What becomes clear in the statement is that there is at least one Democrat in the Senate who is thinking extremely concretely about how to reform the financial system from top to bottom. She opens with some straightforwardly constituent-oriented explanation for her vote: New York is the nation's financial center and is going to get the stuffing beaten out of it unless things can be stabilized. She doesn't sugar coat it (my emphasis in this all other quotes):
Now I think we are here in some respects because we failed to tackle a home mortgage crisis, and now we are facing a market crisis. If we fail to tackle the market crisis, we risk an even deeper economic crisis. I don’t think any of us want to see irresponsibility on Wall Street compounded by ineffectiveness in Washington. That’s why we must act, even as we do so with regret and reservations, because we have little choice. ... As is the case very often in effective compromises, no one is happy. But we cannot let the perfect be the enemy of the good, or in this case, the enemy of what’s necessary. But as we vote for this proposal tonight, we must do so considering what steps we will take next.
Sounding pretty Krugman-esque here (probably because she keeps hiring his son to work for her) (that was a joke for the irony impaired, btw) about the hold-your-nose necessity of passing the bill, but it is placed in context - this is happening now because we did not take action earlier. The market collapse did not happen in a vacuum, it is not merely greed or bad investment choices. It has a history and has already done harm and that is what needs to be remedied. She then, in her typical no-nonsense fashion, lays out that remedy, addressing three significant goals.
First, we must address the home mortgage crisis. For two years, I and others have called for action as wave after wave of defaults and foreclosures crashed against communities and the broader economy. We are not yet through the woods. Millions of mortgages are underwater or under specter of adjustable rates set to rise.
I am proposing what we're calling The Homeowners Mortgage Enterprise, an acronym obviously spelling HOME, to rewrite mortgages and reset terms so that creditworthy, responsible families can keep their homes and keep making affordable payments. Through such a HOME program, we'd also be able to consider freezing adjustable mortgage rates and even placing short term moratoriums on foreclosures.
Hillary reads her Roubini. Here is Roubini one week earlier, on September 24th:
Even if the Treasury TARP plan is implemented fairly and efficiently the US will not avoid a severe U-shaped18-month recession and a severe financial and banking crisis: the recession train has already left the station in Q1 and the financial/banking crisis will be severe regardless of what the Treasury and the Fed do from now on. What a proper rescue plan can do is to avoid having the US experience a multi-year L-shaped recession and extreme financial crisis like the one that led to a decade long stagnation in Japan in the 1990s after the bursting of their real estate and equity bubbles.
I have also argued that, in order to resolve this financial crisis it is not enough to take the bad/toxic assets off the balance sheet of the financial institutions (a new RTC); it is also necessary and fundamental to reduce the debt overhang of millions of insolvent households via a significant debt reduction on their mortgages (an HOLC program like the one that was implement during the Great Depression); and also recapitalize undercapitalized banks with public capital in the form of preferred shares (as the RFC did with 4000 banks during the Great Depression). An RTC scheme without an HOLC and RFC component would not resolve two fundamental problems: millions of households are insolvent and unable to service their mortgages; the financial system is vastly undercapitalized and needs capital to avoid an ugly credit crunch and to foster new credit creation that is needed for future growth.
That is why I proposed the creation of a HOME (Home Owners’ Mortgage Enterprise) that would be a combination of an RTC, a HOLC and a RFC.
Reading Hillary's brief remarks, it is clear she is focusing on the portion of the Roubini plan that directly affects the homeowners, namely the HOLC portion for reclaiming and working out the mortgages that can be cured, but she makes clear the same concern that Roubini has and why any real financial reform must rework household debt: "And only by rewriting the terms of the debt held by families whose mortgages can be salvaged will we recoup a great deal of the value of the debt we are purchasing from Wall Street firms. " This gets to Roubini's more detailed explanantion of the dynamic between unsustainable mortgages and an incurable financial feeze:
[W]hen a household is financially distressed it also needs debt relief to be able to have more discretionary income to spend. So any unsustainable debt problem requires debt reduction. The lack of debt relief to the distressed households is the reason why this financial crisis is becoming more severe and the economic recession - with a sharp fall now in real consumption spending – now worsening. The fiscal actions taken so far (income relief to households via tax rebates) and bailouts of distressed financial institutions (Bear Stearns creditors’ bailout, Fannie and Freddie and AIG) do not resolve the fundamental debt problem for two reasons. First, you cannot grow yourself out of a debt problem: when debt to disposable income is too high increasing the denominator with tax rebates is ineffective and only temporary; i.e. you need to reduce the nominator (the debt). Second, rescuing distressed institutions without reducing the debt problem of the borrowers does not resolve the fundamental insolvency of the debtor that limits its ability to consume and spend and thus drags the economy into a more severe economic contraction. So of the five possible uses of fiscal policy – income relief to households (the 2008 tax rebate), rescue/bailout of financial institutions (Bears Stearns, Fannie and Freddie, AIG), purchase of assets of failed institutions (an RTC-like institution), recapitalization of undercapitalized financial institutions (an RFC-like institution), government purchase of distressed mortgages to provide debt relief to households (an HOLC-like institution) – the last option is the most important and effective to resolve this severe financial and economic crisis.
