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SEIFFE:  It's The Economy, Dumbbell!

Tuesday, September 23, 2008 

By Ralf Seiffe

During the presidential campaign of 1992, James Carville famously observed “it’s the economy, stupid!”  His meaning was that any dummy could see that the White House would be won by the party complaining most about the economy and the one which promised the most economic progress.  Now, the failure of Fannie Mae and Freddie Mac as well as several of Wall Street’s pillars has created an economic mess that will again bring victory to the Democrats if they adopt a slight variation of their 1992 slogan.  This time  “It’s the economy, dumbbell.”

The “dumbbell” in this case is a description of what the Democrat constituencies have become since Bill Clinton’s first campaign.  On one end of this apparatus is the conventional perception of the Democrat constituency: the economically disadvantages, minorities, victims of identity politics, municipal and union workers.  These are the folks that make up the coalition that was forged during the New Deal and which was massively augmented during the 1960’s.

At the other end of the dumbbell are the wealthy new Democrats typified by the wealthiest senators and congressmen, new economy entrepreneurs, foreign-born currency speculators and their organizational progeny such as Move On.org and media matters.  What’s surprising is that the Democrats have been able to attract the patronage of the financial community, too.  Recent figures published by www.opensecrets.org shows that the majority of political donations made by large Wall Street firms go to the Democrats, including those firms that have been in the news these past weeks. This may help explain why the politicians--especially Democrats--are willing to bail out the plutocrats that have been their party’s target since Herbert Hoover was president.

Both of these countervailing weights are constituencies who expect something from the government.  On the “poor” end of the dumbbell are the recipients of a new form of welfare.  When Republicans forced “welfare reform” down Bill Clinton’s throat in the 1990’s, he appeared to choke but it was really a laugh; Clinton’s coterie simply moved from defining welfare from “Aid to Families with Dependant Children” to an even bigger giveaway, a program called “affordable housing”.   Since midway through his presidency, the government sponsored enterprises (GSE) operating in the mortgage markets have systematically defined credit standards down.  The effect of which was to provide homes for ever-less qualified borrowers who recognized the government as their benefactor, no doubt.

To make sure this was new form of welfare became a permanent part of Washington’s largesse, Clinton sent his “A-Team” to make sure the Democrats guided and controlled Fannie Mae and Freddie Mac.  This team included Bill Daley, Rahm Emanuel, Jamie Gorelick, Franklin Raines, James Johnson, Andrew Cuomo and others who made sure to expand “affordable housing”. They built a conduit to the private sector’s capital which they used to advance their political goals, regardless of the clearly evident credit risks.  This was done with the full cooperation of Janet Reno’s Justice department and the Controller of the Currency and one must be appalled by their technique of extorting banks with federal charters to make these sub-prime loans under the coercion of the Community Reinvestment Act.   But one must also admire how their scheme kept the bankers quiet by taking these bad loans off the banks’ balance sheets through the operations of Fannie and Freddie.

On the wealthy end of the dumbbell is the new Democrat constituency.  This included the Fannie and Freddie managers who paid themselves mega-millions and acted like a gang of freebooters; there are reports that this gang paid itself more than $200 million over several years.  Even that wasn’t enough so they actually cooked the books to hype their bonuses.  What a combination: fraudulent books designed to attract more phony credit.

These dilettantes were joined by real Wall Street financiers who one would normally regard as Republicans.  Bankers are often Republicans because the GOP tends to create environments in which profits accrue and are less taxed.  But this equal opportunity climate requires a banker to provide a service people want and that takes brains, pluck and capital.  .

But once in control of the GSE’s, Democrats offered a much more attractive business model.  Banks were drawn to the re-leveraging and securitizing of sub-prime mortgages because it is a huge business the size of which only the government could create.  It took very little creativity to accumulate these assets and they were easy to sell because bankers positioned them as nearly risk-free investments with Fannie and Freddie guarantees.  That made the business a source of huge bonuses. So, despite the GSE’s insistence that there was no government guarantee of Fannie and Freddie’s performance, the markets’ belief that there was such an implied guarantee has proven the more accurate assessment.  The bottom line was the Democrat’s new housing welfare system made Wall Street lots of money and the profits available eventually won the Street’s loyalty.

That leaves the bar between the dumbell’s weights--an $800 billion connector that links what Saul Alinsky would call the “Have Nots” and the “Haves”.  The regular Americans who are neither the low nor the mighty should probably be called the “patsies” because both ends expect these actual taxpayers to be the lifting force as they ride each end.  The families that played by the rules and paid their mortgages will be the ultimate victims of  “Fanniescam”.

Ralf Seiffe advises business start-ups and product launches from Chicago, Illinois and is a political analyst and columnist for the Illinois Leader and Illinois Review.

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