The Economy

Floor Speech

THE ECONOMY -- (Senate - September 24, 2008)

Mr. DORGAN. Mr. President, I have often described on the floor the lyrics of Bob Will's and the Texas Playboys' song from the 1930s:

The little bee sucks the blossom and the big bee gets the honey; the little guy picks the cotton and the big guy gets the money.

Never is that more true than what we see today with the prospect of unbelievable financial bailouts and the mechanics of what is happening on Wall Street and the wreckage of the financial system. I wish to show my colleagues this about the bailouts by the administration. Everybody is talking about a $700 billion proposed bailout by the Federal Reserve and Treasury Secretary Paulson. In fact, the Federal Reserve previously committed $29 billion so J.P. Morgan could buy Bear Stearns, the investment bank that was failing. In addition, the Fed opened its discount window for direct loans to non-regulated banks for the first time since the Great Depression. We understand that this program and two other Fed loan programs total some $300 billion. There is another $300 billion for the Federal Housing Administration, and about $200 billion for Fannie and Freddie; JPMorgan Chase for Lehman financing, $87 billion; AIG insurance, $85 billion; $50 billion for money market funds that was offered as a guarantee; and now the prospect of $700 billion is pending. That isn't just $700 billion; that totals $1.7 trillion. Even if the Congress decides not to provide the $700 billion bailout that is being requested, there already exists $1 trillion that have been offered to try to stabilize the financial system.

Now, the question is, How did we get into this mess? What caused this wreckage? What do we think we should do about it? I wish to talk for a bit about what caused this. I take no pride in being right 9 years ago as one of eight Senators who voted against the Financial Modernization Act. That act was a bunch of folks who sold to the Congress the proposition that what we put in place for protection in the 1930s, during the Great Depression, to separate banking from more speculative enterprises, such as real estate and securities--the decision was that that is old-fashioned, don't keep doing that; let's allow these companies to merge, to create massive financial holding companies--a kind of financial cafeteria under one roof. Let's bring them together, and you can build firewalls inside the organization. So the Financial Modernization Act was passed.

I said on the floor of the Senate then that within 10 years I believe we will see massive bailouts that will be paid for by the American taxpayer. I regret that I was right. It should not have happened, however. I wish to talk about what has happened as a result of taking down the basic protections. Let me go back to the start of two things--one I mentioned--the Financial Modernization Act, which took apart the protections. Second, a group of people came to this town boasting that they weren't interested in regulating. People were put into positions where they were supposed to regulate and decided not to regulate. Those two pieces together, taking apart the protections in law and putting in place people who wanted to be willfully blind in deciding not to regulate, steered us right toward the cliff. Here is what began to happen across the country. Most Americans saw this because you could not miss it. You wake in the morning and perhaps you brush your teeth or you shave in front of a mirror and you might have a small television set that you are watching, seeing what is going on, and the advertisements come on--and they are always louder than the programs. The advertisements say: Hey, if you have been bankrupt or if you have bad credit, you can get a loan from us. Do you think you are paying too much for your home loan? Are your house payments too high? Get a loan from us.

This was the biggest mortgage bank in the country, Countrywide. They advertised this:

Do you have less than perfect credit? Do you have late mortgage payments? Have you been denied by other lenders? Call us.

America's biggest mortgage bank was saying: Have you got bad credit? Call us. Want a loan? Call us.

Millennia Mortgage said this in their advertisements:

Twelve months, no mortgage payments. That's right, we will give you the money to make your first 12 payments if you call in the next 7 days. We pay it for you. Our loan program may reduce your current monthly payment by as much as 50 percent and allow you no payments for the first 12 months. Call us today.

So Millennia Mortgage was saying: Get a mortgage from us. We will pay the first 12 months. They didn't say, of course, that that money you are not paying is going to go on the back end of the loan, with interest, and will substantially increase the cost of your loan.

Zoom Credit, in their advertisement, said this:

Credit approval is just seconds away. Get on the fast track at Zoom Credit. At the speed of light, Zoom Credit will preapprove you for a car loan, a home loan, or a credit card. Even if your credit is in the tank, Zoom Credit is like money in the bank.

