Introduction by Workers Action
The following op-ed article by David Brooks appeared in The New York Times, June 17, 2011.Brooks’ description of the corruption behind the demise of Fannie Mae, a government-backed lending institution that has since been nationalized, is based on a recent book, “Reckless Endangerment,” by Gretchen Morgenson and Joshua Rosner. The striking element of Brooks’ analysis is his repeated equation of this specific act of corruption, in which Representative Barney Frank is implicated, with business as usual in Washington. As he puts it: “The scandal has sent the message that the leadership class is fundamentally self-dealing.” And he adds: “The final message is that members of the leadership class have done nothing to police themselves. The Wall Street-Industry-Regulator-Lobbyist tangle is even more deeply enmeshed.”
The article nicely complements two other recent New York Times articles. The first was Paul Krugman’s explanation of why the Obama administration is not pursuing an aggressive jobs creation program: it would hurt the interests of the banks and the rich. The second is about Obama trying to mend fences with Wall Street in preparation for his upcoming election campaign, where he is aiming at raising $1 billion.
Students of Karl Marx, of course, find little surprising in these developments. Marx argued that the economic base of society, which supports all other activities, is the most dominant factor in shaping and influencing all other spheres of society, including human behavior and attitudes. Capitalism is based on the pursuit of individual self-interest, regardless of the impact on other people. Governments that rest on a capitalist foundation will inevitably find this sentiment infusing its institutions. Politicians almost always act in their self-interest, even though their policies are contrary to the interests of the vast majority of the population.
In fact, another recent New York Times article illustrated this precise point. The article described how corporate lobbyists manage to dominate San Francisco politics by securing one tax break after another for their corporate customers, even though the city includes progressives on the Board of Supervisors and even though the city has been crippled by a sizeable deficit. The lobbying firm first secures the tax break. Then the head of the lobbying firm, as a private individual (not as a lobbyist, which would be illegal), holds a fundraiser for the “progressive” member of the Board who was willing to introduce the bill for the corporate tax break. In this way, the “progressives” are able to raise enough money to get re-elected, and the cycle repeats ad nauseam. The article noted that the lobbying firm succeeded in eliminating somewhere between $30 million and $50 million per year in tax breaks for Zynga. Of course, then the San Francisco City government points to its growing budget deficit and demands that city workers make huge concessions. And the corruption continues.
Who Is James Johnson?
By David Brooks
Published: June 17, 2011
Most political scandals involve people who are not really enmeshed in the Washington establishment —people like Representative Anthony Weiner or Representative William Jefferson. Most scandals involve spectacularly bad behavior —like posting pictures of your private parts on the Web or hiding $90,000 in cash in your freezer.
But the most devastating scandal in recent history involved dozens of the most respected members of the Washington establishment. Their behavior was not out of the ordinary by any means.
For that reason, the Fannie Mae scandal is the most important political scandal since Watergate. It helped sink the American economy. It has cost taxpayers about $153 billion, so far. It indicts patterns of behavior that are considered normal and respectable in Washington.
The Fannie Mae scandal has gotten relatively little media attention because many of the participants are still powerful, admired and well connected. But Gretchen Morgenson, a Times colleague, and the financial analyst Joshua Rosner have rectified that, writing “Reckless Endangerment,” a brave book that exposes the affair in clear and gripping form.
The story centers around James Johnson, a Democratic sage with a raft of prestigious connections. Appointed as chief executive of Fannie Mae in 1991, Johnson started an aggressive effort to expand homeownership.
Back then, Fannie Mae could raise money at low interest rates because the federal government implicitly guaranteed its debt. In 1995, according to the Congressional Budget Office, this implied guarantee netted the agency $7 billion. Instead of using that money to help buyers, Johnson and other executives kept $2.1 billion for themselves and their shareholders. They used it to further the cause —expanding their clout, their salaries and their bonuses. They did the things that every special-interest group does to advance its interests.
Fannie Mae co-opted relevant activist groups, handing out money to Acorn, the Congressional Black Caucus, the Congressional Hispanic Caucus and other groups that it might need on its side.
Fannie ginned up Astroturf lobbying campaigns. In 2000, for example, a bill was introduced that threatened Fannie’s special status. The Coalition for Homeownership was formed and letters poured into Congressional offices opposing the bill. Many signatories of the letter had no idea their names had been used.
Fannie lavished campaign contributions on members of Congress. Time and again experts would go before some Congressional committee to warn that Fannie was lowering borrowing standards and posing an enormous risk to taxpayers. Phalanxes of congressmen would be mobilized to bludgeon the experts and kill unfriendly legislation.
Fannie executives ginned up academic studies. They created a foundation that spent tens of millions in advertising. They spent enormous amounts of time and money capturing the regulators who were supposed to police them.
Morgenson and Rosner write with barely suppressed rage, as if great crimes are being committed. But there are no crimes. This is how Washington works. Only two of the characters in this tale come off as egregiously immoral. Johnson made $100 million while supposedly helping the poor. Representative Barney Frank, whose partner at the time worked for Fannie, was arrogantly dismissive when anybody raised doubts about the stability of the whole arrangement.
Most of the people were simply doing what reputable figures do in service to a supposedly good cause. Johnson roped in some of the most respected establishment names: Bill Daley, Tom Donilon, Joseph Stiglitz, Dianne Feinstein, Kit Bond, Franklin Raines, Larry Summers, Robert Zoellick, Ken Starr and so on.
Of course, it all came undone. Underneath, Fannie was a cancer that helped spread risky behavior and low standards across the housing industry. We all know what happened next.
The scandal has sent the message that the leadership class is fundamentally self-dealing. Leaders on the center-right and center-left are always trying to create public-private partnerships to spark socially productive activity. But the biggest public-private partnership to date led to shameless self-enrichment and disastrous results.
It has sent the message that we have hit the moment of demosclerosis. Washington is home to a vertiginous tangle of industry associations, activist groups, think tanks and communications shops. These forces have overwhelmed the government that was originally conceived by the founders.
The final message is that members of the leadership class have done nothing to police themselves. The Wall Street-Industry-Regulator-Lobbyist tangle is even more deeply enmeshed.
People may not like Michele Bachmann, but when they finish “Reckless Endangerment” they will understand why there is a market for politicians like her. They’ll realize that if the existing leadership class doesn’t redefine “normal” behavior, some pungent and colorful movement will sweep in and do it for them.