Guest Editorial
BY MENCKEN'S GHOST | SEPTEMBER 7, 2011
Hurricane Fannie Mae destroyed more homes than Katrina and Irene
Please join me for an informative walking tour of the damage done to my hometown of Scottsdale, Ariz., from Hurricane Fannie Mae, a hurricane that has caused more damage to housing across the land than hurricanes Katrina and Irene combined. Trust me: You’ll enjoy the tour.
The hurricane is named after Fannie Mae because the government-sponsored enterprise had precipitated much of the damage to the nation’s housing by establishing the practice of securitizing mortgages; that is, bundling them into bonds for sale in worldwide bond markets. The practice severed the personal relationship between mortgagees and mortgagers that had existed previously and had kept borrowers and lenders from becoming greedy imbeciles.
Adding to the force of Hurricane Fannie Mae were the easy money policies of the Federal Reserve, the lowering of mortgage standards by the federal government, the greed of buyers who bought homes they couldn’t afford, the greed of lenders who wrote what were essentially unsecured mortgages, and the mania brought about by the hokum spread by the government, academia, media, and the real estate and financial industries that housing never decreased in price and was a great investment for everyone.
Now for the tour:
A couple of blocks from my small townhouse is a ritzy, leafy neighborhood of one-acre lots and million-dollar-plus homes, some of which are zoned as horse properties. One of the lots is vacant and devoid of any evidence that a large, brick ranch house had once stood there.
The perfectly good house had been torn down in the middle of the housing bubble. Soon after, construction began on a replacement house, a 13,000 sq. ft. McMansion. One day during the housing bust, after framing and plywood sheeting had been completed on the house, construction abruptly stopped. Construction workers suddenly departed, taking their equipment and locking the gate behind them on the temporary cyclone fence that surrounded the property. No doubt, the builder went broke.
The half-finished house sat for two years, slowly deteriorating in the elements and becoming an eyesore in the upper-income neighborhood. A couple of months ago it was sold and razed in preparation for a smaller home to be built in its place. The lot is once again vacant and devoid of any evidence that homes had stood there.
I don’t know the exact amount of money that has evaporated on this one lot, but it has to be a staggering figure, probably in the range of what it would cost to send three kids to Ivy League universities for four years. Capital that could have gone to education or been invested in new businesses is--poof!--gone with the wind, to borrow the title of Margaret Mitchell’s masterpiece. Multiply the evaporated money by a million and you’ll come close to the total cost of Hurricane Fannie Mae.
Next door to the vacant lot is a sprawling ranch home, circa 1975, that is for sale and in the process of being foreclosed--or at least it shows all the signs of being foreclosed. The lawn has turned to dirt, the shrubbery is untrimmed, a broken lantern has fallen on its side, sprinkler heads are broken, a step ladder leans against a tree, and children’s toys litter the yard. But those aren’t the most telling signs of foreclosure. The most telling signs are the expensive SUVs in the driveway. They probably cost $150,000 in total when purchased new, and, as vehicles do, they’ve quickly depreciated in value and are worth about half as much now.
The expensive vehicles indicate that high-fliers bought the house and quickly found themselves over their heads in debt when the housing bubble burst and the economy collapsed. In their case, their heads are probably in their butts, so it wouldn’t have taken a lot of debt to pull them underwater.
More than likely, the buttheads are living rent-free at the house, because once borrowers stop making mortgage payments, it takes months or years to evict them.
A couple of blocks from this house and across a major thoroughfare is the wealthiest town in Arizona, Paradise Valley. About a third of the homes on a nearby street in the town had been torn down during the housing bubble to make way for McMansions. Due to the bubble bursting, construction never began on several of the lots, and construction stopped abruptly on two unfinished homes. Only now, years later, has work continued on the unfinished homes. This is a sign that the market is at, or near, the bottom. Prices have fallen nearly 50 percent and are now where they were in 2003, which is the year that prices had begun climbing 50 percent.
You didn’t have to be a genius to know that if home prices had increased for no sound economic reason, they would eventually fall after the bubble burst to what they had been. Yet most experts in economics and real estate didn’t know this and still held out the false hope that prices wouldn’t drop that far.
In the meantime, three nearby restaurants have closed, along with scores of high-end retail shops. Vacant space also abounds at nearby Class A office buildings, including one building where, ironically, a remaining tenant is JP Morgan, one of the culprits behind the housing crisis.
Each time I walk down the Paradise Valley street, I wonder if recent home buyers have given any thought to what the air-conditioning bills are going to be for their gargantuan homes if electric rates skyrocket as expected in the coming years. Will these homes become white elephants? And do the residents stop to ponder why so much American capital goes into housing instead of manufacturing plants and other investments necessary for a vibrant economy?
