News & Views from 465 California Street

Paging Bill Clinton!

Clint Reilly

How quickly the worm turns. Just last November, pundits were predicting 40 years of Democratic hegemony and the dawn of a new progressive era.

That was before America’s $12 trillion national debt descended like a dark cloud over the Capitol.

The effect of this staggering number is twofold. First, it puts a damper on future government spending for social programs. Second, it has prematurely revived the fortunes of the Republican Party.

A New York Times article by Edmund L. Andrews explained our problem: “With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion per year by 2019, up from $202 billion this year.”

Liberal columnist Paul Krugman dismisses such figures as “deficit hysteria,” claiming that $700 billion is a sustainable debt service payment for a greatly expanded economy in 10 years. But Krugman’s ideology is blinding him to the political consequences of such staggering sums.

For middle-class taxpayers, the sticker shock will almost certainly raise grave concerns about the cost and size of government and set the stage for Republican candidates to unfairly attack Democratic incumbents as “tax-and-spend liberals” in 2010 and beyond.

It is ironic that Republican President George W. Bush’s failed economic policies and hands-off regulatory agenda created the crisis. Even the most egregious bank bailouts came under Bush’s watch. But who ever said politics is about the truth?

Here in the Bay Area – one of the most progressive regions in America – we will not feel the ground shift immediately.

Our congressional delegation, headed by Speaker Nancy Pelosi, has been instrumental in designing the economic stimulus packages aimed at reducing unemployment and boosting the economy. As California’s unemployment rate climbs past 12 percent, leaders such as East Bay Congressman George Miller and Peninsula Congresswoman Anna Eshoo have worked relentlessly to find smart remedies to the situation.

But national polls tell a different story. President Obama’s job approval rating has dipped below 50 percent for the first time, a key indicator that trouble may be on the horizon in 2010. The rancorous health care debate in Congress seems to have repelled all but the hard core partisans on each side of the issue.

And red state independents, many of whom vested their hopes in Obama just 12 months ago, are now defecting due to their concerns about the ballooning national debt. Recent gubernatorial races in New Jersey and Virginia saw Republicans winning handily; voters instinctively trusted them to make the right decisions on fiscal policy.

Miraculously, Republicans – who only months ago were stumbling in the dark – now have a signature issue on which they have more credibility than Democrats.

Luckily, Democrats already have a tried-and-true roadmap to success when faced with this scenario. They should take a page from the book of wily pol Bill Clinton.

Governing in a decade when voters were suspicious that Democrats were weak on crime, Clinton passed the largest national crime bill in history. Among other things, the bill put 200,000 new police officers on the streets, eliminated federal Pell grants for prison inmates and increased penalties for sex offenders. In addition, the crime bill pacified law-and-order Democrats while co-opting police officer unions and police chiefs.

Clinton didn’t stop there. Responding to an impulse for fiscal restraint that runs deep in the psyche of American voters, he enacted policies that reduced the national debt and curtailed social spending. He was severely criticized in his own party for triangulating Republican issues but his tactics worked. No longer assailable as a “tax-and-spend liberal,” Clinton cut the legs out from under a hapless Bob Dole in his 1996 presidential reelection campaign.

It does no good to point out that Republicans were the party in power when the national debt shot skyward. Today, American voters want leaders they can trust to fix it.

President Obama and Washington Democrats should heed Clinton’s example. They must break the bankers, not the bank.

Comments (4)

  • Here is what realy happened Clint, don’t blame Bush, Thank Barney Frank and Chris Dodd. Maybe you should tell the truth you scumbag.

    “We must not forget that the catalyst for most of the stress in the housing market was government policy aimed at increasing the homeownership rate through lowering mortgage lending standards. These policies began in 1977 with the Community Reinvestment Act (CRA) which targeted banks and encouraged them to increase lending in low- and moderate-income communities. From 1977 to 1991, $9 billion in CRA lending committments had been announced.

    In 1992, congress passed the Federal Housing Enterprises Financial Safety and Soundness Act, also known as the GSE Act (ironically, the name sounds so benign). The objective here was to force Fannie and Freddie to purchase loans that had been made by banks; loans that were made as part of the CRA. The GSEs had to do this to comply with the law’s “affordable housing” requirements. Since then, Fannie and Freddie have purchased over $6 trillion of these mortgages. The goal of community groups, of forcing Fannie and Freddie to loosen their underwriting standards in order to facilitate the purchase of loans made under the CRA, was achieved. Congress inserted language into the law encouraging the GSEs to accept downpayments as low as 5% or less, ignore impaired credit if the blotch was more than a year old, and otherwise loosen their lending guidelines.

    The result of these loosened credit standards, and a mandate to make “affordable-housing” loans, created a massive pool of high risk lending that ultimately drowned the GSEs, overwhelmed the housing finance system, and caused an expected $1 trillion in mortgage loan losses by the GSEs, banks, and other investors and guarantors. Most tragically, there is an expectation that, at the end of this cycle, the U.S. will have seen 10 million or more home foreclosures.”

    Posted by: Ty Webb | December 1st, 2009 at 11:59 am

  • Your article lays the total blame of our current finacial crisis on Bush.
    I am a Independent (former republican) who recently voted for Obama.
    The link below is a short history of the repeal of the Glass Steagall Act
    which a great many credible and finacially astute individuals believe was the major cause as it allowed Banks to merge with Investment houses and insurance companies.

    Democrats voted for it and President Cliton did not veto this bill.

    I have paid close attention to Obama and his administration.
    I now regret voting for him because he has not paid attention to energy policies, vacillated on Afghanistan, attacking Fox because he can’t handle criticisims re his Van Jones episode, Anita Dunn. His trip to China was a disaster and i have come to the conlusion I help elect a naive and an apparetly ill informed person.

