laws and similar legislation have sought to balance what people earn and what they can afford to pay for housing and other debts. This is the balance that would be restored by writing down bad debts – or to put it another way, writing off bad loans.

This is not the path that Congress is taking. Instead of bringing debts within the ability to pay, its banking and real estate committees are trying to find a way to re-inflate housing prices. The hope is to enable existing mortgage debtors who have defaulted, or are on the brink of doing so, to get into a position to sell out or to borrow the money due on even easier terms from the Federal Housing Administration (FHA). This would leave government agencies rather than Wall Street holding junk mortgages. It would give security not to home owners and mortgage debtors but to the lenders and speculators holding the $5 trillion in mortgages guaranteed by the Federal National Mortgage Association (FNMA, “Fannie Mae”) and the Federal Home Loan Mortgage Corp. (“Freddie Mac”), as well as the default-insurance companies on the hook and whose IOUs have now sunk to junk status themselves.

[…]

Congressional banking committee heads are simply behaving as politicians traditionally do by giving priority to their major campaign contributors in the financial and real estate sectors. Led by Democratic senators Charles Schumer from Wall Street and Christopher Dodd from Connecticut’s insurance industry, and supported by Congressman Barney Frank from the real estate sector, Congress is seeking to bail out the bubble’s sponsors, not its victims. The plan is to re-inflate the housing bubble at least long enough for the largest banks and other financial speculators to dump their riskiest holdings. Book values on these mortgages – and the real estate that backs them – are purely fictitious, despite the AAA whitewash from bond-rating agencies which themselves are now under investigation for the fatal Arthur Anderson-style conflict of interest between their research and sales arms.

I know, that’s a lot of quoting, but the issue is complex and needs a little time to put together. Hudson does an excellent job laying out not just the criminal workings of banks and corporations in all of this, but the long-standing and intentional role played by the government (in this case Democrats somewhat more than Republicans) in creating this scandal and benefiting from their donors’ appreciation. This article is well worth your time.

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