No ability to get out of debt means no ability to restart a viable financial engine. While it is popular to howl about moral hazard and making irresponsible borrowers "Pay for their mistakes" (Didn't they know they couldn't afford that house!?!?!), as I have pointed out in earlier posts, it is a perfectly rational act on the part of homebuyers to try to leverage a real estate transaction to replace the systemic economic shortfalls of declining wages and underemployment. I also point to my own home buying experience where, had we not insisted that we be shown all mortgage options, we would only have been offered exotic loans. We were strongly advised to take the riskier loans and actually told that if we withheld our financial data, we could borrow more. This brings up a point Barry Ritholz makes today in his post, Fannie Mae and the Financial Crisis:
This nonfeasance under Greenspan allowed banks, thrifts, and mortgage originators to engage in all manner of lending standard abrogations. We have detailed many times the I/O, 2/28, Piggy back, and Ninja type loans here. These never should have been permitted to proliferate the way they did.
The most significant element were the 2/28 APRs, and their put back provision. Just about all of these gave the securitizer/repackager the right to return the loans within 6 (or 12) months if they went into default. Hence, our proposition that the 2002-07 period was unique in the history of finance. If any of these mortgages went bad within 6 months, the undewriter was on the hook.
HOW DIFFERENT WERE LENDING STANDARDS IF YOU ONLY NEED TO ENSURE THE BORROWER WOULDN'T DEFAULT FOR 6 MONTHS VERSUS FINDING BORROWERS WHO WOULDN'T DEFAULT FOR 30 YEARS.
Shorter Barry - if it is in the interests of the mortgage broker to sell shit that will not come back to hit him, that's what he's going to sell to both the borrower and the GSE. How do you ask for a loan you don't know exists if you are not an obsessive geek who has been reading econoblogs for six years and has a good clue that the conventional wisdom is wrong?
Back to Hillary. While only mentioning the HOLC provision, I'm willing to bet she wants most if not all of the other 9 points of Roubini's plan as part of the overall financial restructuring. Her second goal is the least ambitious and is more aimed at warning that we have to keep watching out for the underhanded BS of Paulson's Merry Banksters:
Second, we must be vigilant on behalf of taxpayers, putting in place safeguards so the Treasury is maximizing the value of the assets purchased with taxpayer dollars. We need to have the flexibility to ensure we're not just subsidizing investors and executives, but we should tie this debt relief to strong recapitalization requirements and greater accountability.
Hey, a legislator that understands that this is a solvency issue and not just a liquidity problem! After reading the NYT series, it is clear that the guys running the economy are not trustworthy. They have been engineering the system for years to produce exactly the results we see, and they don't appear to think there is anything wrong with it except that the stupid public quit trading up, stopping the gravy train. Hillary doesn't just want to slap some financial handcuffs on Hank, she wants to bring greater tranparency to the entire shadow banking shenanigans:
I also want to be sure that companies do not take undue advantage of this program and sell securities to the Treasury with one stroke of the pen and claim a deduction for the losses on those assets with the other—in essence, double dipping, dumping their bad assets on taxpayers, and getting a tax break as well. I'm proposing we build on a very creative provision in the bill before us, and establish an e-TRUST Program. That would stand for Transparent Rules Used to Safeguard Taxpayers. In the bill, there's a provision that transactions be put on the Internet.
I want to ensure that the assets brought—bought and sold by the Treasury Department are reported online in real time, so any American can log on and see how their tax dollars are being spent. All assets bought and sold must be available on a publicly accessible website that discloses the buyers, sellers and values of these assets. The American people are buying these securities, and so the American people must have easy access to their portfolio
It's also important for the American people to understand that lying behind these complex transactions, with all kinds of long names that you read in the newspaper—collateralized debt obligations, and credit default swaps and all the other, you know, words that are used to in some way explain the complex financial transactions that brought to us this place—standing behind are real assets. There are real homes owned by real people on real land in real communities across America. So we want to know how those securities that stand in for these real assets are being traded, bought, and sold, and we want to be sure that we realize for the taxpayer the benefit of these transactions.
Don't just trust the politicians and bureaucrats to do the right thing, look at what is being done. and see how it impacts real assets. Hold the infestment banks (or whatever their remnants are now defined to be) accountable for what is now a taxpayers' portfolio. Most important, put a system in place that enforces transparency, whether the Merry Banksters like it or not. One look at the econoblogs tells me that there are many self-appointed watchdogs in the general public only too happy to comb through this data, looking for irregularities, if it is made available.