    Anyone who can state that they plan to reduce the medicare buget by $500 Billion dollars yet improve the overall medicare system has too many nerons short of a brain.

    Obama is simply not credible and he will be a one term president.

    Posted by: William Byrne | December 2nd, 2009 at 11:37 am

  • Hi Ty,

    The intent of the legislative Acts you write about (the 1977 CRA and the Federal Housing Enterprises Financial Safety and Soundness Act of 1992) was to facilitate lending to put more Americans into home ownership, to achieve the American Dream.

    However, to lay blame the intent of those (very noble) aforementioned Acts being the root cause of this massive deflation we are witnessing take place is ignoring the truth that the repeal of the Glass-Steagall Act of 1933 via the passing of the Gramm-Leach-Bliley Act of November 12, 1999 and its subsequent effects was and is indeed the real cause of this Depression-style mess. But this won’t be like the Great Depression, more like the Great Recession for reasons i will attempt to explain below.

    But first, let’s address your stance above as i would like to respectfully disagree on some of your claims even though i agree with many parts of it. In 1977, the CRA was designed to mandate banks to invest in areas where they wouldn’t normally, to mend urban blight and uplift poor areas. It was designed in theory to increase lending to those on the lower end of the economic spectrum so they would have a stake in their neighborhoods and communities. What better way than to allow someone to be a homeowner? This was intended to uplift the inner cities and encourage investment in less than desirable areas.

    But what we are seeing now is far greater than what’s discussed above. This deflation is reaching even the good areas, and A credit, prime borrowers. What was the cause of this phenomenon?

    In 1990-1991, we saw a mini-recession brought on by the speculative excesses following the Reagan administration. The S&L crisis was handled rather well under George HW Bush (the father) as he went against his own GOP party and signed into law a Gov’t bailout program to aid fledgling, failing institutions. Yep, regulation. Tax and spend. There was so much loose lending, predatory lending, crony lending, and what i call “greater fool lending” that led to overleveraging during that mini-deflation and just bad loans and investments on speculative purchases. Texas was hit hardest. However, the rest of the nation didn’t see massive overleveraging as much because a massive bubble didn’t form. Why? Higher interest rates. Higher interest rates deters speculative forms of real estate purchases and tighter lending criteria. And stricter underwriting.

    We were lucky then in the early 1990s when Bill Clinton came to power. Clintonomics, was a modified form of Reaganomics, with smoothened out edges (regulation to check the “unfettered capitalism” part). Please refer to this link for explanation:

    But we were lucky in the mid 90′s. The PC age came about and new industries popped up. New industries that spawned real tangible jobs created work. The pioneers to credit for this were the tech entrepreneurs, who created out of nothing things new and those useful tools that would eventually make their way into offices, homes, cars, anywhere you can imagine (wireless now.. ;) From those creations came more upstarts such as software companies and it just kept on morphing until the internet age was derived enabled by the PC. Information superhighway, E-commerce, wireless, and the digital age ensued shortly thereafter and all the while these cottage industries created more real jobs. This boom reverberated into traditional industries and boomed the entire economy to great heights and pulled Real estate out of its previous doldrums. Overspeculation and overvaluation problems solved. There was real support based on income and salaries. Jobs to service mortgages.

    Former Federal Reserve Chairman Alan Greenspan was our chief regulator after the 2001 tech bust (excess) and he could’ve tightened the spigot on loose liquidity and stopped it all and the recession that would have occurred earlier would’ve been less severe and might of even been shorter. But he didn’t. Real estate was the other industry pumped up which now with the power of hindsight, became clearly speculative. The valuations were historically out of whack, due to interest rates being at a historically all-time low. But that wasn’t the only factor. It was those credit default swaps…”special investment vehicles”…toxic derivatives. The Gramm-Leach-Bliley Act of 1999 enabled banks to engage in risky lending practices. Why were they able to? Notes purchased on the secondary market were packaged and repackaged and then sold off as securities. There was no markings-to-market, and many were sold as prime even though bundled in were some loans that should’ve never been made in the first place.

    Fact is, banks such as Wachovia bank (which also engaged in these practices as Wachovia Securities) began selling mortgage-backed securities as early as 1998! They were the first. In order for other banks to compete they engaged in the same flawed practices. They were allowed to now with the repeal of parts of Glass-Steagall. It was all about underwriting and the credit ratings agencies and those regulatory entities didn’t do their jobs. GSEs, such as Fannie and Freddie, kept buying those mortgages until the Ponzi game was up. The bubble boom was built on a flimsy house of cards with the aid of loose liquidity. So historically low interest rates coupled with unprecedented greed enabled this mania to form and grow out of control. Irrational Exuberance was a key component because of over-leveraging. Real estate is a margined, leveraged long-term investment. It should never be a speculative one for folks who don’t have enough money or market strength/support behind them to play the game, because deflation can wipe out one’s equity and then the ratios are off. Unsustainable long-term especially if one loses a job or sees declining income due to a weakened economy.

    We will see how this plays out. Only the free market can unravel this completely. Until then, good ‘ol Joe and Jill B. Taxpayer has and will continue to play the role of risk sharing insurer after the fact, along with Gov’t.

    Posted by: Don Nguyen | December 2nd, 2009 at 4:15 pm

  • My quote was from Noriel Roubini, I’ll go with him over your explanation as only he and Peter Schiff predicted this mess.

    Blighted areas are blighted because the people there don’t give a shit.

    Posted by: Ty Webb | December 7th, 2009 at 11:13 am

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