In America, debt is reaching record levels. With real wages in decline, many have no choice but to borrow. Rising student-loan debt intensifies the problem, along with the Bush administration’s massive budget deficits, and inflation caused by the Iraq War and high oil prices. It is no surprise that the debt crisis is now engulfing the entire economy. Danny Schechter is one of the few journalists to provide meaningful coverage of the issue. In his 2006 film, In Debt We Trust, he was among the first to warn of the threat posed by the risky “sub-prime” loans and securities that ultimately played a large role in the current recession. In this interview, Schechter discusses America’s debt problem and some of the actions that can help fix it.
Interview by Chris Pepus
Illustration by Nation Of Amanda, myspace.com/onenationunderamanda
Pepus: Many people are confused about the sub-prime mortgage disaster. Could you explain how sub-prime loans work and how they triggered this economic crisis?
Schechter: Well, in the aftermath of the collapse of the dot-com boom, the American economy was going into the toilet. This is prior to the year 2000. There was a tremendous drop in the stock market and a lot of worry about what would re-invigorate the American economy. There were two thoughts put forth by Alan Greenspan (then chairman) of the Federal Reserve Board.[i] One, let’s cut interest rates, make money cheaper, get more money circulating, prime the pump, so to speak. Secondly, let’s reward or support financial “innovation,” to find new ways of investing money and new markets to invest in. Housing has been the centerpiece of the American economy—trillions of dollars in value—and it’s been the heart of the American ideology. Home ownership is the key to wealth, regardless of the stock market. We saw a slow increase over the ’90s in the value of housing. So along came a man named (Lewis) Ranieri at Salomon Brothers. His idea was, how can we make money off the housing market? Already, the brokers are making money; the people who originate loans are making money, but Wall Street is not involved. The idea was let’s turn mortgages into securities and then re-sell those securities. So, first, the broker is selling the house to the borrower. Increasingly, loans, which used to be originated by banks, began to be originated by brokers—an unregulated army of entrepreneurs and hustlers.
Along comes Bush talking about the “ownership society.” The housing market was doing pretty well, but they figured it could do a lot better if they could entice more people to get involved. This leads to the provision for sub-prime lending. So a whole class of people who couldn’t afford loans were now being given loans. The people who gave the loans knew that these people couldn’t afford these properties. But they didn’t care because they got higher fees and the like. Then they could sell the loans to Wall Street companies that would package these loans into securities called CDOs (collateralized debt obligations) and then re-sell them. They were making money, billions of dollars. Of course, at the bottom of the pyramid were these poor people who were getting in over their heads. It was like a Ponzi scheme.[ii]
Pepus: That’s one of the most interesting points in the film: that the lenders are able to sell the loans fast by bundling them into a larger financial package. They have an incentive to make shady loans.
Schechter: Right. They later said that there was “suction” from Wall Street. People on Wall Street said, “Forget about your normal underwriting standards. Let’s just move this money.” The local mortgage people were doing loans like the “Ninja” loan: no income, no job, no assets, no problem. Literally millions of people did this, because it was their only way out of poverty, their way into a neighborhood with better schools. This whole pattern indebted large numbers of people. They called these securities “asset-backed securities.” Unfortunately, there were no assets backing these securities, because the people didn’t really have the collateral. They just suspended (the rules) to keep this money moving upwards into these Wall Street firms. All the biggest names on Wall Street were complicit in this. Bank of America just did a study that said that $7.9 trillion has been lost—a combination of write-downs, loss of share values, and loss of housing values. If a house goes into foreclosure, the house next door loses value. There goes the neighborhood. There goes everything that’s financed by property taxes. The ripple effect of this is disastrous. So, 258—I think, as of now—mortgage lenders imploded, went out of business. Banks in other parts of the world that bought into these properties had to be saved. In this country, the Federal Reserve began what they called “injecting money into the system,” making money available to these lenders, rewarding criminal practices. One of the key rules in finance is called “moral hazard,” that you don’t reward people who do something wrong. But they did it, partly because the consequence of not doing it, in their view, was that the whole system might fall apart.
Pepus: How were these mortgage sellers able to get away with this?
Schechter: There were a couple of reasons this happened. First, the regulators were asleep at the switch, because the Bush administration doesn’t believe in regulators. Lack of regulation allowed these banks to re-define all the rules, create this shadowy banking system. The second problem was that the media were complicit in the whole thing. The reason is that money from mortgage lenders, credit card companies, etcetera, began to be made available (for advertising). Three billion dollars were pumped into radio stations, television stations, the Internet. Suddenly, there were all these ads for these mortgages. So it’s not surprising, when that industry becomes your dominant advertiser, you’re not going to investigate it. Also, a lot of the reforms that everybody was talking about in the aftermath of the Enron debacle were never implemented. Wall Street has a way of failing to learn from its past. Today, Greenspan says, “Yes, there were criminal practices,” but it’s like Scott McClellan.[iii] It’s after the fact. There’s a need to treat this as a criminal matter, not just as an economic matter. That’s why I call this the “sub-crime problem.”
