Robert Kuttner On The Reality of the U.S. Financial Crisis and What Needs To Be Done About It

http://www.huffingtonpost.com/robert-kuttner/dont-blame-the-dream-of-h_b_610594.html

All,

The brilliant and truly progressive economist, political analyst, and social activist Robert Kuttner cuts through all the bullshit and lies to tell the complete and unvarnished truth about the contemporary ravages of a deadly and ruthless corporate capitalism and its direct very destructive effects on the American people. In the meantime please do yourself a favor by clicking on the following link and checking out his latest very important book A Presidency in Peril . You won't be disappointed...

Kofi


Posted: June 13, 2010

Don't Blame the Dream of Home Ownership
by Robert Kuttner
Co-founder and co-editor of The American Prospect
Huffington Post

Here is a fable that is making the rounds. It is a collection of half-truths and outright lies:

The financial meltdown was the result of too many people pursuing the American Dream of home ownership. People who couldn't really afford to be homeowners became speculators. Government added to the damage with cheap mortgages, misguided laws such as the Community Reinvestment Act, and overgrown government-sponsored agencies like Fannie Mae and Freddie Mac.

This stuff is a staple of rightwing talk shows. In a moment, I will rebut each element of this storyline, but first I want to single out a wildly misleading piece by the New York Times financial columnist Joe Nocera. The piece, which ran in Saturday's business section, was titled "Wake-Up Time for a Dream."

The dream -- surprise -- is home ownership. It is depressing that a rightwing theme has invaded the mainstream Times.

Nocera writes, "The financial crisis might well have been avoided if we as a culture hadn't invested so much political and psychological capital in the idea of owning a home. After all, the subprime mortgage business's supposed raison d'etre was making homeownership possible for people who lacked the means -- or the credit scores -- to get a traditional mortgage."

Now this is just malarkey. And the Nocera piece is worth reading in its entirety to appreciate just how an influential financial columnist can get a critically important story so utterly wrong.

For starters, the homeownership rate was already 64 percent in the mid 1960s. It peaked at about 69 percent just before the bubble burst -- but was nearly 68 percent in 2001 before subprime lending took off. Back in the 19th century, thanks to the Homestead Acts of the Lincoln era, homeownership (mainly family farms) was well over 70 percent in much of the west.

Ordinary working people can become homeowners and accumulate property wealth when two elements are present. Government programs have to be competently run and prevent private-industry sharks from abusing them. And working people need a degree of financial predictability in their job security.

In the period between, Franklin Roosevelt and LBJ, both factors prevailed. The Federal National Mortgage Association, later privatized as Fannie Mae, was part of the government. If mortgages met its standards, FNMA bought them from local banks and replenished bank working capital. Just as importantly, wages of working people steadily rose, so that more and more ordinary Americans could afford mortgage payments. Not surprisingly, homeownership rates rose. After Congress passed fair housing legislation in 1968, so that minorities could get a fair shot, black homeownership took off, too.

But beginning in the 1970s, wages stopped increasing with productivity growth. And the financial sharks got hold of programs intended to promote homeownership.

A newly privatized FNMA increasingly thought more about using its implicit government guarantee to increase market share and enrich its executives and shareholders. Not until Bush II, however, in 2004 and 2005 just before the housing collapse, was Fannie directed by the political masters in the White House to lower its standards and purchase pools of dubious mortgages so that Bush's "Ownership Society" could claim credit for increasing homeownership rates.

Fannie Mae, a corrupted agency, has become a handy all purpose scapegoat. The lack of a provision in the financial reform legislation to resolve the mess at Fannie has become the main alibi that Republican senators give for voting against the whole reform package.

Nocera contends that the subprime industry's "raison d'etre" was to promote homeownership "for people who lacked the means -- or the credit scores -- to get a traditional mortgage." Sorry, Joe. The industry's reason for being was so that financial wise guys could make a bundle at the expense of suckers. Low income prospective homeowners were merely useful props. They were the poster children, but not the real purpose.

