US sub-prime woes a result of ‘getting rich on backs of poor’

John Murray recently met Morris Reid, formerly an aide to US president Bill Clinton and these days a TV pundit with his own public affairs company in Washington DC. They talked about the US primaries and turning around the credit crisis. It wasn\'t a confidence-boosting session

Towards the end of play on Friday 14 March – the day Bear Stearn’s shares tumbled by 50% – Morris Reid, erstwhile aide to Bill Clinton and currently a media pundit and managing director of his own public affairs firm in Washington DC, dropped by for a chat.

Naturally, we soon moved on to the US housing and mortgage markets and the US primaries in which John McCain has emerged as the Republican presidential candidate, while Hillary Clinton and Barack Obama are still fighting it out for the Democrat ticket.

Looking at the UK media coverage of the US primaries, the American housing crisis hadn’t appeared to be on the political agenda, so I asked Reid if that was because of the way UK journalists were following events or whether the state of the housing and mortgage markets wasn’t an issue in the US?

To my surprise he said it wasn’t an issue, even though it had gone beyond being just a sub-prime bubble and that the contagion had spread worldwide and was having an impact on Bear Stearns, which was to be taken over by J P Morgan that very weekend.

But how come it’s still off the radar, I asked, given the scale of the problem? Reid said it was not so much off the radar – it just wasn’t a primary issue.

Referring to the Democrats, he said: “It’s not the sub-prime market, it is our economy that’s bad and the reason it’s bad is because rich people got rich on the backs of poor people in the sub-prime market. So maybe they see it as a way of furthering their agenda on the populist approach, as opposed to hitting the issue squarely.”

Reid thought the Democrats were “really missing out” on this one. “I was one of the first people saying that this wasn’t a sub-prime bubble – this was going to be a wholesale problem and it was going to hit the major markets as well, mainly because we all knew about the securitisation, and the secondary markets and a lot of the hedge fund troubles, and that the banks had a lot of stuff in their own portfolios.”

He added: “I think the Democrats missed it for two very important reasons. One, it was an issue that could have been applauded both by Main Street and Wall Street for stepping in and providing leadership.

“The second reason, where I feel they missed the issue is that from a small business standpoint most people in America still start their businesses through second mortgages on their home. So there were two wide open opportunities, two very interesting constituencies and they didn’t address it so they really missed the opportunity.”

And as to the media coverage of developments in places like Cleveland, Ohio, where possessions are at an industrisl scale and neighbourhoods are sliding into slums overnight, Reid said that it wasn’t happening.

“The American media haven’t been producing any thought-provoking pieces,” he said. “They’re struggling to re-address how they’re going to present the news. The nightly news in America is on the decline – fewer people are watching the nightly news – and those watching tend to be much older.”

After reflecting for a moment, he added: “One of the things the Republicans said is that we’ve a great economy. Well there are pockets of anxiety in America. Cleveland, Ohio, is ground zero for that anxiety. If you’re looking at where the election is going to be won, Ohio is the most important state be-cause it’s terrible there. So that should be a harbinger for the democrats that we need to focus on Ohio and we need to focus on economics.”

However, Reid thought the mortgage and housing market would shoot up the political agenda if one of the big banks, like Bear Stearns, went under. “It’ll be right on the front page,” he declared and sure enough by the following Monday the ‘rescued’ bank was front page news.

The knock-on effect has moved the credit crisis into a new phase that has made UK chancellor Alistair Darling’s budget almost irrelevant and has stirred the Fed into further action. But Reid thought a big bank failure might play into the hands of the Democrats.

Nobody is too confident about George Bush’s grasp of economics and his deficit budgeting. Spending more and cutting taxes is an interesting way to run an economy, so did Reid think McCain could turn the US economy around?

“Well he made a comment, which he claims was taken out of context, that suggested he didn’t really understand the economy,” Reid said. “The Republicans have been effective at painting the picture of an economy where you either cut taxes or you don’t cut taxes and the media has bought into that.

“But the US economy is more complicated than just cutting taxes. If it was just about cutting taxes we’d have a really great economy because George Bush has cut taxes more than anybody else in the world. So the Democrats have to fight the ‘me too’ situation. Whenever the Republicans say something, the Democrats say ‘me too’. “The Democrats have to step away from that and come up with a plan, an economic plan.

“I believe that this is the first time in a generation when the Democrats could possibly have an upper hand on a Republican candidate when it comes to economics.”

But wasn’t it Bill Clinton who said “it’s the economy, stupid”, and could that come back in a big way? I asked.

Reid agreed but added that the situation had changed. “One thing that is different is that George Herbert Walker Bush had a war that was successful and the American people bought into it but he lost (failed to get a second term).

