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Transcript:

July 18, 2008

BILL MOYERS: Welcome to the JOURNAL.

Once again we're closing the barn door after the horse is out and gone. In Washington, the Federal Reserve has finally acted to stop some of the predatory lending that exploited people's need for money. And like Rip Van Winkle, Congress is finally waking up from a long doze under the warm sun of free market economics. But it's waking to a nightmare.

"This is a really perilous moment." That's how one top financier and former treasury official described our economic crisis on the NewsHour this week. Our banking system, he said, "is in worse shape than at any point since the 1930s. We've never seen such large losses so fast."

As he was speaking, California's big IndyMac Bank went down with a crash, the second worst collapse in U.S. history and sent thousands of depositors out looking for their money. The FDIC, the Federal Deposit Insurance Corporation, took over as reports circulated that the FBI is investigating IndyMac for mortgage fraud. Analysts are predicting that as many as 150 of the 7,500 banks in America may fail over the next 18 months, and one analyst even said that number might double over the next 3 years.

At a press conference President Bush acknowledged the peril and then tried to assure us it's all going to come out okay.

PRESIDENT BUSH: My hope is, is that people take a deep breath and realize that their deposits are protected by our government I think the system basically is sound, I truly do. And I understand there's a lot of nervousness. But the economy is growing, productivity is high, trade is up, people are working. It's not as good as we'd like, and to the extent that we find weakness, we'll move.

BILL MOYERS: Yet confidence in our financial system has been sinking like the Titanic…so even as in one breath the President said he didn't like government bailouts, in the next he ordered up a massive federal bailout. He told Congress to cough up public money to buy the slumping stocks of Fannie Mae and Freddie Mac. Don't let those down-home names fool you. Those two huge institutions finance about half the country's twelve trillion dollars of mortgage debt. And they were about to go belly up.

But not everyone thinks the government should be using your taxes to bail them out, especially with no conditions attached.

Listen to this exchange between Treasury Secretary Henry Paulson and Senator Jim Bunning of Kentucky:

SENATOR JIM BUNNING: Where is the money going to come from, if you have to put it up?

HENRY PAULSON: Well, obviously, it would come from the government. But I would say...

SENATOR JIM BUNNING: And who is the government?

HENRY PAULSON: The taxpayer. And I'm, what I'm looking to do is the same thing you are, Senator, to minimize the cost to that taxpayer. And I think the surest way to do that is...

SENATOR JIM BUNNING: Secretary Paulson, I know you're very sincere in your proposal.

HENRY PAULSON: Yes.

SENATOR JIM BUNNING: But, come January, you will be gone.

HENRY PAULSON: Right.

SENATOR JIM BUNNING: And the rest of us will be sitting at this table - or at least most of us - and we all have to be responsible to the taxpayer for what we have done. And I don't think this is a responsible...

HENRY PAULSON: Then, Senator, you will vote against it, in all your wisdom.

SENATOR JIM BUNNING: I do everything I can to stop it.

BILL MOYERS: Meanwhile, the Feds' clamp-down on predatory lending has come too late for millions of Americans who have already lost their homes. The pain for them is real. They're hurting badly, and so are their communities. You can see the whole picture in one neighborhood in Cleveland, Ohio. Producer Peter Meryash and correspondent Rick Karr take us there.

RICK KARR: There's a cancer eating away at a neighborhood in Cleveland called Slavic Village: On block after block, homes sit empty, boarded up, stripped bare. But things were different just a few years ago.

BARBARA ANDERSON: There was a time when each and every one of the houses on the neighborhood was up and standing, and looking pristine. The yards were well manicured. You could hear laughter. You could hear neighbors calling out to each other from across the street. At that time, there were a lot of gardens in the backyards, and people were very proud of their gardens, and they would pick the tomatoes, or they'd pick the peppers, and they would share it with neighbors. You would see people sitting on porches, reading newspapers and laughing and talking, listening to their music.

RICK KARR: But that was before the sub-prime mortgage crisis started to destroy Slavic Village in the first half of the decade. Since then, longtime resident

BARBARA ANDERSON: says there have been more than half a dozen foreclosures just on her block. This house went after the man who owned it was admitted to a nursing home .and his wife couldn't keep up the payments. There used to be a home on this empty lot until it was foreclosed, condemned and leveled. And the family that lived here came home one day to find that a Sheriff's bailiff had put their possessions out on the street after their bank foreclosed. Anderson, who runs a community organization that's trying to fight the neighborhood's decline, says it's like a horror story.

BARBARA ANDERSON: You could almost see the fangs, just gouging the actual lifeblood out of the neighborhood as more and more houses became boarded up, and more and more houses became to be stripped. So, the house now next door to it, the house on the other side of it, and now those houses began to eat away at other houses. So, each time it looked like one house had actually infected the house next door to it, and it had taken on that same Dracula kind of look. And it was infecting even more houses.

RICK KARR: That infection spread to more than a thousand houses in the neighborhood. At one point last year, there were more foreclosures in Slavic Village's zip code than in any other in the country. Tony Brancatelli represents the neighborhood on Cleveland's City Council.

TONY BRANCATELLI: I was born and raised in this neighborhood. And it's, you know, seeing what's been happening in the families has been very heartbreaking. Seeing what's been happening to our housing stock has been very heartbreaking. And so it's tough to wake up every morning and see that we're averaging two foreclosures a day in this neighborhood. That is just unheard of.

