Some years ago, I read James Grant use the phrase that went something like this: "the democratization of credit, and the socialization of risk." I don't know if that phrase is directly related to the recent spate of bailouts and the like going on, and I didn't notice the phrase in Grant's excellent piece in The Wall Street Journal this weekend. But you can't help but wonder if public apathy about this stuff stems from an instinctive belief in everybody bailing everybody else out makes everything okay.
Actually, I think people are so irked at $4.00 and up gas prices -- and worried about further increases -- that their focus is fixed there. And Grant suggests this could be the factor consuming populist anger at the moment. Other choices are perhaps the public now viewing "Wall Street" the same as "Main Street" because of widespread stock ownership; or that Wall Street really owns both political parties and their candidates.
But Grant is a perceptive guy, and digs deeper, and goes farther back, for the real reason:
I have another theory, and that is that the old populists actually won. This is their financial system. They had demanded paper money, federally insured bank deposits and a heavy governmental hand in the distribution of credit, and now they have them. The Populist Party might have lost the elections in the hard times of the 1890s. But it won the future.
And a bit further along:
By and by, the lefties carried the day. They got their government-controlled money (the Federal Reserve opened for business in 1914), and their government-directed credit (Fannie Mae and the Federal Home Loan Banks were creatures of Great Depression No. 2; Freddie Mac came along in 1970). In 1971, they got their pure paper dollar. So today, the Fed can print all the dollars it deems expedient and the unwell federal mortgage giants, Fannie Mae and Freddie Mac, combine for $1.5 trillion in on-balance sheet mortgage assets and dominate the business of mortgage origination (in the fourth quarter of last year, private lenders garnered all of a 19% market share).
I'm a huge admirer of Grant, so it's no surprise to regular readers here that I like this article. With no shortage of pundits in the American press trying to pin the credit troubles on this party or that one -- I've actually heard some journalists term President Bush's economic policies as laissez-faire! -- reading the thoughts of someone willing to go back to the root of the crisis is refreshing.
Another bit standing out:
Late in the spring of 2007, American banks paid an average of 4.35% on three-month certificates of deposit. Then came the mortgage mess, and the Fed's crash program of interest-rate therapy. Today, a three-month CD yields just 2.65%, or little more than half the measured rate of inflation. It wasn't the nation's small savers who brought down Bear Stearns, or tried to fob off subprime mortgages as "triple-A." Yet it's the savers who took a pay cut -- and the savers who, today, in the heat of a presidential election year, are holding their tongues.
I remember when the Suharto regime in Indonesia fell during the Asian crisis in the late 1990s. Press reports were full of Indonesian "crony capitalism" with rampant corruption. And, while corruption will be around to some degree as long as humans walk the earth, Washington is starting to look a lot like Jakarta. And the transformation has roots going back to at least the 1930s.
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