Rolling Stone‘s Jesse Myerson was roundly ridiculed last week when he wrote that the solution to America’s economic ills was to embrace communism.
Myerson, who promotes the Twitter hashtag #FULLCOMMUNISM on his Twitter bio, never uses the term “communism” in his op-ed and later explained it away as a “post-Occupy joke,” but communism by another name still smells the same: like human misery, poverty, and death.
As opposed to Karl Marx’s famed ten planks of communism, Myerson identifies only five “reforms” to create his vision of utopia: 1) guaranteed work for everybody, 2) an all-encompassing welfare state, 3) expropriate of the means of production, 4) communal ownership of all capital, and 5) a central bank in every state.
What is disturbing here is not that Rolling Stone would publish the nonsensical ravings of an economically ignorant Occupy organizer, but that the economic fallacies that characterize Myerson’s screed reach to the top levels of officialdom.
In a speech in Osawatomie, KS, last month, President Obama echoed Myerson’s disdain for capitalism. Like Myerson, the President creates a strawman by implying that our system of corporate cronyism is actually the free market at work.
For instance, Obama correctly identifies that the root cause of the subprime mortgage crisis was “banks and investors [who were] allowed to keep packaging the risk and selling it off.” What the President doesn’t identify is: to whom were the banks selling the risk.
The answer is Fannie Mae and Freddie Mac, two government sponsored enterprises (GSE).
Fannie Mae was created in 1938 specifically to create a liquid secondary market for home mortgages so that banks could originate more home loans. Originally, Fannie was confined to buying FHA loans, but, in 1970, Congress allowed it to begin buying private mortgages. Freddie Mac was also created in 1970 for the same purpose.
When the dotcom bubble burst, the Federal Reserve followed the Keynesian prescription of easy money to stimulate the economy. Much of that money found its way into the housing sector. Instead of keeping the mortgages on their books, banks — now flush with newly-created cash — found willing buyers in the government created secondary market, including Fannie and Freddie, as well as investment banks. These buyers then sliced and diced the mortgages into mortgage backed securities (MBS), reselling them as low risk investments.
The problem, of course, is that since the banks who originated the loans were selling the mortgages, their underwriting standards declined precipitously. After all, once the mortgage was sold, they were no longer subject to the risk. And, because the business was becoming so lucrative, many unscrupulous players entered the game.
Finally, the whole thing blew up. However, instead of allowing these incompetent gamblers to take their lumps, the government declared them “too big to fail,” and saved them with trillions of taxpayer dollars.