RICK KARR: Here's what happened: The kinds of people who lived in Slavic Village were prime candidates for sub-prime loans; many of them were retired, so they'd already paid off most of their old mortgages but they were living on fixed incomes, so they didn't have enough cash on hand to repair regular wear and tear on their homes.

BARBARA ANDERSON: And their homes were now showing those signs of neglect. They needed a roof, they needed their porches repaired and their money was all tied up in the equity of their home. And that's what they needed to tap into in order to make any repairs.

RICK KARR: So they did what Americans have done for decades - they tapped into that equity by re-mortgaging their homes. But the rules of the game had changed: Mortgage brokers and unscrupulous lenders were practically beating down Clevelanders' front doors, offering loans that were too good to be true.

JIM ROKAKIS: Back in the old days when there was no sheriff in town, people would rob the banks. Well, here we are in modern day era. And there's no sheriff in town. The banks were robbing the people.

RICK KARR: Cuyahoga County treasurer Jim Rokakis has been following the crisis for close to a decade and trying to clean up the mess. He said the loans on offer weren't like anything that borrowers had ever encountered before.

JIM ROKAKIS: You'd tell them, "I don't have any money." "No problem, we don't, you don't require a down payment." Or, "I have a horrible credit score." "No problem, we're not gonna let that get in the way." "But I don't even have job." "No problem. We're not gonna document your income." I mean, it really, in some cases, was that extreme. And it gets worse. I've sat in on probably 100 counseling sessions, people facing foreclosure. I'd say the majority of people fit the criteria of not having enough income, didn't come in with a down payment, had a bad credit score. Most of them got cash back at the close. How's that for an incentive?

RICK KARR: Rokakis says the new loans were a bad deal for borrowers. Their terms could be confusing, with shifting interest rates and so-called "balloon payments." Homeowners got smacked with higher monthly costs, unexpected fees and tax bills and stiff penalties if they fell behind. Once the banks foreclosed and homeowners moved out, the buildings just sat empty. All that the neighbors could do was watch them crumble.

JIM ROKAKIS: And the real victim here is the person that lives on that block, that person who pays their taxes, plays by the rules, has done nothing to deserve what they're facing today, which is a devastated neighborhood, with their most valuable asset, their home, now worth virtually nothing. That's the victim.

RICK KARR: But there are a lot of victims of the mortgage crisis, who've been hurt through no fault of their own. Renters, for one. Many lost their homes because even though they'd been paying their rent, their landlords hadn't been paying their mortgages. More than a third of all foreclosures nationwide are on apartment buildings or houses where renters lived. In Cleveland, that's affected thousands of individuals and families. Aretha Robinson-Kelly ended up in one of Cleveland's homeless shelters after a bank foreclosed on this building where she'd been renting an apartment on the city's East Side.

ARETHA ROBINSON-KELLY: We were there for like five years and just all of a sudden, like a couple months ago, a bailiff came out and said, "Did you guys know this building was in foreclosure?" And I said no. And we were still paying rent and the water got shut off. And basically I wind up here in the shelter; my husband and I.

RICK KARR: Robinson-Kelly didn't just lose her home; she says she also lost four or five thousand dollars, her security deposit, pre-paid rent, and almost everything she owned.

ARETHA ROBINSON-KELLY: We had two days to move. And I didn't have money to rent a truck. I just took things that I could. So I lost everything.

MIKE PIEPSNY: Renters are almost seen as collateral damage. There's no resources to help these people.

RICK KARR: Mike Piepsny runs the Cleveland Tenants Organization, which advocates for renters' rights. He says the group's been busier than ever.

MIKE PIEPSNY: Over the past year and a half, we've noticed a significant increase in renters calling, saying, you know, that somebody's been looking at my house, I just received notice, someone knocked on my door and said, "We have to be out in 30 days." And we're getting about 100 to 200 calls a month now from renters that are faithfully paying their rent and their caught up in the foreclosure crisis. However you look at the problem, 30 days to get your belongings, find a new place, come up with security deposit, and get your life back in order, it's just not enough time.

RICK KARR: Most renters who lose their homes move in with relatives or friends. But an increasing number are ending up in Cleveland's crowded homeless shelters.

BRIAN DAVIS: In Cleveland now, we have so many people who are entering the shelters that it's nearly impossible to accommodate an intact family: Mom and dad and kids. So, it's almost 100 percent likely that you will have to split up your family. Moms will go to one shelter. Dad will go to another shelter. And even sometimes they have to give kids to relatives, because we just don't have enough space in our shelter system.

RICK KARR: Brian Davis, who runs the Northeast Ohio Coalition for the Homeless, says that for families, in particular, the transition to life in shelters can be devastating.

BRIAN DAVIS: Everything that you do that we take for granted everyday is extremely complicated, once you become homeless, and once you don't have a stable place to rest your head. For many people, it's a real struggle to get up everyday and try to face this insurmountable problem of, "Where am I gonna live tomorrow?" And, "How am I gonna find housing?" And, "How am I gonna afford this?

RICK KARR: Tracy Grimes and her family ended up in a homeless shelter after living through two foreclosures. She says it was bad enough watching her neighborhood succumb to the crisis. But, she says, the ordeal's been hardest on her kids.