Again, they say that even if your credit is in the tank, Zoom Credit is like money in the bank.

Zoom credit specializes in credit repair and debt consolidation, too. Bankruptcy, slow credit, no credit--who cares?

That is what they advertise. I don't know who the president of Zoom Credit was or who the president of Millennia was. I know who the president of Countrywide was. I know he is out of that company. That company is now collapsed and sold. He ended up with somewhere north of $140 million in unbelievable outer-space compensation. I don't know who these company presidents were, but I assume the brokers and CEOs of these companies were wallowing in money. They were all wallowing in money like hogs in a corn crib, grunting and snorting, making out like bandits--billions of dollars. In fact, in the 9 years that have led up to this period, the bonuses on Wall Street were $200 billion. I am not talking about salaries. I am talking about bonuses. In 9 years, it was $200 billion. It was $33 billion last year alone. So everybody is making money. They are advertising to people: got bad credit, bankrupt, slow pay, no pay? Doesn't matter. Come to us and get a mortgage.

So they were writing mortgages in the dim light of these rooms, with brokers who are breathless to get their bonuses and mortgage banks interested in putting the mortgages out there. They are advertising we can give you teaser rates. Want to pay a 1 percent rate? We can do that. Two percent? We can do that. Then they would create a mortgage at a teaser rate, with a reset in 3 years maybe to 9 or 10 percent, which is locked in with a prepayment penalty so you cannot prepay it. It is a reset that the borrower cannot possibly pay. But they say: Don't worry about that; the housing prices are going up, up, up, and all you have to do is get this mortgage from us, and when it resets, it is true that you will not be able to pay it, but you can flip the property in 2 years. That is not a problem. You will make money.

So they put these bad mortgages out there--bad mortgages all around--and they would combine them with a few good mortgages and put them into a security and splice and dice them and cut them up, like they used to package sawdust in sausage years ago. Then they would sell them upstream, from the mortgage bank to the hedge funds and investment bank. They are all fat and happy because they all know the return embedded in these securities is a very substantial return. The mortgage holder is locked into it because they have prepayment penalties. None of them were smart enough, even as they were collecting massive incomes, to understand that the people who were going to have to make the payments could not possibly make the mortgage payments once they were reset.

So at some point, mortgages began to reset. It is estimated that 2 million American families will sometime over the next year come home and sit around the supper table and discuss the fact that this is their last night in their home because they are losing the home because they cannot pay their mortgage. I am not talking about 2,000 or 20,000 or 200,000 families; I am talking about 2 million American families.

It has caused a precipitous drop in property values around the country. It broke the bubble of the escalating price of housing and then began to collapse it. It has had a profound impact on most American families. The most significant form of equity for most American families was their home equity. Similar to the tent pole being pulled out of a big tent, it collapsed. We have people sitting back and thumbing their suspenders, wondering how this could have happened. It doesn't take a genius to figure it out. Where were the people who were supposed to regulate in this town when they saw this practice of advertising mortgage conditions that you knew the borrowers could not meet? Where were the regulators? They were sitting by with grins on their faces because they were engaged in other things; they weren't regulating. So now we have this unbelievable financial wreckage.

We see major investment firms that have been around since the Civil War going bankrupt. We see runs on some of the funds in the investment banks. On Monday, we saw the most significant drop in the value of the dollar in a single day, and the most significant increase in the price of a barrel of oil in a single day, even as the stock market dropped 500-plus points on the same day.

So the question is: What do you do about this financial wreckage? How do you put this back together? Even as the Treasury Secretary and the Chairman of the Federal Reserve Board are now over before a committee of the House today, describing their plan to put this back together. As I indicated earlier, their plan is to provide $700 billion to take the toxic mortgage-backed securities off the hands of those who invested in them, which, by the way, then adds up to about $1.7 trillion having been committed of American taxpayers' money--even as they are doing that, nobody is talking about how you fix the underlying problem. You can pour something in the top, but if you have not put a stopper in the drain, you are going to pour it right out the bottom.

