What the President May Tell Congress

The President may be gearing up to blame the bad economic climate squarely on the House of Representatives. Recently he declared himself 'frustrated'. "That was the subject line of an e-mail sent to millions of supporters late Wednesday night from President Obama's re-election campaign. It expressed his frustration with Congress' unwillingness to deal in bipartisan fashion with the country's economic problems."  By that he apparently meant they stood in the way of spending. He made the pitch for more spending at the speech at the White House recently.

The message was simple. Spend. On high speed rail, national broadband, transportation projects and similar undertakings. "Now is the time to put country before party", something he suggested other people were guilty of.

The President was also set to assign the blame in the failing housing industry to banks.  New York Times reports that "the federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation." At the core of the suit is the argument that Fanny and Freddie were unsuspectingly led into making bad investments by designing and manipulative banking institutions.

The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.

Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers. ... The two mortgage giants acquired the securities in the years before the housing market collapsed as they expanded rapidly and looked for new investments that were seemingly safe. At issue in this case are so-called private-label securities that were backed by subprime and other risky loans but were rated as safe AAA investments by the ratings agencies. ...

“Fannie and Freddie thought they were taking AAA tranches, and like so many investors, they were surprised when they didn’t turn out to be such quality investments."

Fannie and Freddie had other reasons to buy the securities, Mr. Rood added. For starters, they carried higher yields at a time when the two mortgage giants could buy them using money borrowed at rock-bottom rates, thanks to the implicit federal guarantee they enjoyed.

The rival narrative maintains that Fannie and Freddie were not babes in the woods or innocents abroad but worked hand in hand with banks and indeed encouraged them to inflate a housing bubble because they had access to taxpayer-backed money. In that view, the two agencies gambled with public money and lost. The foremost proponents of that angle are New York Times reporter Gretchen Morgenson and the financial analyst Josh Rosner who wrote the book Reckless Endangerment which argues that nobody was blameless, but that the necessary condition for the catastrophe was the Federal guaranty. One reviewer wrote:

Reckless Endangerment chronicles the screwing of America by just about everyone in power: dirty politicians, inept watchdogs and an insatiably avaricious financial community that knew better but didn't care. NY Times reporters Gretchen Morgenson and Joshua Rosner have taken the time to investigate not just players in the financial mess circa 2008 but the 15 years prior when Bill Clinton decided to get behind the dubious notion that everyone should have a stake in the American dream and own their own home.

In theory it all sounded perfect--who could object to people bettering themselves? The only problem was that to make the dream "accessible to all" generations of lending practices and protections would have to be dismantled. Safeguards would be gutted and due diligence would become a nuisance that is brushed aside. There are plenty of culprits here: the usual Wall Street money-mongers and in the 90s and early 00s a Republican Congress in their pocket. But Morgenson and Posner shine a powerfully bright light on the complicity of marquee Democrats such as Bill Clinton, Christopher Dodd and Barney Frank. Toss in Democrat insider Jim Johnson into the cauldron and it is a powerful witches brew.

Jim Johnson, quintessential DC insider used all of these connections in the 90s on behalf of empowering Fannie Mae and eviscerating sound financial practices. Greasing the wheels of powerful polls on banking and finance committees became standard procedure. Finding a sinecure for Barney Frank's boyfriend was a pleasure not a problem (if Frank isn't a criminal it is by a hair's breadth). Libeling the responsible, honest regulators and economists who tried to stop this train-wreck waiting to happen was all in a day's work, and a particular Johnson specialty.

But with the administration now admitting that Recovery Summer won't come before 2012 -- the White House released figures forecasting high unemployment through 2012 -- blame is the only name of the game. A catastrophe is coming and the culpability for it can't be shared equally. Someone has to take the rap.

It is likely that the reason he so urgently sought to address the Congress is joint session is so that he would be afforded with the visual opportunity to jab his finger in the House of Representative's faces. 'There they are, the guilty men. The do-nothings who would let the nation's infrastructure disintegrate. The partisan hacks who would keep me from spending to put money in your pockets. Times will be hard and when you think on them, think of these men.' Jab. Jab.

Will it work? Will the public buy it and rise up with the President point their collective fingers at Boehner and the Republican freshmen who were not even in office when the bubble inflated and burst? Who knows, but the hardcore faithful will be willing to go for it. And maybe the President has no choice but to try.

The stimulus is just a memory, back along the road with all the dead armadillos and roadkill.  Recovery Summer has gone the way of Green Summer and its falling leaves. The President's popularity is in the tank according to every poll. He has nothing to lose by declaring all-out war but the White House; and unless he can blame his opponents he'll lose that anyway. His only chance is to take the offensive, to win back the high ground and strike back with the old magic before his trip to Bali in November.

When the chips are down, men of unimpeachable character are apt to be interested in only one thing: who's going to hold the bag? Who's going to take the rap? Nothing else matters. What are the odds that in fashionable clubs and high government offices a version of the following dialog has not taken place?

Sam Spade: We'll get back to the money later on. There's something else to be discussed first. We've got to have a fall guy. The police need a victim, somebody they can pin those three murders on.

Kaspar Gutman: Three? There's only two, because Thursby certainly killed your partner.

Spade: Only two then. What's the difference? We have to give the police...

Gutman: Come, Mr. Spade, you can't expect us to believe at this late date... ...that you're afraid of the police, or that you're not quite able to handle...

Spade: I'm in this up to my neck. I've got to find somebody, a victim when the time comes. If I don't, I'll be it. Let's give them the gunsel. He actually did shoot Thursby and Jacoby, didn't he? Anyway, he's made to order for the part. Look at him! Let's give him to them.

Gutman: By gad, sir, you are a character. That you are! There's never any telling what you'll say or do next... ...but it's bound to be astonishing.

Spade: It's our best bet. With him in their hands...

Gutman: But, my dear man, can't you see that if I even for a moment... ...thought of doing such a thing... That's ridiculous. I feel towards Wilmer here just exactly as if he were my own son. Really, I do. But if I even for a moment thought of doing what you propose... ...what in the world would keep Wilmer from telling the police... ...every last detail about the falcon and all...

Spade: Let him talk his head off. I'll guarantee you nobody'll do anything about it. ... The fall guy's part of the price I'm asking. As for Miss O'Shaughnessy... ...if you think she can be rigged for the part I'm willing to discuss it with you. ...

Gutman: By gad, sir, you are a character.

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