Well, our walk ends here. Did you enjoy it and learn anything about the American culture and economy?
The documentary “Inside Job” is a masterpiece of agitprop
Narrated by the leftist actor Matt Damon, “Inside Job” has been hyped as an insightful documentary that explains the causes of the financial crisis, the housing meltdown, and the subsequent bank bailout. Actually, it is a masterpiece of agitprop and is deserving of an Academy Award in that category, if there were such a category. As with all propaganda, it is woefully lacking in impartiality and balance; but it should be watched for the masterful way that it distorts the truth.
The theme of “Inside Job” is that greedy, amoral scoundrels in the financial industry, especially Wall Street banks, have corrupted the government, have engaged in financial shenanigans because of deregulation, have entered and exited a revolving door between Wall Street and government, have been in bed with both Democrat and Republican presidents, and have continued to have a powerful influence over politicians through lobbying and campaign contributions.
There is a lot of truth in all of that. In fact, this commentator has written that by replacing free-market capitalism with a bizarre combination of corporatism, mercantilism, crony capitalism and socialism, the government is creating an oligarchy in the USA. But unlike the conclusions drawn by “Inside Job,” this isn’t happening because the government is an innocent victim whose default state is goodness. It is happening because the government became unmoored from its constitutional roots long ago and is floating wildly with few limits on where it goes and what it does.
The documentary repeats the canard that banking had been deregulated. What it is really referring to is the repeal of the Glass-Steagall Act, which had prohibited banks from becoming holding companies and owning non-bank businesses and trading on their own behalf. I side with those who believe that the repeal was a mistake, but the fact is that banking is a highly regulated industry and a de facto franchise of the government. The franchise gives commercial banks the privilege to engage in leveraged fractional-reserve banking and to profit from changes in interest rates and exchange rates caused by the monetary policies of the Federal Reserve, which was established 98 years ago through a collusion of bankers and the government.
In other words, banking is not representative of free markets. The modern banking industry’s behavior, incentives, culture, compensation, ethics (or lack thereof), risk taking, capital standards, and business models are inseparable from the policies of its franchiser, the federal government and its central bank and regulators. Yet the documentary wants the audience to believe that banking is bad and government is good, except for some bad political actors.
The documentary uses various propaganda techniques to cover up how governments helped to precipitate the financial crisis. For example, in the opening segment on the banking crisis in Iceland, the first scenes and commentary are about the environmental evils of a new dam and other development to support the aluminum industry, which is attracted to Iceland’s cheap hydro and thermal power.
No doubt, Matt Damon doesn’t use any aluminum products or ride in planes sheathed in aluminum.
Did Iceland’s failed banks loan money to the industry? Was the industrial development built with shady finances? The documentary never asks or answers these questions. The purpose of juxtaposing supposed environmental damage with the banking crisis was not to get to the truth. It was to employ a propaganda technique of heightening emotions and lessening thinking by implying a link between two unrelated emotional issues.
Continuing with the environmental theme, the documentary portrays Icelanders as having lived in an environmental and social utopia before the coming of the aluminum industry and the privatizing of banking. Using the propaganda technique of not presenting any information that runs counter to the narrative, the documentary says nothing about Icelanders eating whales and nothing about other negatives of Icelandic society, which is highly socialistic. (I’ve been to Iceland and can confirm that it is neither an environmental utopia nor a social utopia.)
The documentary says that the Icelandic banking crisis was caused by the privatization of its three major banks, which subsequently engaged in risky loans and were undercapitalized. But the film doesn’t tell the rest of the story.
The rest of the story is that the monetary policy of Iceland’s central bank resulted in inflation, which in turn caused interest rates to skyrocket, which in turn resulted in European banks and other investors buying bonds from Icelandic banks because they could get a higher interest rate. When borrowers determined that the Icelandic banks were undercapitalized and that the Icelandic currency was going to fall, there was a run on the banks.
It is a propaganda technique to only tell the part of a story that matches the intended message and to be silent about the part that doesn’t match.
This technique is used repeatedly in the documentary. For example, in describing how the housing bubble had developed and collapsed, the film does not mention that the U.S. government had forced banks and the government-sponsored enterprises of Fannie Mae and Freddie Mac to lower mortgage standards. In fact, the film lambastes both of these GSE’s but never acknowledges that they are sponsored by the government and have the implicit financial backing of the government (actually taxpayers). Nor does the film explain that Fannie Mae, with the government’s encouragement, had first developed the idea of securitizing mortgages; that is, buying mortgages from banks and bundling them into bonds that could be sold around the world.
