Our Banking Problem

Last week (02.23.12) Bank of America kissed off Fannie Mae saying it would no longer sell mortgages to the (closet taxpayer backed) mortgage buyer. Published reports say the break is over some of the crappy mortgages BofA sold Fannie in the past. Mortgages, Fannie thinks BofA knew –or should have known – were crap. Fannie apparently wants their money back. BofA says the mortgages went south because of the recession, so Fannie (we the taxpayers) should eat them.

Like a lot of bad things this looks back to 2008. BofA bought subprime mortgage lender Countrywide Financial as it was about to go belly up. BofA says the Feds “made us” buy it; some think BofA thought it was getting a real steal. In any case, BofA is down +/- $30 billion on the deal so far. The once biggest dude in the world of banking has been on a diet slimming down, dumping anything it can and backing away from the mortgage business, whilst dodging its responsibilities and sticking the taxpayers with its problems at every opportunity. Case in point: last August, when BofA ran their manure spreader through Fannie they picked up a half billion dollars of our money.

It’s sickening when you consider how much (+/- $45 billion in TARP) we gave BofA to forestall their potential collapse. Not to mention BofA’s use of the Federal Reserve “Discount Window” where the Fed passes under-the-radar loans to the banks. Late in 2008 as BofA was attempting to take over Merrill Lynch, between them the two entities were living on about $80 billion in the Fed’s stealth loans.

All the while, regular folks, many of whom had been -through their naivety- lured into home loans they could not possibly hope to pay, were getting no help from the banks. Instead of using TARP and the other taxpayer bucks to help little folks they had set up to fail, the banks went back to gambling with more of the shaky financial products like derivatives that got us into this mess.

How big a deal is BofA’s decision to stop selling loans to Fannie Mae? It’s pretty big if you think it’s the people’s job to make sure that these too-big-to-fail banks don’t fail. BofA says it’s no big deal, they can sell off their mortgages to Freddie Mac and Ginnie Mae. These two agencies complete the triumvirate of federal agencies created to help make the American Dream –home ownership- come to be. Like Fannie Mae, Freddie Mac is a publically owned company and is “wink, wink” not backed by the taxpayers. Ginnie Mae was spun off from Fannie and is the only openly taxpayer backed entity of the three.

It’s past time to stop the reckless gambling, to break up these ethically challenged too-big-to-fail behemoths, and get the resultant smaller banks refocused on the reason for their existence, to provide the funds to keep our economy moving. If we could get the banking sector resized and refocused, the two Maes and a Mac might be good for us; right now they are just good for the banks.

What’s Bugging America

A study by the highly regarded Pew Research Center provides insight into what is bugging Americans. Surprisingly it’s not the national debt, or immigration, which was the major issue in their last study done in 2009. In the Pew survey conducted in early December, income inequality leapt up about 50% from the 2009 study to be seen as America’s greatest source of tension. Two thirds of the respondents see the divide between the super rich and those on down the food chain as our major concern.

It gets more interesting when you look at the breakouts. As you might expect, the minorities, the poor, and the liberals are most likely to see inequality as the major cause of tension, but their scores were not up much from the 2009 study. The big jump came at the upper middle of the income ladder, 71% of those earning from $40,000 to $75,000 pointed to income inequality; that’s up more than 50% from 2009. Even the level of Republicans who see inequality as the number one issue is surprising, more than half, 55%.

More troubling, however, is the growing body of data indicating that opportunity to move up the ladder in the United States is in serious decline. The American Dream no longer tops the world. Canada and most western European nations now offer their citizens a better shot at that dream than we do. Among a number of studies one European study seems most comprehensive. Conducted by a group of scientists, it compares economic mobility across leading nations and we do not come off well. It shows that 40% of Americans born into the bottom 20% of our economy live out their lives there. Compare that to England at 30% and Denmark at 25%. Only 8% rise from the bottom fifth to the top fifth compared to 12% of the Brits and 14% of the Danes.

At the other end of the scale –the top of the economic pile– far more Americans born to wealth remain there than in other nations. Our absence of mobility is a threat to our nation. A threat seen not only by those on the left, but by leading right leaning players, Rick Santorum and Paul Ryan both expressed concern.

Economic inequality and economic mobility are linked at the hip. A tax code that favors the wealthy combined with a dramatic shift in taxing inequality have left those on the bottom and in the middle giving up a greater share of their income to support America. Billionaire Warren Buffett has been pointing to the flaws in our system for several years. We should all find it ludicrous –as he does– that he pays a lower share of his income than the lowest paid employee in his company.

We can’t keep the American Dream alive if we allow inequality to rule. We cannot  ask the middle-class and those on the bottom of the economic ladder to devote a greater share of their income to support needed services than we require from the rich. It’s not fair; it’s ethically abhorrent.