Let me describe what I discovered today. I went to the Internet today. While the Treasury Secretary and Fed Chairman are over testifying about how you deal with the financial wreckage, and how much you ask the American taxpayer to pay for this malfeasance, I found this. I was just curious how many places on the Internet I could still find the same business practices of advertising to come and get a loan if you have been bankrupt or if you have bad credit. Well, I found 325 cases on the Internet where they would provide you a home loan and promise they would not check your credit. Again, they would not check your credit. Isn't that interesting? Talk about bad business practices. There are 325 companies advertising get a loan from us and we will not check your credit. Most people don't believe it when I say these mortgage companies, who put out these toxic mortgages, were advertising ``no doc'' loans. It doesn't have anything to do with doctors. That means you can get a mortgage from them for your home without having to document your income. You are going to ask them to provide the funding for you to buy a home, and they say you don't have to document your income to us in order to get that loan. That is so far afield and ignorant, in my judgment, of what you would expect in terms of sound business practices that it is even hard to describe.

Here is what is on the Internet this morning. Easy loan for you. It says that you can get your loan, without collateral, in a couple days. Even with bad credit, no credit or bankruptcy, your unsecured loan is completely guaranteed.

Think of that. We have people asking over in a House committee today to have the American taxpayers provide $700 billion for a bailout. And on the same day, on the Internet, here is a company that is advertising that they will give you a loan with no collateral. It will take a couple days. Even if you have bad credit, no credit, or bankruptcy, we will guaranteed your unsecured loan. Is somebody going to fix this, I wonder.

Here is what I found on the Internet this morning. SpeedyBadCreditLoans.com. Think of that. Isn't that unbelievable, SpeedyBadCreditLoans.com. I guess there is a dot.com for almost everything, including speedy bad credit. If you have bad credit, type in your characteristics. I have bad credit. Can I get a mortgage? Can I get a loan? Bad credit loans. Bad credit, no problem; no credit, no problem; bankruptcy, no problem. Get a guaranteed bad credit personal loan today.

I am wondering if those we are paying to be regulators in the Federal agencies today who are supposed to deal with predatory lending, deceptive practices, I wonder if they are still asleep at their desks or are they going to the Internet to find out these kinds of business practices exist on the Internet? Probably not.

I found this today as well. I could do this all day because it is all over the Internet. ``Bad credit personal loans, a Christian faith-based service. Fast results in just 60 seconds.'' There is a modicum of responsibility here. It says you have to reside in the United States. That is really helpful, I guess. Bad credit personal loans. If you have bad credit and some Christian faith, if you live in the United States, we have some money for you.

This is an example of a cesspool of greed, and we can't possibly begin addressing these issues, the underlying problems on Wall Street, the financial wreckage that has been caused, without addressing this situation. You are going to decide to bail out whatever, you are going to put up $1.7 trillion and try to stabilize things when you have this sort of thing going on in the country? This is almost unbelievable.

On Monday, there was an analysis of what happened in the marketplace. Why was there a precipitous, larger than ever, 1-day drop in the value of the dollar? Why was there the largest 1-day runup in the price of oil, accompanied by a 300-plus point drop in the market? Most of the analysis was people were concerned about the value of the dollar, throwing massive amounts of credit, the substantial amount of money that is being provided to bail out firms to provide undergirding loans for firms. All of this is added to the Federal debt, by the way, which itself is about $700 billion in trade debt in this year, about $700 billion in fiscal policy debt in this year. That's almost 10 percent of this country's GDP in 1 year. Analysts take a look at that and say: On top of that unbelievable debt and fiscal policy, you have run off the rails in fiscal policy, you are off the rails in trade policy with unbelievable debt, we will now ante up a substantial amount of money for Federal bailouts, and analysts say: I worry about what that will do to the value of the dollar.