TRACEY GRIMES: Every day one of them asks, "Mom, when are we leaving here, when are we getting our house?" little one asks "when are we going back home?" and there's no back-home to go to.

RICK KARR: The number of homeless students in Cleveland's public schools has increased by forty percent over the last year and school officials say that's almost entirely due to the foreclosure crisis. Glenda Nolen teaches fifth grade in the city and works for a program called Project ACT, which is designed to help homeless students.

GLENDA NOLEN: All of a sudden, they're ripped out of their home. When they come to a shelter, they can only bring what they can carry. Stuffed animals can't, you know, do not come with them. So, not only are they ripped from their home and their friends, but their belongings. And that makes it very difficult.

RICK KARR: Nolen says homeless kids can have a tough time staying focused on their schoolwork.

GLENDA NOLEN: They need attention and they know something is wrong in their lives, that they're being upset. They have more important thoughts on their mind than math. They're thinking, "Where am I gonna go tomorrow?"

RICK KARR: So, neighborhoods suffer, renters suffer and kids suffer, all through no fault of their own. And all despite the fact that local elected officials noticed that something was wrong starting in the late 1990s.

JIM ROKAKIS: In 1995, there were 3,300 private mortgage foreclosures filed in this county. By 2001, the number was 7,000. That's the point where a group of us approached the Federal Reserve Bank in Cleveland, and asked them to intervene. And we had a big conference here on sub-prime lending, predatory lending in Ohio, in March of 2001. So, as early as 2000, we were raising questions, and asking for help.

RICK KARR: Rokakis says Fed officials served them a nice lunch and listened politely as he and his colleagues pleaded with regulators to reign in sub-prime lenders. But in the end the Fed didn't do a thing.

JIM ROKAKIS: I don't think, they had enough, we had enough clout, to get them to move. Obviously, we didn't. I learned a hard lesson. I learned that the Fed really is there to protect banks, and not to protect the consumers.

RICK KARR: Cleveland officials decided that if the federal government wouldn't do anything, maybe the city could. The City Council took up an ordinance that banned predatory loans. But at the State Capitol in Columbus, where Republicans controlled both houses of the legislature and the Governor's Mansion, lobbyists for the mortgage industry pushed for a law prohibiting Cleveland and other cities in Ohio from regulating lenders.

OHIO STATE REPRESENTATIVE JON HUSTED: I don't think that there is anyone in this body today that can tell me how we should regulate, manage or micromanage how people get loans in this state.

RICK KARR: Those lobbyists also made hundreds of thousands of dollars in campaign contributions. In the end, legislators gave the bankers the law that they wanted.

COLUMBUS GENERAL ASSEMBLY: "Fifty- six affirmative votes, thirty-eight negative votes, therefore the Senate amendments are agree to."

JIM ROKAKIS: We've been convinced that regulation is bad. Government doesn't have a role. That if we allow free flow of commerce and markets operate unimpeded, that things will be better, and things will operate more efficiently. And this is what happened when you lack regulation.

RICK KARR: Without meaningful regulation, the loans kept coming and the banks kept foreclosing. And the situation in Cleveland, and its suburbs, kept getting worse. The banks that took possession of foreclosed houses let them sit empty; many of them were stripped of anything of value. Cleveland City Councilman

TONY BRANCATELLI: showed us one house in Slavic Village that'd been ransacked by scavengers.

TONY BRANCATELLI: They're desperate for copper, they're desperate for brass and non-ferrous metals. And so, we're at an all time scrap price. And people will come in and pull the drywall off, just to cut at the copper wires. They'll come in and strip all the plumbing. They'll come in and strip the heating systems, because steel's at an all time high. And so, there's absolutely no value left in the house. And this is what we're left with. And you multiple this times a thousand houses in our neighborhood.

RICK KARR: In the end, he says, these houses are worth less than nothing because they simply need to be leveled.

TONY BRANCATELLI: This year, the City of Cleveland will spend $6 million demolishing these types of substandard homes. Last year, we spent $6 million demolishing these types of homes. That's $12 million that we can't invest in roads. That's $12 million we can't invest in parks or infrastructure. And so, we are the victim. We're demolishing these houses. We're eliminating value in our communities. But we have to do that to save the neighborhoods.

RICK KARR: Foreclosures are straining Cleveland's police and fire budgets, too, as drug dealers and addicts gravitate to abandoned homes and arsonists set them on fire. Cleveland's mayor, Frank Jackson, says that meanwhile, the crisis is about to slash the city's property tax revenues.

MAYOR JACKSON: Evaluations will be next year, and when they do those evaluations, people will find a significant reduction of property value, not just here in Cleveland, but throughout this county which will have significant impact on our school system that supports itself, a property tax, and on our operating budget.

RICK KARR: So the City of Cleveland filed a lawsuit earlier this year to recover some of that money and hold Wall Street responsible for the foreclosure crisis. The suit targets twenty-one investment banks and mortgage companies that have foreclosed on thousands of Cleveland homes including Deutsche Bank, which has filed more than four thousand seven hundred and fifty foreclosure actions. Wells Fargo, with more than four thousand and Countrywide and HSBC, which have filed about thirteen hundred each. Cleveland didn't file suit against these banks because they made the loans in the first place, but rather because they allegedly created the environment that led to a lot of bad loans.

