Jul
22
Two bits of news Tuesday about the big picture economic crisis:
+ The Senate will consider restricting oil speculation.
+ The Fannie/Freddie bailout will cost at least $25 billion.
Both stories are a bit more complicated than that, but the full situation is easily explained.
What senators did was vote 92-0 to remove a procedural impediment to debating limits on oil speculation. This is a long way from action, and a lot of senators don’t think there is anything they could do that would have a practical effect on the situation.
They may be right. Oil speculation IS exerting upward pressure on oil prices. But no U.S. action can make markets in other countries stop the buying and selling of oil contracts by an endless succession of self-appointed middlemen who want to make a quick profit in the middle space with ever touching the oil itself.
Also, the speculators aren’t individuals with pin-wheel eyes — they’re pension funds and other institutional investors big enough to afford lobbyists.
So don’t expect any useful action on this front.
As for the bailout, the key point is that $25 billion is merely the figure that will be put into the federal budget, for starters.
The true cost could go much higher, because there is really no alternative to pumping billions into Fannie Mae and Freddie Mac so these federally-sponsored but independently-managed mortgage guarantors and resellers can buy, bundle and flip the mortgages that bankers cannot currently sell on securities markets themselves.
This, by the way, could become politicized. The Wall Street Journal, whose editorial page drives much of the ideology of the Republican Party these days, has lately made a point of mentioning that Sen. Chris Dodd of Connecticut, the Democratic chairman of the Senate Banking Committee, got a sweetheart mortgage deal from Countrywide Financial, the leading apostle of subprime mortgages and perhaps more responsible than any other company for the mess the country is in. The Journal editorial writer is to be commended for also noting that a lot of Republican members of Congress also supported the wild mortgage market. It seems pretty clear from this distant non-partisan vantage point that a lot of otherwise bright people on both sides of the aisle simply assumed nothing would go wrong.
Politicians want to DO something, and to be seen as doing something, about current economic travails. They can start by realizing that the economy is important and they’re going to look really stupid if they rubber-stamp any “solutions” that lead to future crises.
I mention this in part because financial institutions are lobbying hard for the least possible increased regulation and oversight. This is exactly what led to the current emergency. In an environment of little oversight and regulations, lenders other than banks sold loans to people who couldn’t afford the payments, and a lot of players who might not have done this on their own felt obligated to join the crowd, since the crowd was making higher profits at first. And it’s always like that. The only way to prevent risky behavior is to forbid it with some clarity. Lenders who are naturally sensible need the reassurance that their competitors can’t do these foolish things either.
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