(In 1994, the same Nocera was celebrating prosperity-for-all in a wildly over-optimistic book titled "A Piece of the Action: How the Middle Class Joined the Moneyed Class." If his latest debunking is Nocera's way of doing penance for his own earlier misplaced euphoria, it is just not helpful.)

The pity is that carefully run government programs, from the Homestead Acts to Neighborhood Housing Services, to the good work of community development financial institutions such as Chicago's ShoreBank, have indeed increased the rate of homeownership among working people, and have done so by avoiding bait-and-switch products like subprime loans, not promoting them. The culprit is not the dream of owning your own home, but the utter cynicism of the financial sharks who took advantage of people innocently pursuing the dream.

Large numbers of subprime loans were in fact marketed to elderly people who had low mortgage debts, who could not live on fixed incomes and who needed to refinance their homes to take out equity. This was not about promoting homeownership but destroying it. Many of these victims are now losing their homes. The stripping of home equity is partly a story of a collapsing pension system in the face of rising costs for America's seniors.

The 1977 Community Reinvestment Act, which encouraged banks to keep credit flowing to less affluent neighborhoods "consistent with sound lending standards" is not part of this fiasco at all. Had CRA been enforced, subprime loans that waived underwriting standards would have been illegal. Most of the mortgage brokers who retailed subprime loans were not even covered by CRA.

It's certainly true (and no serious person claims otherwise) that 100 percent of Americans will never own their own homes. Some people are too transient or just too poor. Some would prefer to rent. But, maddeningly, one element of the story that the debunkers of the American Dream invariably leave out is the near-collapse of programs for affordable rental housing. Among moderate income Americans who rent, the fraction of income spent on housing rose steadily for three decades.

Ironically, many low income people turned to homeownership as a last resort because they couldn't find an affordable rental -- and the same Bush Administration that gutted subsidies for affordable rental housing refused to enforce laws on the books specifying standards for responsible lending to aspiring homeowners.

A sound housing policy would combine assistance for homeownership with affordable rental housing. A homeownership rate of 70 percent, which is common in several affluent European nations, is perfectly reasonable -- if our political system keeps sharks like the subprime gang from wrecking the system and agencies such as FNMA from being corrupted.

Fannie Mae, which over-reached and went broke as a private company with a government guarantee, is now a ward of the federal government. It should be restored to its original form under Roosevelt, as a public corporation with high principles and high standards.

In the aftermath of the subprime collapse, many hard working lower income people, including a great many African Americans, have seen their dreams wiped out. The home ownership rate in black communities, which were targeted for subprime loans, is in free fall. Brandeis University's Institute on Assets and Social Policy reports a devastating increase in the black-white wealth gap.

The same New York Times recently published a fine piece by reporter Michael Powell on what is happening to the black middle class in Memphis, "Blacks in Memphis Lose Decades of Economic Gains."

The same story could be told about hundreds of predominantly African American neighborhoods.

The villain of the piece is the mortgage meltdown coupled with rising unemployment rates that are the collateral damage of the same financial collapse. The villain is not moderate income homeowners.

These people paid their mortgages on time, and there was nothing wrong with their dream. What was wrong was the failure of their government to keep the private financial industry from stealing the dream.

Robert Kuttner's new book is A Presidency in Peril. He is co-editor of The American Prospect and a senior fellow at Demos.

We Don't Need Another Gliberal: The Political Dilemma of Elena Kagan

http://www.nytimes.com/2010/06/15/us/politics/15kagan.html?nl=us&emc=politicsemailemb1

All,

As I deeply suspected all along it's now clear that Ms. Kagan is just another half-assed and absurdly "cautious" 'gliberal'/neoliberal whose fundamental politics are those of the decidely mediocre and self serving "moderate Democrats" in the opportunist wing of the Democratic Party who are far too often nothing more than 'Republicans-lite' (like her former political mentor and boss Bill Clinton). In many ways Kagan--who is now Obama's nominee choice for the Supreme Court-- mirrors and embodies many of the biggest weaknesses, blindspots, and openly careerist attitudes and values of the current President...