Pepus: On your point about the media, press coverage of the Federal Reserve bailout indicated that it was going the help the situation. But no one explained that your bank could foreclose on your home and then turn around and take what was basically welfare from the federal government. All this was somehow supposed to help the people.
Schechter: Well, now you have former Federal Reserve officials saying that the Fed has actually made things worse. But it doesn’t seem to work its way into the major media, because the major media—advertiser supported—are into trying to keep confidence up, keep people shopping. That’s why, before Christmas, you have all these local TV stations live at the mall. They say, “It’s never been bigger. People have been lining up eighteen hours in advance.” Then, a week later, we find out that the actual amount of the transactions has never been lower. Media are pumping up their advertisers: Macy’s and this one and that one. There’s this incredible pulling of the wool over people’s eyes. It’s frustrating to talk about, because very few people want to hear this. They don’t want to know about three-and-a-half million families in foreclosure and millions of renters being thrown into the streets. You have the administration saying, “Well, there may be a recession.” The investment bankers and economists last November said that we’re in a recession.
Pepus: You’ve written about this crisis as a regulatory failure, but you’ve also discussed legislation that has played a role. Could you talk about that?
Schechter: Well, this goes back. This is not only a Republican problem. If you look at the treasury secretary (Henry Paulson), he’s from Goldman Sachs. I call him the “Goldman Sachs embed” at the Treasury Department. But look at (Clinton’s secretary of the treasury) Bob Rubin. He was another Goldman Sachs guy. The investment banking community has had its tentacles in the financial side of the government for years. The Clinton administration moved towards the viewpoint of the Democratic Leadership Council in terms of a pro-corporate economic policy. Even though (Clinton) was supported by the labor unions, in the end, the labor unions got screwed. He supported NAFTA (the North American Free Trade Agreement), a policy which his wife is now trying to back away from.
Pepus: She was a critic of NAFTA from the very beginning.
Schechter: Yeah, right. [Both laugh.] So this is not just a partisan problem. There’s very little institutional analysis. There is not enough effort going into building a progressive alternative movement, really. There are some out there, but not with much impact. They don’t get any media time. The media are defining what the issues are. The institutions that do serve the public interest—public television, public access—they’re being defunded. When you look at the pundits who are on the air, they’ve all been wrong on almost every occasion.
Pepus: Getting back to government actions in response to the crisis, President Bush signed the Economic Stimulus Act in February. What impact do you expect the new law to have?
Schechter: Well, most people who’ve studied this have said that it’s had zero impact. The reason is that when people are deeply in debt, when they get a little extra money, they pay down on their credit cards. They’re not increasing economic activity. It’s not enough money and it’s not targeted toward, say, infrastructure projects that create jobs. Of course, the war’s economic impact is just being noticed. We’re spending money on the very things that are undermining our economy.
Pepus: One possibility you’ve raised is that racketeering laws could be used to prosecute some of the lenders. How would that work?
Schechter: The government has a statute that they have used to prosecute the mafia successfully, showing that people who are acting in tandem to undercut the law are racketeers. The same thing should apply to the Wall Street people, because they acted in ways that had the net effect of ripping off tens of millions of people and undermining our entire economy. It is like robbing a bank, but this is a story of the banks robbing us. It’s interesting that the FBI announced an investigation of fourteen mortgage companies, but there was never any follow up. Then another announcement comes, saying that they’re broadening the investigation to include financial institutions. But there’s been more work done at the state level. In Cleveland, Deutsche Bank was trying to foreclose on fourteen properties. The defense lawyers said, “Okay, can you show us the mortgage?” The bank didn’t have the mortgage because it had been sliced and diced and put into these different securities. The judge said, “Okay, come back with the mortgage and then we can re-open this case.” This sent the fear of God into all of these guys. Now we’re in a situation where credit card defaults and automobile defaults are really high. This is not just a sub-prime crisis; this is a systemic crisis and a global crisis. You have millions of kids on campuses in hock up to their eyeballs on credit cards and student loans. You have all these homeowners—that’s an incredible constituency that cuts across racial, ethnic, political lines. It’s a powerful potential force, but nobody seems to see the potential of reaching out to it.
To find out about Danny Schechter’s new book Plunder, go here:
Download the top ten credit-survival tips, from Dr. Robert D. Manning, author of Credit Card Nation:
[i] The Federal Reserve Board is America’s central bank. It governs the money supply and oversees other banks. Its members are appointed by the president and confirmed by the Senate.
[ii] Ponzi scheme, named for con-man Charles Ponzi, is a business scam where money from new investors is used to pay returns to earlier investors. The business itself generates little or no money and the scheme lasts only as long as the company can find new investors. Ponzi schemes are illegal.
[iii] President Bush’s former press secretary, Scott McClellan, stated many falsehoods about Iraq during his tenure. He has now admitted that the administration manipulated intelligence information to make a case for war.