posted by William Greider on 09/08/2008

The 2008 election has many unusual aspects, but none is more bizarre than the sorry spectacle of the bailout for Fannie Mae and Freddie Mac.

American voters are like the lambs being led to slaughter and at the very height of the presidential campaign. Yet not a peep of protest from John McCain and Barack Obama, not even a hint of the righteous anger injured taxpayers will rightly feel as they figure out the deal for themselves. The rescue of the two giant mortgage firms is another huge expenditure of the public's money--one or two hundred billion dollars this time--to reassure bankers and financiers the government stands by them in their troubles, whatever the costs.

Think about it. Candidates Obama and McCain are wagging their fingers at the governing system in Washington, both warning they intend to make big changes if elected. Meanwhile, business-as-usual doesn't wait for the next president. The financial system needs the capital right now, and so Treasury Secretary Henry Paulson has opened up the spigot. Obama and McCain meekly bless the deal. This sequence of events makes them look look the political goats, their grand talk of change pushed aside by what Wall Street demands. The 2008 election may be close, but it looks like the status quo has already won.

There is a lot more pain and embarrassment to come. The nation is in the midst of an historic financial crisis--more bank failures are ahead and probably another bailout of even larger scale. Yet the two major parties act as though this subject is too complicated for ordinary Americans to understand. Neither candidate has found the nerve (or decency) to explain the full dimensions of what the country is facing. Both men are no doubt told to say as little as possible, for fear of touching off more panic among investors. Voters can safely be left in the dark.

Facing the crisis honestly would not fit very well with the flag-waving campaign themes. The United States is financially busted and utterly dependent on lending from foreign powers--both friends and rivals around the world. The government rescue of Fannie Mae and Freddie Mac could not be put off until after the election, as insiders had hoped, because foreign creditors were beginning to back away from lending any more capital to the two failing US firms. The major creditors are led by China, Japan and other Asian nations, plus oil-rich Arab states and even Russia. The Bank of China has reduced its $376 billion in lending to Fannie and Freddie by 25 percent since July and other nations threaten to do the same.

So the Treasury arranged a deal that throws Fannie and Freddie shareholders over the side, but promises to protect the creditors, foreign and domestic. Bill Gross, chief investment officer of PIMCO, the mammoth bond house in California, issued an ominous warning in advance. If Washington didn't "open up the balance sheet of the US Treasury" and pump lots of public money into the ailing financial firms, the major lenders would sit by and let the great deflation of Wall Street proceed to its ruinous climax. Without the big lenders, credit would dry up through the US economy and the destruction could prove bloody historic for all. The Treasury Secretary heard the message.

How much more capital does Wall Street need to get well? Maybe as much as $500 billion, some experts estimate. What's frightening is that even that great amount might not provide a cure for anytime soon for the real economy, where unemployment rises along with mortgage foreclosures. Thus, Washington puts up unlimited billions for financial repair, but has been rather penny-pinching about paying for economic stimulus aimed at work and production. Obama now proposes a new stimulus package, but the pitiful sum of $50 billion. McCain talks up more corporate tax cuts.

If Americans had a functioning democracy, both of these guys would be competing furiously to get real.