“The current president has a war that is very unpopular, the people haven’t bought into it, but he’s got a second term. They’re going to try and paint this again as a homeland security fight so the Democrats really need to talk more bread and butter issues and really talk across the table. The Democrats have a hard time communicating one on one.” George Soros heavily criticised the current president’s deficit budget, arguing the last time America went to the ballot box that this would lead to a housing and mortgage market crisis and a stop-go economy which the UK used to experience in the 1960s, so did Reid think any of the primary candidates would be likely to address this should they be elected?

“They’ll have to,” he insisted. “The problem is that they do it in political terms. They do it terms of ‘we’ve got a budget and we are wagering our grandchildren’. That doesn’t work.

“The reason Bill Clinton was so successful was that he was able to get the average American to understand what he was doing and how policies help. I’m not so sure Barack Obama and Hillary Clinton and John McCain really want to give that level of detail because they feel that’s not a winning issue.

“They think the winning issue is health care, they think it’s tax cuts – things that are more readily impacting on the average person.”

Looking at the three presidential hopefuls, I suggested to Reid that they were all inclined towards protectionism, which didn’t augur too well for the future of the global economy or working our way out of the current credit crisis. Did he have a comment on that?

“I do have a very strong opinion on that,” he declared. “One, I don’t think any of these guys are levelling with the American people and if you look at the North American Free Trade Agreement, for example – sure there are things about the treaty we don’t like, but on the whole we live in a global society.

“Take one example – Boeing was going after a $40bn procurement with the Defense Department that went to a European company which has a joint venture with a US company. That is the future. The American government is just one government in the world so if we continue to close off our borders then other people are going to close off their borders too.

“Bill Clinton had a very specific trade policy. Ron Brown carried it out. I was part of that. We understood that export created jobs and we touted it. We beat that drum, man. What the Democrats haven’t been able to do is to frame that in a new context. The problem is they let tax cuts dominate the issues instead of freer fair trade and worker retraining.

“Worker retraining in America is more important now than at any time its history, particularly in the rust belt – states were you’ve got to make a transition. But there is a lack of investment. America doesn’t invest in its own stock, we don’t invest in worker retraining, we don’t invest in building roads and schools. George Bush has built more schools in Iraq than he has in America.

“So the Democrats and Republicans aren’t levelling with the American people because if we close off our society it will be to the detriment of America. It will also continue the decline of the dollar.”

But isn’t any of the three presidential hopefuls capable of sorting out the credit and housing crisis if Bushenomics fails?

“As of right now none of them have a clear track record or, frankly, a plan so the jury is still out,” Reid said. “The person I think that could be the most courageous is Barack. He hasn’t been around long enough to have a track record, so when you haven’t got a track record you can try and plead ignorance.

“Hillary is more an insider baseball player and is more likely to dog and pony. So is McCain. He’ll dog and pony. He’ll trade off on things.”

Finally, should the next president be a Democrat, Reid thought housing would become an important issue again. “Women and minorities aspire towards homeownership,” he said.

“I do believe that if you have a woman or a black as a president, owning a home is going to have a big focus. So if either Hillary or Obama win, they’re going to have to fix it and it’s going to be an 18 to 24-month programme. So organisations like Fannie Mae and Freddie Mac – they’re really trying to get their act together now, so that they are poised to LStake advantage of that.”

Bear Stearns fire sale has changed the complexion of the race for the presidency
As a postscript to the interview with Morris Reid, the Bear Stearns fire sale to J P Morgan spurred Hillary Clinton and Barack Obama into criticising the Bush administrations failure to tackle the credit and housing crisis.

According to the Washington Post on 18 March, they had expected to focus on Iraq but Clinton’s policy address on Iraq at George Washington University was immediately followed by a news conference dominated by economic questions.

The Washington Post stated: For Obama, Clinton and the presumptive Republican nominee, Senator John McCain (Arizona), the gyrations of the credit crisis have helped to reshape the playing field for the campaign season. In January, Obama and Clinton were prepared for a detailed debate on their respective universal health-care proposals, noted Jason Furman, a Brookings Institution economist and former economic adviser to Senator John F Kerry’s 2004 campaign. Instead, they argued about economic stimulus proposals. McCain’s surprise visit to Iraq this weekend, meanwhile, was virtually lost amid coverage of J P Morgan Chase’s fire-sale purchase of Bear Stearns under Fed supervision. According to the Washington Post, the housing crisis has been the subject of a simmering dispute between Clinton and Obama for weeks.

In December 2007 Clinton proposed a framework to keep families in their homes with a moratorium on foreclosures for 90 days and a voluntary freeze of at least five years on adjustable sub-prime mortgage rates. This measure has been criticized by Obama who said that Clintons plan would send interest rates for new and refinanced mortgages skyrocketing.

On 13 March Clinton called on Congress to immediately establish a $30bn emergency housing fund for states and localities struggling with mounting foreclosures.