Wednesday, February 25, 2009

Gordon Gecko For President: Obama and Pop Culture Can Do What Rick Santelli and Sean Hannity Can’t
By, Cedric Muhammad

If I could have gathered an orchestra, I would have had them build up to a crescendo during this portion of President Barack Obama’s Address To Congress: “People bought homes they knew they couldn’t afford from banks and lenders who pushed those bad loans anyway.”

Unfortunately, I would have had to send them home, because the show stopping punch line was never delivered. President Obama never explained why “banks and lenders…pushed those bad loans anyway.”

A few days I presented a blog, “Securitization As Satan,”:

In it I explain that despite what you may be led to believe by listening only to CNBC’s Rick Santelli (“This is America! How many of you people want to pay for your neighbors’ mortgage that has an extra bathroom and can’t pay their bills? … President Obama, are you listening?”) and Fox’s Sean Hannity (“Government influence and Fannie Mae and Freddie Mac caused this!”), the undisputable truth – which no media outlet will present and no respected economist or financial historian can deny – is that a significant majority of loans in this country were orignated, not because of the primary motivation of a bank or mortgage lender to make money off of interest rate payments, but rather its desire to make more money by selling that loan to a third-party investor: an investment bank, commercial bank, hedge fund, government sponsored entity, pension fund, or insurance company.

The secondary market for mortgage securitization and not the primary market for mortgage lending is more to blame for this mess that we are in.

And the shadow banking industry that purchased these securities became more important than the commercial and mortgage lenders who originated the mortgages they were based upon.

Now, I gather that this truth won’t be popularized until Jay-Z makes a track called ‘Securitized Gangster,’ or, Britney gets the phrase tatooed on her ——; or Michael Douglass can be coaxed into starring in Wall Street II in the role of Lewis Ranieri of Salomon Brothers or Angelo Mozilo of Countrywide.

But it sure would be helpful if our Beloved new POTUS would take a few moments to explain to the American people how we really got into this mess, and the reality that because so many banks sold their mortgages to third parties, he and Congress are really limited in their ability to stimulate the economy or repair the housing market. (Hey Lil Wayne, how’s this for a song - ’A Bank Can’t Change What A Bank Don’t Own.’)

As I have previously blogged, this is why the privately-owned Federal Reserve’s TALF program (designed to revive securitization) is more important to understand than the U.S. Treasury Department’s TARP program (designed to revive commercial bank lending). Credit won’t unfreeze because securitization controls room temperature.

The reason this basic truth is important is because it leads to another – the fact that the American economy became too dependent upon its financial services sector, moving away or taking valuable capital and talent from other sectors like manufacturing, agribusiness, general services, and even information technology, not to mention unknown areas of innovation.

Statistics show that an American economy that had manufacturing as 29.3% as a share of its Gross Domestic Product (GDP) in 1950, with financial services representing 10.9%; by 2005 had eveolved into financial services with a 20.4% share of the American economy and manugacturing down to 12%.

Securitization, which moved beyond mortgages in the 1970s to everything from credit card receivables, student and small business loans, computer leases, and corporate borrowing (even music royalties see ‘Bowie Bonds’) in the 80s and 90s, has become the lifeline of a significant portion of economic activity in America and the world.

In short, if a primary economic activity like a loan, receivable, or revenue stream can’t be bundled and resold as a security in the secondary market, it may not be produced in the first place. It is estimated that without securitization markets $2 trillion in lending is no longer possible.

How important is this?

$4 trillion in total is what was lent to businesses and consumers in 2007.

That’s the real definition of a credit freeze.

Yes, this is the financial version of the tail wagging the dog - a situation where a small part (securitization) is controlling the whole of something (real economic activity).

If the President really hopes to stimulate this economy and save the housing market, he will have to bring balance to an economy that grew to devalue produce from the earth, the entrepreneur with a great idea, a profitable local factory, and even the simple purchase of a home – if it could not be turned into paper profits, over and over again.

If he can’t do it I and we will have no choice but to turn to what Sean Penn, in his Oscar accpetance speech, called the ‘Commie, Homo-loving, sons of guns…’ to get the message across.

Cedric Muhammad’s ‘The Eclectic Economist’ blog is available at (

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