Kofi



As Aide, Kagan Battled Colleague Over Policy

By PETER BAKER
Published: June 14, 2010
New York Times

WASHINGTON — Elena Kagan was not responding to messages, so Christopher Edley Jr. fired off an exasperated e-mail message to higher-ranking White House officials. He had just learned that Ms. Kagan’s office was preparing a policy for President Bill Clinton to discourage “social promotion” in schools.

To Mr. Edley, a consultant to the Clinton administration, that was code for flunking more poor children. But he could not get Ms. Kagan’s attention.

“I have had no success contacting Elena to learn details or give feedback on this policy,” he wrote. “I have tried email, voice mail, hallway greeting, and conversation with her secretary.” If he could not reconcile himself to the policy, Mr. Edley added, he would have to decide “whether I need to resign.”

The tension between Ms. Kagan and Mr. Edley that day in 1998 went deeper than unanswered messages and an ultimately forgettable policy clash. At the heart of the dispute was a broader cleavage inside Mr. Clinton’s White House between two visions for Democratic politics, one that adhered to traditional liberal conceptions of social justice and aid to the disadvantaged and another that sought to nudge the party to the center after a generation of electoral losses.

Along that fault line, Ms. Kagan, now President Obama’s nominee to the Supreme Court, was situated squarely in the camp of the centrist New Democrats as deputy to her college friend Bruce Reed, the White House domestic policy director and veteran of the Democratic Leadership Council that advocated a “third way.” Mr. Reed coined the phrase “end welfare as we know it” and promoted the measure that Mr. Clinton signed into law requiring work and setting time limits. He advocated charter schools, free-trade pacts and more police officers on the beat.

And for two years, from 1997 to 1999, Ms. Kagan served as Mr. Reed’s lieutenant in those battles. Whether her work reflected her personal beliefs or those of her boss is still debated in Clinton circles, but either way her formative years in politics were spent in the trenches with Mr. Reed.

“She was a full partner with him in trying to move the debate,” said John D. Podesta, Mr. Clinton’s last White House chief of staff and now an outside adviser to Mr. Obama. “I don’t know that you can ascribe all of Bruce’s views to her. On the other hand, I think they were fairly simpatico.”

Chris Jennings, the president’s health care adviser, said Ms. Kagan and Mr. Reed “share similar philosophies” that government should empower people but not create dependency. He added, however, “a clone she is not.”

Perhaps no other issues during her time with Mr. Reed put her in the cross hairs of an ideological firefight as much as Mr. Clinton’s project to improve race relations. Born out of his second inaugural address promise to become a “repairer of the breach,” the initiative exposed the breach inside Mr. Clinton’s own team, according to interviews with participants and a review of 4,700 pages of documents in Ms. Kagan’s files released this month.

Leading one side was Mr. Edley, a Harvard Law School professor who was recruited to consult on the project and resisted anything that seemed to abandon core progressive values. On the other were Mr. Reed and Ms. Kagan, who wanted less talk of grievance and more focus on initiatives that promoted both opportunity and responsibility.

From the start, Mr. Reed and Ms. Kagan resisted the idea of a race commission, sending a March 1997 memorandum criticizing “serious flaws” with the idea and arguing instead for a multiday White House conference followed by town-hall-style meetings. Ultimately, Mr. Clinton appointed a seven-member commission to study race.

“We made our case, and we lost for the most part,” Mr. Reed recalled in an interview.

In handwritten notes, Ms. Kagan recorded skepticism. “Mission too focused on PR, not enough on research/report,” she wrote. “Focus should be on future, not Kerner,” she added, referring to a landmark 1968 study of American race relations.

After a May 1997 meeting where they were told that the project would be 80 percent dialogue and 20 percent policy, they received a strategy plan. “Looks like 20% substance was an extremely optimistic estimate,” Mr. Reed wrote Ms. Kagan.