MAYOR JACKSON: Without them, this would not have happened. But for their actions, this would have not occurred.

RICK KARR: Banks were making a lot of money buying and selling mortgages whether the loans were sound or not. The more loans, the more money. So, the suit says, "in order ... to keep pace with Wall Street's burgeoning demand" for new mortgages, the banks pushed for lower lending standards until, "Even borrowers unlikely to meet their obligations [got] loans". Jackson says the banks had to know that Cleveland would end up paying the price for what they were doing.

MAYOR JACKSON: It was very obvious that our market here in Cleveland, and in this region, could not support this model. It could not support. And that you and people cannot be in these institutions cannot be, claim to be so brilliant to the point that they tell you, "Bring me all of your wealth, and entrust it to me, because I'm so smart that I'll know how to invest this money, guarantee you income," and then be stupid over here and ignorant, and saying that they didn't know. Now, you can't be both, they knew. But the money was too good. It was too good, and they couldn't give it up.

RICK KARR: Only two of the twenty-one banks had comments when we approached them: Wells Fargo called the lawsuit's allegations "completely unfounded" and said that "it is proud of [its] practices." HSBC said that, among other measures, it's set up a "Foreclosure Avoidance Program." But city councilman

TONY BRANCATELLI: : says that isn't nearly enough.

TONY BRANCATELLI: I still would like to see my pound of flesh. I want to see these mortgage companies, even though they're taking billions of dollars of losses right now, they've also had billions of dollars of profit. And we need to have these mortgage companies step to the table and say not just they're gonna give us the house, because I don't want this house. I want this house, plus $10,000 for demolition. I want this house, plus environmental remediation money, so I can come in and clean it up and reoccupy it.

RICK KARR: Even as the lawsuit moves forward, the foreclosure problem's spreading deep into Cleveland's suburbs.

JIM ROKAKIS: There's a suburb, Garfield Heights, over 1,400 vacant homes, Maple Heights, a similar number. Cleveland Heights, over 1,000, Euclid, over 1,000, Shaker Heights, once one of the most prestigious suburbs in America, 500. Some of these neighborhoods will not come back. They will not come back, at least as we know them. This county has lost over 90,000 people in the past seven years. No county in the country has lost more population, with the exception of New Orleans parish. And as I said to many people, they had the hurricane. And we had overzealous, unregulated lenders. And the impact was almost the same in some communities.

BILL MOYERS: With me now is one of America's leading chroniclers of money, power, and politics, who says what's happening is the disgrace of Wall Street, its excesses paid for by people like those in Cleveland and millions like them around the country.

William Greider has spent forty years examining how powerful institutions affect ordinary people. Once a top editor of THE WASHINGTON POST, a columnist for ROLLING STONE, and now National Affairs Correspondent for THE NATION, he has produced a series of best-selling books: SECRETS OF THE TEMPLE: HOW THE FEDERAL RESERVE RUNS THE COUNTRY, ONE WORLD, READY OR NOT: THE MANIC LOGIC OF GLOBAL CAPITALISM, WHO WILL TELL THE PEOPLE: THE BETRAYAL OF AMERICAN DEMOCRACY, and this one, THE SOUL OF CAPITALISM. He's working on a new book with the title: COME HOME, AMERICA.

Good to see you in person.

WILLIAM GREIDER: Thanks Bill.

BILL MOYERS: What were you thinking as you saw that report from Cleveland?

WILLIAM GREIDER: Made me angry all over again, even though I know the story. And then I thought, "This is usury." This is a living example of what the Bible prohibited, which is the sin of usury. Most Americans have never heard of it probably.

BILL MOYERS: Usury?

WILLIAM GREIDER: Usury, to be clear about it, is rich people taking advantage of poor people by lending them money on terms that are sure to make them fail. All three of the great religions, Judaism, Christianity, Islam, had a moral prohibition against usury because they recognized that society can't function like that. People of great wealth and their institutions like banks naturally have the power to overwhelm people of lesser means. And you can't allow that in a decent society. It won't survive.

BILL MOYERS: Where were the gatekeepers? Where were the watchdogs? Why did it take the Fed so long to put an end to-

WILLIAM GREIDER: Well-

BILL MOYERS: -predatory practices?

WILLIAM GREIDER: To make the story overly crude, Congress repealed the law against usury. It was done in 1980 by a Democratic Congress, Democratic President. And, of course, the Republicans all piled on and voted for it. And that was the first stroke, only the first of many, in which they stripped away the regulatory laws from the financial system and from banking.

And that allowed the free market modernized gimmicks of one kind or another, all these things we're now reading about, to flourish. And that's where we are. I mean, the gatekeepers said to the banking industry and to the financial industry, "We don't think federal control or regulation is good for you, so we're, therefore, liberating you to do your own thing."

BILL MOYERS: So why did they do that in 1980? I mean, there was, of course, the rise of the backlash to regulation from 40 years of Democratic rule-

WILLIAM GREIDER: The-

BILL MOYERS: -there was the rise, the arrival of the conservatives with their free market ideology.

WILLIAM GREIDER: Right, right.

BILL MOYERS: What was the issue?