The electronic herd that bets on currency, the currency traders, when they go against a currency, they can destroy an economy and devalue the dollar, meaning people pull their investments and put it in gold and put it in commodities. That is what dramatically can destroy an economy.

It may well be true that might be worse. The destruction of the economy might be worse by dramatically eroding the value of the dollar and having the currency traders run against this dollar than not doing the $700 billion that Secretary Paulson and Mr. Bernanke suggest.

I think it is the case that this Congress has a responsibility to do something. Doing nothing is not something that makes sense. We cannot decide: You know what, whatever is happening is happening; we are oblivious to it; we will decide to take the same tack regulators have taken in the last 7 years and sit around and observe and from time to time grin or just decide that we will be completely ambivalent about what is happening. We cannot do that. We have to take some action.

So the question is, What? First and most important for me is we have to restore the stability and the safety of the banking system. I think that means we should recreate the protections that existed after the Great Depression. It may not be that we recreate explicitly what Glass-Steagall provided, but the protections that it provided must exist going forward. Otherwise, we will not have done anything by bailing out anybody. We will still have the same circumstances existing in our economy, with people advertising on the Internet that we would like to put bad paper out, thereby giving mortgages to people with bad credit, bankruptcy, or other slow-pay problems in their credit history.

It makes no sense to me to ignore what happens when you merge or combine the functions of banking with the functions of investment in real estate and securities. Banking requires not just the reality of safety and soundness but the very perception of safety and soundness. If people perceive a bank is not safe and sound, they will run on the bank and the bank will fail, inevitably, regardless of how much capital it has. It will not have enough capital to withstand a run on the bank. That is why just the perception of the safety and soundness of banking enterprises is imperative. We went far afield in deciding that we will allow the fusing of inherently risky enterprises, investments and securities and real estate, to banking.

I know that some point to as a success allowing, for example, Bank of America to come in and purchase one of the failing investment banks. I don't view that as a success. At the moment, it was able to forestall a failure. But now we have attached a large banking enterprise, whose perception of safety and soundness is critically important, to an investment bank that was failing. I don't see that as success. I think it is moving in exactly the wrong direction.

I want us to find a menu of ways to provide confidence to the American people that we are moving in the right direction. That requires a lot of things. No. 1, straighten out this wildly escalating trade deficit. We cannot have a $60 billion-a-month trade deficit. That is what destroys your currency value. We have to get real on fiscal policy. We cannot continue to spend what we don't have on things we don't need. We have to find a way to create a fiscal policy that has some stability and balance to it. We have to address these business practices with effective regulation. We have to recreate the protections that existed for the banking system.

We have to address the wildly excessive and speculative incomes and salaries on Wall Street which I think incentivized reckless behavior. As I indicated, in the last 3 years on Wall Street, just the bonuses--I am not talking about salaries--just the bonuses were $100 billion. Many of them went to the very people who steered us into this corral. In the old western movies, they used to call this a box canyon: there is only one way in and one way out. The same people who got us there made a massive amount of money putting us where we now are.

As I said, we need a system of regulation that gives us some accountability that laws are going to be followed, that we are going to regulate the deceptive practices, predator lending, and so on.

Then I think, as well, we need to have some period of forbearance on mortgages where people who can continue to make payments even under the original interest rate can make those payments for a period of time and continue to stay in those homes. That is the only way we will begin to put some strength under the value of homes. Otherwise, we will continue to see a collapsing of home values. As I said, 2 million families will lose their homes this year unless we find a way to take some action.

Finally, we should create a taxpayer protection task force. No matter what else we do, we need to investigate and claw back ill-gotten gains in which people have gotten away with billions of dollars by shady business practices.

Whatever this Congress decides to do or must do, the American taxpayer ought to have a share in the increased values of the investments that are made in their name.

There is one point that unites everybody in this Chamber, perhaps in this Congress, perhaps in the entire country. I don't think anybody knows what the right answer is. We certainly can take a look at this situation and understand now what caused much of this, but I don't know that anybody has a magic bullet that says you do this and we immediately provide stability, we move this country toward higher ground, we have stopped some of the volatility. I don't know that anybody knows that. But I think the American taxpayers are plenty worried about what I think is a stampede in the wrong direction.

