Knowledge and Power: The Information Theory of Capitalism and How It is Revolutionizing Our World [2013] by George Gilder

Author:George Gilder [Gilder, George]
Language: eng
Format: epub
Publisher: Regnery Publishing
Published: 2013-06-10T04:00:00+00:00

The government’s favorite banks, therefore, were the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), which were created to promote home ownership. Posner describes these monsters as private institutions, but they are “government-sponsored enterprises” (GSEs)—chartered and championed by the government—and they shape and stultify the entire mortgage system. Through their targeted purchases in the secondary market, they stand between mortgages and their actual issuers and owners, obscuring the information on which those mortgages are based. Because Fannie and Freddie are ostensibly private, their liabilities do not appear on the federal balance sheet, but they enjoy the implicit backing of the U.S. Treasury. At the end of 2009 these bureaucracies commanded $8.1 trillion of guaranteed debt, a staggering sum when compared with the $7.8 trillion of total marketable debt for the entire U.S. government.

The giant Wall Street banks, the federal piper’s obedient dancers, were not far behind the GSEs in government favor. Wilmers acerbically questions the notion that any bank is “too big to fail. Looking at their performance, and the vast bailouts they required, perhaps they are too big to succeed.” Their only strategy was the legally dubious conversion of government guarantees and insurance schemes into egregious levels of leverage. These tactics could transform trivial, sub-penny gains in rapid-fire stock trading into money-printing orgies. In early 2012, Wilmers pointed out that nine billion dollars of Goldman Sachs’s heralded profits came not from profitable investments but from the appreciation of its debt as a result of the government’s zero-interest-rate policy.

Wilmers contends that the Dodd-Frank Act, with 2,323 pages and 217 new regulations, enshrines the government’s implicit backing of the established Wall Street banks despite their having strayed far beyond legitimate banking services. The dance goes on.

“It has become a virtual casino,” Wilmers told the New York Times’ Joe Nocera. “To me, banks exist for people to keep their liquid income, and also to finance trade and commerce.” Yet 75 percent of the 2010 revenues of the five biggest Wall Street banks came from highly leveraged trading and money shuffling rather than from lending or even from conscientious investment.3 In fact, since trading revenues go straight to the bottom line, while these banks have all too often been losing money on loans, all their income essentially comes from trading. Providing government-guaranteed funds and mortgages as safety nets for these financial funambulists has no theoretical justification. But dancing Jamie Dimon dismisses bankers like Wilmers as reactionaries who would return to the horse and buggy, which is how Dimon characterizes making capitalist loans to industries you understand.

Meanwhile, nothing at all has been done to rein in the chief miscreants in the mortgage scandal, Fannie Mae and Freddie Mac. The federal government had to pump in $126 billion when these otiose operations were forced into conservatorship—the GSE version of bankruptcy. The Congressional Budget Office estimates that including the operating costs of these GSEs in the federal deficit would increase it by $291 billion and predicts another $200 billion in new burdens in coming years.

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