WILLIAM GREIDER: Well, the driver then, and it was a powerful driver, was inflation. And through the '70s, for lots of reasons inflation, which tends to undermine the value of financial wealth and money, was out of control. The Federal Reserve had lost control of it, not entirely its fault. But that set up a political climate that said the government is not working and that wasn't wrong at the moment. Let's get the government out of the way.

And that was very appealing as framed by Ronald Reagan and other conservatives. But I think it's fair to say most Democrats yielded to it against whatever their original instincts were because of political necessity. And then the third dimension, maybe the most important, was that you had this very powerful industrial sector, that is banking and finance, that wanted and had pushed for years to get out from under the regulatory controls, limits on interest rates, the law against usury, the merger of commercial banks with investment banks, which had been prohibited in the New Deal because it caused the disaster of 1929.

I can go on and on. But you see the pattern. And the point I keep trying to make to people is that history learned the hard way that you do need prudential controls on industries like banking 'cause they're so central to everybody's well being.

BILL MOYERS: Left to their own devices, they go too far?

WILLIAM GREIDER: Yeah. They will use their power to their own advantage. And that's what we're witnessing now, a kind of recklessness that was set free by political retreat and people, some of them were sincere. Some of them were just on the make. But here's our great American tension. We want an economy that's dynamic, that's growing, puts more jobs out there for people to get, rising wages, all that good stuff. And at the same time, we want an economy that's stable. And that means no inflation, steady as you go, so forth and so on.

And this is the, you know, this is the mortal condition. You're not going to escape that tension. Government is a powerful intervener that tries, ought to try, to balance those two desires. For many years, the Federal Reserve served that role and tried to strike a balance.

BILL MOYERS: And then what happened?

WILLIAM GREIDER: During the last generation, 25, 30 years ago, the Federal Reserve, the central bank that regulates money and credit, tipped hard in one direction.

BILL MOYERS: Toward?

WILLIAM GREIDER: Crudely put, toward capital, in favor of capital and against labor. It not only hardened the value of money by suppressing inflation, but it participated very aggressively in the role of stripping away regulatory breaks on financial system and banks. Declined to enforce many of its own regulatory powers that exist in law. And meanwhile, sort of kept a foot on the brake about economic growth and full employment and all those good things that might help working people by encouraging rising wages.

BILL MOYERS: So at the same time the Fed was helping to keep wages down in order to keep inflation from escalating, its policies were, nonetheless, helping banks and investors to inflate the cost of their-

WILLIAM GREIDER: Right.

BILL MOYERS: -the value of their assets beyond reality-

WILLIAM GREIDER: That's it.

BILL MOYERS: -right?

WILLIAM GREIDER: That's it. At one point, writing in "The Nation," I somewhat playfully and wickedly referred to Alan Greenspan, the Federal Reserve chairman, as the "one-eyed chairman." He can see inflation and wages and goods and services, the prices that consumer prices, even when it doesn't exist. And he'll put his foot down on the brake. But he doesn't see the inflation in the financial system at all.

And the inflation in the financial system is the value, the prices, of financial assets, most obviously stock, rose fantastically over 20, 25 years, two, three times the growth in the real underlying economy. Something's wrong there, right? How do these financial assets, which supposedly reflect the economy, suddenly become worth three times more?

BILL MOYERS: Yes. How did they?

WILLIAM GREIDER: Well, now we're back in the game, aren't we? With deregulation, with the help of the Fed, and with the success of the Super Bull market, everybody's animal spirits in the financial system became more animal. And they and they went for it, and they said, "If you'll get this rule out of the way or you let us make this kind of weird little gimmicky paper innovation, we'll do even better."

BILL MOYERS: Yeah, you-

WILLIAM GREIDER: And you had this force rising up, driving things higher in the stock market while, in many sectors of the economy, if not everywhere, people are saying, "Gee, this doesn't feel that good to us." And particularly working people.

BILL MOYERS: You've written about a fantasy, an illusion that led to the housing bubble. You wrote about a fantasy that was sold, an illusion that led to the housing bubble. Whose interest was it to sell a fantasy?

WILLIAM GREIDER: Well, the merchants of financial paper, to put it bluntly. I mean, the illusion was that you could dismantle or disregard fairly old-time traditional rules of proper banking and stewardship and that that would definitely allow prices, profits, everything to go still higher. But that they could somehow dissolve the risk in that for the society, not just for the society but for themselves.

One example of that was what you heard about in the sub-prime mortgage thing. Who is holding this mortgage that's been lent to these people who we know are going to fail 'cause their incomes just aren't sufficient? Well, it's kind of hard to say because this mortgage is designed as a securitized package of 1,000 mortgages. And you sell it in the financial market to investors all over the world.

And then they sell it to somebody else, and it moves round literally. So what you've done with this innovation is you've distanced the lender from the borrower. Each party, the guy who sold the mortgage, the bank, then the next, the guy who buys the bond, takes his returns upfront, sells it on, and you stripped away the responsibility for that lending. And that's a pretty good microcosm of what happened generally in the financial system.

BILL MOYERS: How is it that these banks wind up holding the rotten mortgage securities that of Fannie Mae and Freddie Mac?