On Friday, we were told by the same people who have reassured us in recent months that things are OK, things are stable, don't worry. We were then told by the very same people that in the next several days, the American taxpayers need to ante up a $700 billion bailout plan, following a substantial amount of money that has already been provided by the American taxpayers to bail out and to provide support for investment banks that were failing. And we are told: Here is a 3- page piece of legislation, one provision of which is that one person will decide where the $700 billion goes, and that person's decision will not be reviewable by the courts or by the Congress. In my judgment, that is a nonstarter. Congress is not going to do that, should not do that.

The question is, What do we do in the coming couple of days to provide some assurance and stability? I think it makes some sense to go back to the fundamentals, and the fundamentals are, you start fixing that which caused this problem. You connect the protections that used to exist. If you start fixing, at the foundation, some of the issues that caused this problem, you will begin to engineer some confidence in this country.

Finally, I used to teach some economics briefly in college. I talked a lot about the supply-and-demand curves, and all of the things we know are in the books that describe the way the economy works. But no one really knows much about how the economy works. We all think we do. Economics is a little bit of psychology pumped up with helium. It is a lot of discussion about what we think might or might not happen.

The most important thing to understand about this economy is the American economy expands when people are confident about the future. If people think the future is going to be better for them and their family--they have a job, feel good, feel secure--they do things that manifest that security. They buy a home, buy a car, take a trip. They do things that manifest people's confidence in the future, and that creates economic expansion. If, on the other hand, people are not confident about the future and concerned about the future, concerned about their job, concerned about job security, then they do exactly the opposite. They decide not to buy that car. They decide not to take that trip. They defer the purchase they were going to make. And then we have economic contraction.

This is not about an engine room of a ship of state with a lot of levers and
gears and dials and gauges that you can get just right to make this economy work. This is a lot about consumer confidence, how do you provide confidence in the future. That is how we begin to expand this economy.

How can people have confidence in the future when they see these unbelievable wild gyrations that are occurring on Wall Street? How can they have confidence in the future when they know what the root of it is? People have been advertising to them that if you are bankrupt, if you have slow credit or no credit, come here, we will give you a loan. How can that engender confidence? And how can people have confidence in an economy where we have a President who says: You know what, we are going to go fight a war and not pay for it; I insist we not pay a penny; I insist that while we fight this war, we are going to charge every single cent, and if you in Congress want to pay for it, I will veto the bill that raises the funds.

Is that going to give people confidence? I don't think so.

People have a right to be concerned about an economy that is deep in debt and getting deeper every day and a trade policy that ships our jobs overseas and ends up with a $700 billion trade deficit every year that will have to be repaid with a lower standard of living in our country. People have a right to be concerned about that.

If you go back to the fundamentals and start putting some of this back together--a fiscal policy that makes sense, a trade policy that stands up for this country's economic interests, and firing the regulators who won't regulate, and put in place new regulations and new regulators who will do the job they are paid to do, and then restore the laws that provided protection so we don't fuse risk with banking--if you start doing those kinds of things and telling the American people we are going to bring back some of those ill-gotten gains, and we are going to stop these outer space incomes of hundreds of millions of dollars a year. In fact, the highest income earner last year was $3.6 billion. That is a $300-million-a-month paycheck. Does that seem a little out of line to you? It does to me.

I have covered a lot of ground, and my sense is that we have work to do to give the American people the comfort and the assurance that we are dealing with the fundamentals that will put this country back on better footing. We won't do that by deciding to write a check and offering up a bunch of money. It won't happen. I mean, that is not what is going to provide confidence to the American people. What will provide confidence is effective leadership, leadership that says here are the six or eight things that are wrong, we know they are wrong, we have known for some while, and now we are going to make them right. If we can we can work on those issues together, I think the American people finally will decide there is some leadership that will give us the opportunity for a better future.

Mr. President, I yield the floor, and I suggest the absence of a quorum.

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