Visual Economy

Videos about how to invest, investing in gold and silver, and economics 101

Federal Reserve’s Free Money Policies Fed Crash

Zerohedge contributor Bob English and Inside Scoop’s Mark Levine discuss the roots of the wealth gap in this 2013 video clip.

Bookmark and Share

User Comments

WealthCycles Commentary

Zerohedge contributor Bob English and Inside Scoop’s Mark Levine debate whether mortgage giants Fannie Mae and Freddie Mac are paying off for U.S. taxpayers and the roots of the wealth gap in this 2013 video clip. Of course, we know the U.S. housing market is “structurally more unsound” today than before the financial crisis because it depends more on government-backed mortgage companies such as Fannie Mae and Freddie Mac, according to BlackRock's Chief Executive Officer Laurence D. Fink.

Thanks in part to rising home prices, Fannie Mae, rescued at the height of the financial crisis at taxpayer expense, has turned around, reporting not only the ability to pay back its taxpayer-financed bailout but a profit. But it was Fannie and Freddie, English contends, that bore a share of responsibility in crashing the economy to begin with.

With the bailout, American taxpayers would up with some 80% ownership of the two government-backed mortgage lenders. “Guess how that happened,” English responds.

“That would never have happened were it not for the federal reserve buying … over a trillion of those [mortgage-backed] securities. The market was tanking, and were it not for the Federal Reserve’s manipulation of interest rates, we would have never had this paying all this money back.”

Although Fannie and Freddie were ostensibly private corporations, English points out, “the FR was buying agency bonds that would be Fannie and Freddie agency bonds since 1999.”

“So the Fed had already given support. I don’t think China would have bought all those bones in the first place had the Fed not been active in the market. So to say they were a private enterprise I think is a false construction.”

The bottom line, Levine argues, is that “at the end of the day we’re getting all our money back, and we’re making a profit, which shows that it was a good idea to bail them out.”

But how did we get here in the first place? English asks.

“We got here because the Republican Congress got rid of regulations; they got rid of Glass-Steagall; they got rid of the ‘bucket shop’ laws that had been around since the early 1900s that prevented you from gambling on other people’s things,” Levine answers.

“Look, I buy house insurance, and if I have a fire, I get the recovery. But I shouldn’t be able to bet on whether your house burns down, or bet 10 times whether your house burns down, ’cause then I might have an incentive to burn your house down….
“My point is you shouldn’t be able to bet on other people’s mistakes. The whole point of insurance, of hedging, is to protect yourself, like fire insurance. What credit derivative swaps did, as you know, is let other people bet on your mistakes so that Goldman Sachs could sell these terrible, terrible collateralized debt obligations to people at the same time that they bet against the things they were selling

In fact, Fannie and Freddie, while they also entered the CDO market, entered late and at far lower levels than other private companies did, Levine argues.

But the root of the evil lies with the Federal Reserve, rather than a need for more regulation English counters.

“Because when you look at CDOs and the derivatives market, $700 trillion, back up to the pre-crisis levels, CDOs didn’t make up that big of a part. Interest rate swaps and other things, those are the things that are gonna decimate the system in the future…. The reason we have this $700 trillion derivatives market in the first place is because the Fed has been giving away free money for over a decade.”

But Levine holds the derivative contracts sprang up as a way for Wall Street to avoid regulation.

“You know why they’re called credit derivative swaps and not insurance, which is really what they were? It’s because ‘swaps’ weren’t regulated; this was this new word created by some brilliant guy at Merrill Lynch. I’m gonna call it ‘swaps’ because that’s not insurance, that’s not banks.”

If non-banks were regulated similarly to how the Federal Deposit Insurance Corporation has regulated banks, Levine concludes, the problem with toxic securities could be avoided in future. For bankers, ensuring the taxpayer bears any moral hazard associated...

The conversation turns to the wealth gap as reflected in the reported disparity in savings rates among the wealthiest Americans and everyone else: The top 1% of Americans now save 37 cents for every dollar earned, English reports. “This is triple the savings rate of the top 1% in 2007.”

The cause of the savings disparity, Levine says, is income disparity:

“The top 1% earn 11% more each year the last three, four years, while the bottom 99%, which is the vast majority of us, lose money year after year. We have a system, let’s face it, that rewards the super-rich at the expense of everybody else. That’s what Barack Obama has been arguing for a long time: We need to tax the rich more fairly so that the money gets distributed more fairly across the public.”

English argues that the cause of income disparity is crony capitalism, in which corporations are disproportionately rewarded, often, as in the case of defense contractors, with taxpayer funding.

 “A lot of these defense contractors like GE derive a significant portion of their income from the federal government.”

The problem is an institutionalized disparity in the way economic rewards and punishments are dealt, Levine says.

“The heart of the problem is, if you’re a middle-class family, and you have a small business, and you do badly with the business, you fail; you lose your business. But if you’re extremely rich, you can ruin a company, have the stock price decrease by two-thirds, and still get out with hundreds of millions of dollars in bailout. That’s not capitalism the way it should be. If Goldman Sachs went to jail and lost a lot of money, that would keep people from making these kinds of mistakes in the future.

And that, English concludes, is the moral hazard argument against government bailouts for private businesses: “When the government picks winners and losers, it does hurt the small businesses.”