WILLIAM GREIDER: There is a level of fraud here which shouldn't be neglected that, I mean, people lied to their customers' banks-

BILL MOYERS: -mortgage-

WILLIAM GREIDER: -banks, mortgage houses, lied to the people they were selling these bonds to. But as we heard, they also lied to the people who were borrowing the money. I mean, this is fraud with the conflicts of interest. There's an investigation underway now with a number of the biggest banks stuck with all this bad paper, this rotten mortgage securities. Who can they sell them to?

The otherwise savvy investors around the world have gotten burned already, so they won't touch them. I know. Let's sell them to our customers. And so they're literally taking the bonds out of their own portfolio as a bank and selling them to the banks' closed customers. Now, that's going to stop, too, because now everybody's onto the secrets.

WILLIAM GREIDER: I think you can get lost in the mechanics of how all this works. And it's pretty sometimes pretty dizzying stuff. I think the bigger message is that what some of our old folks knew turns out still to be true.

BILL MOYERS: Which is?

WILLIAM GREIDER: Which is the process of lending, borrowing, investing, all of those things, require a personal hands-on knowledge of what you're doing but also a level of integrity that, put it bluntly, does not exist at this time in our financial system.

BILL MOYERS: You see a direct connection between what happened to those people in Cleveland and across the country and the cozy relationship that you've often written about between Wall Street and Washington?

WILLIAM GREIDER: Yeah. Yeah. The point I want to make, though, is that this is deeper than politician rolling over for his campaign contributor, the guys who finance the Democratic Party or the Republican Party. They do that, too. But they were sold a fantasy, an illusion, which sounded wonderful about how markets make better judgments than government and the public. And that liberating finance and business from prudential rules that society imposes upon them will produce a bigger, better economy and better returns for everyone.

All those fantasies have been destroyed by these events, I mean, wiped out. And if you think about it, as we go through the hard months ahead, America's going to have to take some pain, right? In one form or another. The government's going to have to probably ask for some sacrifices.

How do they do that when the American people have just seen the government rush in three days, five days or less, to bail out the biggest, most powerful institutions in the country? That is, the financial investment houses and banks and major banks.

BILL MOYERS: In your opinion, the bailout of Freddie Mac and Fannie Mae, good or bad?

WILLIAM GREIDER: I think it's bad. I mean, I think the way they're doing it is terrible. It's not done in the public interest. The bailout is necessary. They are failing at the bailout. And I believe they're failing because they haven't gone far enough.

They need to start thinking of, okay, how do we save the folks? That is, the broad interests of the American people as a nation, as workers, as family, blah, blah, blah. And the way to deal with Fannie Mae and Freddie Mac and some others like it is to nationalize them. Make them agencies of the federal government. That's what they were originally. And they performed for many years a really valuable service to housing markets.

They sort of re-circulated the capital and the mortgages and so forth. Make them a sub-agency of government. Let the shareholders of Fannie Mae and the rest eat their losses. They were playing risk taker shareholders. Let them suffer the consequences of their wrong bets. And go back to a more normal configuration.

Not a casino. No private shareholders. Look, the bailout of Fannie Mae that they're proposing says, somewhat generously I think, we'll put $300 billion on the table to buy the shares of stockholders in Fannie Mae and Freddie Mac. And just us saying that should give them a lot of confidence. Well, yeah, wouldn't it if you've just had the federal government promise to buy your shares if you don't want to hold them anymore.

BILL MOYERS: Maybe that's why all the foreign investors rushed in yesterday to buy Fannie Mae and Freddie Mac-

WILLIAM GREIDER: It might have some connection, yes.

BILL MOYERS: -if they know the taxpayers are going to put the money in, they've got a pretty good-

WILLIAM GREIDER: They've got what you might call a no-lose proposition. And the other part of that, and this would be simple. You could pass this in three days. Restore the federal law against usury. That won't have too many details to it at first. But it'll be a general statement that the federal government is prohibiting the kind of outrageous predatory practices, which have become general in this country, of not just banks but other financial firms.

BILL MOYERS: Credit card companies and-

WILLIAM GREIDER: Credit card - yeah, it's a long list. We know those abuses.

BILL MOYERS: Put some limits, some boundaries?

WILLIAM GREIDER: Well, eventually you have to draw very precise boundaries, I think, and restore some structure that says, okay, you can get a return of X on credit cards, but you can't get a return of triple X, right? And that kind of regulation. And that's not easy to draw. It takes a while.

But the first law that would just reassure the public, we're against usury. Muslims are against it. Christians are against it. Jews are against it. And we're going to develop a government laws that prohibited and penalized these institutions when they get caught doing it.

BILL MOYERS: Excessive interest, owned loans.

WILLIAM GREIDER: Excessive-

BILL MOYERS: That's what you mean by usury?

WILLIAM GREIDER: That's the narrowest meaning. But the larger meaning is wealthy people, whether they're banks or individuals, ought not to be able to use their power, their wealth to exploit people who don't have wealth, great wealth. That's not too complicated. And I'm not being utopian here. I'm just saying that you can reestablish legal-slash-moral limits on the behavior of finance and their wealthy patrons. And if they don't want to observe those rules then they need not apply for emergency loans at the Federal Reserve or the Treasury Department.

BILL MOYERS: In other words-

WILLIAM GREIDER: You see what I'm getting at? And-

BILL MOYERS: Yeah, in other words, so-

WILLIAM GREIDER: -and this is a-

BILL MOYERS: -if there's a bailout, certain conditions on that bailout.