A month later, Mr. Clinton announced his project, but tensions persisted. In July, Mr. Reed and Ms. Kagan sent Mr. Clinton thoughts emphasizing the “equal opportunity and shared responsibility” formula that had been his hallmark. Mr. Edley responded the same day, arguing against “so much emphasis on the Clinton record, past Clinton initiatives, Clinton themes.”

By fall, the project was developing policy initiatives and Ms. Kagan forwarded one list to Mr. Reed. “Pretty exciting stuff,” she wrote, evidently in sarcasm. Next to a proposal to draft a presidential letter calling young people to action, she scribbled, “By November 15, a letter!” In November, Mr. Reed and Ms. Kagan sent the president their own “race-neutral opportunity agenda,” including expanding access to banks for poor Americans; deploying more police officers to local communities; and enacting “education opportunity zones” to promote public school choice, end social promotion and remove bad teachers.

In January 1998 came the eruption over the social-promotion initiative that prompted Mr. Edley to threaten briefly to resign. Just weeks later, he sent a memorandum outlining various themes. Ms. Kagan wrote on it: “I’m all in favor of pushing hard on (3) — his ‘obsession’ — so we can get our way on (4).” (No. 3 was “Public Leadership” emphasizing inclusion while No. 4 was “Policy Action” to overhaul but preserve affirmative action.)

“We thought the administration had a responsibility to propose big ideas that would expand opportunity, not just have a conversation about these issues without concrete action to address them,” Mr. Reed said in the interview.

Mr. Edley, now dean at the law school of the University of California, Berkeley, declined an interview request. But Judith A. Winston, the project’s executive director, recalled a “constant push and pull” with the White House staff. “For any policy to be really effective in eliminating the disparities, they had to be targeted by race, not just race neutral,” Ms. Winston said.

By summer 1998, Mr. Edley was drafting a “race book” to sum up the project. But he believed he was “setting up for failure because I have no authority from the president to do anything except spin wheels,” Mr. Edley confided in August to Maria Echaveste, a deputy White House chief of staff who would later become his wife.

The next day, a White House aide wrote Mr. Reed and Ms. Kagan that Mr. Edley’s ideas on education “are not likely to be ours.” In frustration, Mr. Edley sent Ms. Kagan ideas a week later and asked, “So, tell me honestly: Are you on board, or are you ‘actively skeptical’?”

Still actively skeptical, by all indications. In September, several aides sent her critiques of Mr. Edley’s draft race book, taking issue, for example, with his ideas on education and law enforcement. The divide was so deep that another aide wrote Mr. Reed and Ms. Kagan in January 1999 about “solving the Edley problem” and complaining about his “flagrant process foul.” Two months later, there was another flare-up when Mr. Edley pressed for an executive order on racial profiling.

“The caution of the White House staff was unsurprising,” Mr. Edley wrote, resignedly. He speculated that the final report would have a dissent by White House staff members: “I hope the memorandum is shorter than the book.” Mr. Reed and Ms. Kagan forwarded Mr. Edley’s memo to Mr. Podesta along with an angry handwritten note, saying: “John — This simply cannot be allowed to happen. We have policy processes for a reason.”

The issue reached a climax in March when Mr. Reed drafted a brutal appraisal of Mr. Edley’s book in his and Ms. Kagan’s names, saying it was “not a bold vision of race and America for the 21st century,” calling its conclusion “hopelessly trite and naïve,” and adding “we doubt that this is the caliber of book the president was hoping for or expecting.”

For Ms. Kagan, though, Mr. Reed’s assessment went too far. She deleted the most inflammatory language. Next to one harsh sentence, she wrote, “Maybe too much.” By the next sentence, she wrote, “Definitely too much.” Finally, she crossed out her name, making the memorandum solely from Mr. Reed.

In the interview, Mr. Reed said Ms. Kagan had taken her name off because she was leaving the White House. But he agreed that she thought he was going too far. “She was toning down my less-than-judicious tone,” he said. “Looking back, there’s no question that she was right.”

In the end, the schism was too profound and the race book was shelved.