PrintOctober 26, 2008
The Economic Meltdown and Obama's Bounce: An American Paradox
Before the fall meltdown of the American economy, the presidential candidates were in a very tight race, with most polls giving John McCain a slight edge. But the focus on the nation's dramatic financial crisis has worked in Barack Obama's favor across the country, including in key battleground states. Yet Obama and his allies contributed significantly to bringing about the disaster, while John McCain warned about and fought to avert it.
Adding to the paradox in Obama benefiting and McCain sliding backwards is that Americans almost invariably side with the whistle-blower, the person who warns of looming disaster and exposes those who put ideological or material gain above the common good. Americans even demand of their fiction -- books, movies, plays -- that the whistle-blower be vindicated in the end.
A plot line like that of Norwegian playwright Henrik Ibsen's "An Enemy of the People" runs contrary to the preferred American theme of justice rewarded. In the play, the protagonist physician discovers that the town's public baths, a major source of income through tourists visiting to take the "cure," are contaminated and toxic. They require expensive repairs. The powerful in the town, fearing the costs to themselves, debunk the doctor's assertions, turn the townspeople against him, and have him stripped of his income. At the end, the malefactors are on top while the protagonist is ostracized by everyone except his wife and children.
Yet despite American distaste for such a denouement, the current interplay of the economic crisis and the fortunes of the presidential candidates closely follows Ibsen's drama.
As is widely known, the root of the banking fiasco lies in the collapse of the housing market, which in turn was due to a loosening of standards for issuance of mortgages and a consequent burgeoning of people taking on mortgage debt far beyond their ability to pay. The inevitable consequence was a flood of foreclosures and huge losses by institutions holding billions in mortgages now much diminished in value if not entirely worthless. Responsibility for setting in motion this runaway train lies in part with those who saw the issuing of such mortgages, and their quick resale, as a source of easy wealth, and with borrowers who acted with little prudence and believed ever-rising housing prices would always bail them out.
But the starting point of this economic disaster lay with the government. Fannie Mae and Freddie Mac were originally created by the federal government - the former in 1938, in the context of the Depression, the latter in 1970 - to promote home ownership by providing government backing for mortgages. In 1968 Fannie Mae was privatized, becoming a government sponsored enterprise, a private corporation with government backing, and both it and Freddie Mac have continued to operate under this model.
In the 1990's the Clinton Administration pushed the two corporations to take on less secure loans in order to expand the availability of mortgages. A September, 1999 article in the New York Times reported:
"... Fannie Mae... has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people... borrowers whose incomes, credit ratings and savings are not good enough... Fannie Mae is taking on significantly more risk... the government-subsidized corporation may run into trouble... prompting a government rescue..."
But despite such warnings of potential problems, Congress failed to exercise its oversight responsibilities. Repeated attempts by the Bush Administration to promote more fiscally sound operating standards were defeated in Congress, largely along party lines. Most Democrats vehemently opposed greater scrutiny. Some Congressional Democrats suggested that the push for greater controls was racist as African Americans were disproportionately the beneficiaries of loosened lending standards.
Barney Frank, long a member of the House Banking Committee and its chairman in the present Congress, repeatedly insisted that worries about Fannie Mae and Freddie Mac were exaggerated and they faced no crisis.
Meanwhile, corporate executives of the two entities lavished their supporters in Congress with contributions. In 2006, Freddie Mac was fined $3.8 million by the Federal Election Commission for illegal campaign donations, the largest such fine ever levied.
The top Congressional recipient of funds from Freddie Mac and Fannie Mae has been Christopher Dodd (D-CT), chairman of the Senate Banking Committee. Barack Obama, even though he's been in the Senate only since 2004, ranks third in amounts received.
Obama's contribution to the housing crisis -- reported most comprehensively by Stanley Kurtz -- begins with his relationship with the Chicago branch of ACORN (the Association of Community Organizations for Reform Now). ACORN is presently most known for its extensive involvement in voter registration fraud - some ACORN workers have admitted to fraudulent practices, while investigations of illegal ACORN registration activities are presently underway in about a dozen states.
But ACORN's Chicago branch, beginning in the 1990's, pioneered aggressive, often intimidating practices to force banks into making high-risk minority loans. ACORN tactics included legal challenges against banks refusing to follow the organization's demands, which often called for violating mandated financial requirements. It also mounted demonstrations in bank lobbies and at the offices and homes of bank officials. Many institutions bowed to Chicago ACORN's pressure techniques, which became a model for such activities elsewhere. When Fannie Mae agreed to buy up the dubious loans, banks had less incentive to resist such assaults from local community groups.
Barack Obama ran activist training sessions for Chicago ACORN personnel in the 1990's and represented the organization in court. As a leader of Chicago's Woods Fund, he directed Fund money to ACORN even as he was clearly aware of its aims and confrontational tactics. More recently, his campaign admitted to making $800,000 in payments to the organization.
The heavy-handed tactics to promote dangerous bank lending practices such as those championed by Obama, the pressure from Congressional Democrats on Fannie Mae and Freddie Mac to back up such loans, and the pay-offs from Fannie Mae and Freddie Mac executives to House and Senate members who resisted greater oversight and stricter rules for the two institutions, were the witch's brew that most figured in bringing our economy to its present dangerous state.
In contrast, John McCain said in 2005, "If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole." The following year he again called for stricter regulation of the two organizations in a letter to Senate leaders.
Why, given their penchant for the triumph of the truth-sayer, have Americans responded to the current crisis by increasingly supporting Obama. Part of the explanation no doubt lies with the mainstream media, which have distorted and omitted key facts and slanted the story in their overwhelming promotion of Obama. The emphasis has been largely on supposed missteps by the Bush Administration, the malfeasance of Wall Street executives rather than that of Congressional leaders, and association of Republican McCain with the Republican Administration. In addition, many Americans see the crisis in terms of high rollers versus the little guy - not very different from the common media line - and associate corporate executives with the Republican Party, a link that flies in the face of political reality but is still very popular.
Whatever the explanation, the current political drift remains dramatically at odds with Americans' self-image as champions of virtue rewarded and vice undone. So wed to this sense of self are we that it has been challenged in American fiction less in weighty tragedy than in comical farce.
Consider Mark Twain's "The Story of the Good Little Boy." Said youngster is always doing good deeds, expecting them to redound ultimately in just reward but always suffering the opposite. In the last such episode he discovers several boys in an iron foundry cruelly mistreating some dogs by tying them to empty nitroglycerin cans. Seating himself on one of the cans, the hero works to free the dogs. An angry town official comes on the scene and, while the other boys flee, grabs hold of the protagonist. Not waiting for an explanation, he turns the young hero around and whacks him on his rear, which is now saturated with nitroglycerin from sitting on the can. The denouement is literally explosive.
Imagine Barack Obama, Chris Dodd and Barney Frank as the boys playing their cruel pranks in the iron foundry, John McCain as the doer of the good deed, and the American electorate as the alderman applying his sense of appropriate punishment.
Should things continue on their present course, with Obama elected President and Dodd and Frank returned to their current Congressional leadership positions, the American public will likely have written for itself not the happy ending it so desires but a painful blend of tragedy and farce.
Kenneth Levin is a psychiatrist and historian and author of The Oslo Syndrome: Delusions of a People Under Siege.