The third goal is the most general, yet establishes an expectation that we're not fixing a specific problem and then going back to business as usual plus a smidgeon more oversight. We're talking about substantive reform:
And third, I think there is general agreement we must pursue broader reforms. That is one of the lessons of this turmoil. ... We've got to end the quarter-by-quarter mentality in which long term prosperity is subverted by short term stock valuations. And obviously, we have to end the culture of recklessness in our financial markets endorsed by an ideology of indifference in Washington.
This is politically smart. She ties the reckless behavior of Wall Street to the ideological choices of the people running Washington. It's just general enough to include actors in both major parties without falling into the trap of "bipartisan blame" so adored by the High Borderists. It becoems a challenge to reform political ideology and not just fix some glitches in the valuation of securities. And what would we expect as an outcome of that reform? Hillary makes it very concrete - national investment:
As the American people invest in these companies, I think we should ask the companies to invest in the American people. I think we should consider requiring financial institutions participating in this Treasury plan to create an American Priorities Fund to be part of their portfolios, to invest in clean energy, infrastructure, mass transit, manufacturing, education, and other public goods and goals that would be well served by greater private investment. ...
Instead of toxic securities that nobody can understand, are so complex and lack all transparency and accountability, banks should be investing in clean energy facilities in Buffalo, or new auto manufacturing plants in Detroit to build more fuel-efficient cars. We should be repairing our bridges, our roads, our tunnels. We should investing in high-speed rail and making sure that Amtrak is just not a second-class railroad, but competes with the best anywhere in the world.
Energy independence. Infrastructure repair (Can we say "Ka-ching" for working class employment?). Effective transit that everyone can use. Manuafacturing, education, etc. This isn't just "We need to reform." It is "We need to reform in order to accomplish these kinds of objectives." It also redefines the role of banks, from only needing to satisfy private concerns to having to provide public benefit in order to profit from a stable and secure financial environment.
Compare Hillary's crisp and direct statement to Obama's, located here on his Senate website. Here's the meat of the statement:
As soon as we pass this rescue plan, we need to move with the same sense of urgency to rescue families on Main Street who are struggling to pay their bills and keep their jobs. I've said it before and I'll say it again: we need to pass an economic stimulus plan that will help folks cope with rising food and gas prices, save one million jobs by rebuilding our schools and roads, and help states and cities avoid budget cuts and tax increases. A plan that would extend expiring unemployment benefits for those Americans who've lost their jobs and cannot find new ones.
We also must do more than this rescue package does to help homeowners stay in their homes. I will continue to advocate bankruptcy reforms to help families stay in their homes and encourage Treasury to study the option of buying individual mortgages like we did successfully in the 1930s. Finally, while we will all hope that this rescue package succeeds, we should be prepared to take more vigorous actions in the months ahead to rebuild capital if necessary.
Just as families are planning for their future in tough times, Washington will have to do the same. Run-away spending and record deficits are not how families run their budgets, and it can't be how Washington handles people's tax dollars. It's time to return to the fiscal responsibility we had in the 1990s. We need to go through the budget, get rid of programs that don't work and make the ones we do need work better and cost less. With less money flowing into the Treasury, some useful programs or policies might need to be delayed in the years ahead.
But there are certain investments in our future that we cannot delay precisely because our economy is in turmoil. We cannot wait to help Americans keep up with rising costs and shrinking paychecks by giving our workers a middle-class tax cut. We cannot wait to relieve the burden of crushing health care costs. We cannot wait to create millions of new jobs by rebuilding our roads and our bridges and investing in the renewable sources of energy that will stop us from sending $700 billion a year to tyrants and dictators for their oil. And we cannot wait to educate the next generation of Americans with the skills and knowledge they need to compete with any workers, anywhere in the world. Those are the priorities we cannot delay.
Not. One. Word. About. Reforming. The. Banking. Industry. Where is any mention of restructuring the system to avoid this kind of meltdown in the future? It's all being played out as a morality tale - people did some bad things, but we can't be mad at them and now we all have to pull together and sacrifice for a brighter, happier tomorrow. The enumeration of goals at the end has no logical connection to reforms on Wall Street. Indeed, from the highlighted paragraph, you get the impression that the problem is the government is the one who overspent stuff and is now going to have to adopt austerity measures to make up for its bad use of taxpayer money. W.T.F?
And the mention of the economic stimulus package is infuriating. What good does it do to "stimulate" the economy if the system is suffering the financial equivalent of erectile dysfunction in every transaction? There is total disconnect between what the crisis is - how it happened, why it happened, its origins in the current administration's mismanagement, the recognition that major reform is needed - and the feel-good "needs" being tossed out. Bankruptcy reform is not an answer in and of itself; it must take place within a program designed to rectify the damage done by a wholly debased mortgage industry. Bankruptcy is the symptom, not the cause, of the foreclosure epidemic. There's a lot of handwaving in the direction that something more needs to be done, but no attempt to put that something into context.
What Hillary proposes is a programmatic and political solution to the devastation wrought by the Movement Conservatives on the geenral public. This is what Democrats need to be prepared to do if they can recapture the government in November. This is what Democrats need to run on.
Now if we only had a Democrat running for president...