WILLIAM GREIDER: Absolutely.

BILL MOYERS: Not just a free pass.

WILLIAM GREIDER: And what they've done in the last year, now two or three times and they're going to do more is to say, "Oh, my goodness, the biggest investment bank, houses are in trouble. We don't usually lend directly to them. We only lend to big banks, but they're in trouble, too. Let's lend to both of them. Let's open the windows and pour out the capital, the liquidity, and so forth." And there wasn't a day that where they paused to say, "What are we getting in return? That these guys promise not to fail?" You see what I'm getting at? It's-

BILL MOYERS: I do.

WILLIAM GREIDER: -it's a wildly grotesque transaction where the public guarantees the life of these firms, and there isn't any effort that we know of to say, "And in return, you're going to behave in the following ways for the next ten years or maybe forever. We'll pass a law later that spells that out more clearly, but this is our starting demand." And I suppose they would say, "Well, we don't have time to do that. This is a crisis, blah, blah, blah." I don't buy that. I think that's a way to avoid those questions is not even mention them.

BILL MOYERS: You have been writing for a long time now that America's moving toward a corporate state. If we become one, can we exercise the self-correcting faculty that prevents us from hitting the iceberg out there?

WILLIAM GREIDER: One of the reasons I think politics is going to change fairly dramatically is that the Federal Reserve, accompanied by the Treasury Department and I think will be accompanied by the Congress, has crossed a very dangerous line in their bailout. They have essentially said, "We will put money on the table, taxpayers' money on the table, for any financial institution or business that is too big to fail." That is, if it fails, it'll send dangerous ripples through the economy.

And we've got a list now of maybe 30, 40, depending on how you count them, that we will be there to save you. I regard that as profoundly dangerous for the American Republic because once you cross that line and you have this special club that's privileged, that has benefits from government that nobody else can get, where do you stop it?

I mean, if I were running a big manufacturing company, I would have quickly run out and buy a subsidiary that's a bank or a financial firm that looks like a bank. And I would then try to get myself on that list. Who wouldn't? What's going on right now it's gotten a little attention - the union SEIU is fighting it, is these private equity firms, which are huge money pots of investors that take over and change corporations and come away with huge profits. The private equity firms are trying to buy into the banks and financial firms.

BILL MOYERS: And what would that mean?

WILLIAM GREIDER: That would mean that this private unregulated equity fund would be participating behind the door, so to speak, in the management of our regulated banks. But it would also, in a pinch, if it's big enough, maybe have a tap into that federal guarantee that if you're too big to fail, we'll be there for you.

BILL MOYERS: Even if-

WILLIAM GREIDER: You see what I'm getting at? And-

BILL MOYERS: I do. This morning in the "New York Times" one of the big stories in the business section is the financial industry is organizing to stop Congress from trying to regulate excessive speculation on oil and energy. They don't want this capacity for exploiting-

WILLIAM GREIDER: Well-

BILL MOYERS: -people's needs.

WILLIAM GREIDER: Well, I could lay us alongside that the Securities and Exchange Commission, which, remember in olden days, was supposed to defend us innocent investors against the guys running corporations. And that's why we have all these reports and so forth and so on. They announced this past week that they're going to go after the short sellers in the stock market.

The short sellers are the guys who say these folks at the corporate headquarters are lying to you or the folks at Citigroup are still not telling the truth about their losses and liabilities. So you see what I'm getting at. It's equivalent to saying we don't want anybody bad mouthing us in the middle of this trouble. And we'll try to penalize them if we can. Isn't that contradictory to the public interest?

BILL MOYERS: Have we hit bottom?

WILLIAM GREIDER: I don't think so. But I think the short answer is nobody knows. My sense is, partly because the rottenness, the bad assets and so forth and the inflated housing prices and all the other defaults have so much more to play out - I think they will then feed back, and are already, into real economic consequences for the general life of the economy.

BILL MOYERS: Meaning?

WILLIAM GREIDER: Well, people lose jobs. Unemployment will rise.

BILL MOYERS: Like Cleveland. Yeah-

WILLIAM GREIDER: And like, you know, a perhaps less vicious story because it'll be more gradual than what's happening in those neighborhoods in Cleveland. But then as that happens, the losses feed back into banks because they've got consumer loans, they've got car loans, they've got business loans. And even banks that have been more or less virtuous in their behavior will be impinged by that. So I'm not making some grandiose calamity prediction. I'm just saying we got a lot more pain to take in this society before this works out.

BILL MOYERS: Both parties have put the watchdogs to sleep, right?

WILLIAM GREIDER: A better metaphor, instead of putting them to sleep, would be castration.

WILLIAM GREIDER: I don't know what you want, I mean-

BILL MOYERS: Both parties of complict-

WILLIAM GREIDER: Putting them to sleep is just a metaphor that stops me-

BILL MOYERS: Both parties have been complicit in tipping the balance of power to capital, right?

WILLIAM GREIDER: I'm afraid so. That's right. I mean, if you go back over the last 20, 25 years, it was always portrayed as a cause of conservative Republicans, even right-wing Republicans. And that was, of course, true. But I think a majority of the Democrats were in collusion virtually every step of the way, and sometimes they led the way.