Another example is the documentary’s lambasting of Standard & Poor’s, Moody’s and Fitch Ratings. The documentary conveniently fails to mention that the government had given the three rating agencies anti-competitive privileges to rate, on the government’s behalf, certain kinds of debt and, in the process, to change their allegiance from borrowers to lenders, thus creating a moral hazard and conflict of interest.
Amazingly, the film treats left-liberal Rep. Barney Frank as a swell guy, although he is the very same weasel who was instrumental in making it easier for unqualified buyers to get mortgages. Accordingly, an interview with Frank is edited to put him in the best light possible. By contrast, photos and interviews of the people that the producers see as villains on the right are edited to put them in the worst light possible. The more unflattering the facial expression, the more it is shown in the film. As such, they come across as shifty, cold, and uncaring.
A darling of the left, George Soros, is also interviewed in the film and put in a favorable light, as if he is the male incarnation of Mother Teresa instead of being a financier who made billions from arbitraging the actions of central banks.
Just as amazing, Eliot Spitzer is also put in a favorable light and portrayed as a crusader against the evil banking industry, although while Governor of New York, he used a subterfuge to get around banking regulations to pay a 22-year-old prostitute for her services. Even more bizarre, the former head of the International Monetary Fund, Dominique Strauss-Kahn, another sleazebag with an out-of-control libido, is interviewed and treated favorably.
Continuing with its obsession with illicit sex, the film interviews a Manhattan madam who ran a high-priced prostitution ring. She claims that hotshot Wall Street traders, with the full knowledge of bank executives, used expense account money to pay prostitutes. Of course, no proof is given. But that doesn’t stop narrator Matt Damon from saying that the government looked the other way when Wall Street tycoons broke sex laws but went after Spitzer for doing the same thing, implying that the tycoons had used their power to get even with the governor for his crusade against banks. Gee, do you think, Matt, that the different treatment had something to do with the fact that Spitzer was a sitting governor who said he was in Buffalo on state business when he was actually in Washington screwing a prostitute under an assumed name? Do you think, Matt?
The most bizarre interview is with a bigwig with the communist government of China, the very same government that has an opaque financial system, that regularly cooks the books, that has a housing bubble of its own, that violates patents and copyrights, that engages in far worse mercantilism than the USA does, and that also uses its central bank to manipulate its currency. The bigwig is allowed to rant about the U.S. banking system but is never asked hard questions about the Chinese system.
Another propaganda technique employed in the documentary is the rapid flashing of random scenes, photos, and vignettes on the screen that have little, or nothing, to do with the banking crisis but make it seem as if they are central to it. For example, mortgage documents are flashed on the screen while the word “fraud” is spoken by Damon. Then there is a related vignette of a woman speaking Spanish as an English translation appears in subtitles. She claims that she and her husband had been led to believe that their mortgage payments would be about $3,000 per month ($3,000!!!!) but the payments actually ended up being over $5,000. The implication is that there was massive mortgage fraud during the housing bubble. No statistics are given on the percentage of fraudulent documents, probably because most of the fraud went in the other direction--from borrower to lender, not from lender to borrower. Borrowers lied with great regularity about their income, but the documentary makes no mention of this.
The documentary holds its best agitprop for the end. It ends with Matt Damon ranting about worldwide unemployment, about idle factories, about the bankruptcy of General Motors and Chrysler, about rising college tuition, about falling incomes for everyone but fat cats, and about just about every other left-liberal nostrum about economic matters and social justice. All of these problems are blamed on Wall Street, and none of them on the government. No mention is made of greedy auto unions and public-sector unions that essentially own the Democrat Party, no mention is made of how government money has driven up the cost of college, no mention is made of how regulations and tax policies have driven industry offshore, no mention is made of the fact that governments at all levels now devour half of national income, no mention is made of the Ponzi schemes of Social Security and Medicare, no mention is made of the government robbing the Social Security Trust Fund and the Highway Trust Fund, no mention is made of the Federal Reserve debasing the dollar and triggering the housing bubble with easy money--no mention is made of these and other countervailing facts.
Such agitprop is effective only when people can’t see through it – when they are uninformed and unread, and when they have been brainwashed in government K-12 schools, in left-leaning universities, and by left-leaning news media and entertainment media. There is no doubt, then, that “Inside Job” has been very effective.
Mencken’s Ghost is the nom de plume of an Arizona writer who can be reached at [email protected].