BILL MOYERS: Do you think Washington really knows what's going on? Do you think they really understand what's happening out there in Cleveland and places like that all over the country?

WILLIAM GREIDER: The short answer is, no, I've been in Washington as a citizen and resident for 40 years. And I'm still occasionally shocked by its ignorance of the rest of the country. And some of that is willful, of course. But some of it is just, it's a very nice life in Washington. You get used to certain protective qualities.

We saw that recently with these political players, who got good mortgages. How do they do that? Well, we know how they did it. And in any case, Washington doesn't yet see the depth of the problem.

If you ask me, well, who's figured this out? Who understands, at least in general terms, where we are? The guys in Washington? The politicians and their governing policy advisors? Or the dimwitted public? I would say the public. And I think there's a lot of evidence in that. You know, they keep seeing these polls where the public expresses doubt about this, about-

BILL MOYERS: Eighty-one percent of the people in the most recent polls say we're heading in the wrong direction.

WILLIAM GREIDER: I call that an extreme consensus. Why do the newspapers not celebrate that? They're always looking for consensus politics. Here's the American public, they've got an eighty-- you know, that's extraordinary.

WILLIAM GREIDER: We have an opening in this crisis for, this is really going to sound grandiose. We have an opening in this crisis for a deep transformation in American politics. I don't say it happens this year, next year, or it's going to take a number of years. But we are in the shock of reality. And people get it everywhere and see the blood in the streets. And you tell them how this worked and who did what to whom, and that's a basis for a new politics.

But it requires people - this is the hard part - to get out of their sort of passive resignation to, "Well, we follow the Democrats" or "we follow the Republicans" or "we let this group or that group tell us how to think" and engage among themselves in a much more serious role as citizens. And when, as they do that, they have to be willing to punish the political powers, in smart ways or crude ways, however they can, first, to get a place in the debate. But, secondly, to force the changing values of the system.

And I, this may be wishful, but I think in the next year, two years, five years, you're going to see both political parties floundering. What do we believe about all this stuff? We've told folks this, you know, lovely story for 20, 25 years about the magic of the marketplace. Do we still want to kind of prop that up? That's where they are now. They're still trying to prop up the marketplace vision and make it work again. It's over.

I think events will demonstrate that. So if they're not willing to change then we need to change the politicians. And that's all a bloody process and doesn't happen quickly. But that's why I'm optimistic.

BILL MOYERS: Bill Greider we look forward to your new book, the title of it will be-

WILLIAM GREIDER: "Come Home, America"

BILL MOYERS: And you come back to the Journal.

WILLIAM GREIDER: Thanks.

BILL MOYERS: For centuries now, philosophers, theologians and historians have reminded us that something fundamental changes in a society whose government adopts torture as official policy. So, how did the United States come to sanction the deliberate inflicting of cruelty on human beings as government policy? Congressional hearings this summer are trying to answer that question. They want to know who should be held accountable for trashing the rule of law in the name of national security?

REPRESENTATIVE JERROLD NADLER: Hooding, including removal of clothing; use of detainee individual phobias, such as fear of dogs to induce stress - are those humane treatments that we should apply?

DOUGLAS FEITH: I imagine one could apply these things in an inhumane fashion or one could apply them in a human fashion.

REPRESENTATIVE JERROLD NADLER: How could you force someone to be naked and -

DOUGLAS FEITH: It doesn't say naked.

REPRESENTATIVE JERROLD NADLER: And undertake 20-hour interrogations?

DOUGLAS FEITH: It doesn't say naked.

REPRESENTATIVE JERROLD NADLER: Removal of clothing. Removal of clothing doesn't mean naked?

DOUGLAS FEITH: Removal of clothing is different than naked.

JOHN ASHCROFT: I think one of the problems is to assume that there is a best way to interrogate. I mean, we're all different kinds of people. We all have different training. We all have a different kind of heritage. For this Congress to say this is the only way we're going to interrogate, we're going to have a warm and fuzzy approach to everybody, I think it would be to jeopardize the nation's security.

BILL MOYERS: We'll be reporting on those hearings on next week's JOURNAL. Some of you will recall that earlier this year I spoke with British legal scholar Philippe Sands, whose book, TORTURE TEAM, prompted Congress to ask him to testify this week, too.

PHILIPPE SANDS: If any of these techniques were used on an American serviceman or servicewoman, or American national in any circumstances, this country, quite rightly, would say, "These standards are not being met, they are being violated."

BILL MOYERS: When he was here on the JOURNAL, we asked Philippe Sands to contribute to our project on the American Dream. We've been asking all of our guests to share with us their hope for America's future. You can see their answers on our site at PBS.org. Here's what Sands had to say.

PHILIPPE SANDS: I sincerely hope that the United States reconnects to the values that it promoted domestically and internationally that ran in the 40s and the 50s and afterwards - a value which is based on equality and on justice and in particular on the rule of law both domestically and internationally. That has been violated in the last eight years and what America needs to do more than anything is reconnect with that system of values. Because if America doesn't show that type of leadership, no one else is going to fill that slot.

BILL MOYERS: I invite you to share your own ideas about the American dream - send us yours and down the road I'll be offering mine in return. Log on to our blog at PBS.org, or send us a video we can post.

I'm Bill Moyers, and I'll see you next week.

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