Must reading by Dean Baker at Truthout (Welfare as We Know It Now):
In the days before welfare reform, single mothers could collect five or six hundred dollars a month without working. That was what welfare looked like before 1996. In the Internet Age, welfare is about having the government do everything it can to make the rich absolutely as rich as possible.
As F. Scott Fitzgerald said many years ago, the rich are not like you or me: They need the government’s assistance to get by. There are all sorts of ways in which the government helps those who have the most.
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At the moment, many of the high-flying hedge fund boys and girls find themselves in trouble because they invested heavily in subprime mortgages and other risky assets. With the housing bubble starting to deflate, some of these assets are nearly worthless and many are worth far less than what the hedge funds paid.
Hedge funds make big returns by making highly leveraged investments, meaning they borrow heavily to multiply their gains. The flip side in this story is that when the hedge funds bet wrong, they can lose much of their capital very quickly.
The hedge fund crew is desperately hoping the Federal Reserve Board will swoop in to save the day. Most immediately, they need lower interest rates. The hedge funds can only hang onto their assets as long as they can pay interest on the money they borrow. If interest rates fall, then an important source of pressure will be relieved.
Next, they need some sucker on whom they can dump their bad mortgages. The best candidates are Fannie Mae and Freddie Mac. These government-backed firms created the secondary market in mortgage debt that allows banks to sell the mortgages they issue. It turns out the hedge funds have been big players in the secondary market, buying up hundreds of billions in mortgage debt that is going bad at a very rapid rate. The hedge fund boys will be lobbying Congress big-time to broaden the role of Fannie and Freddie so they can buy this bad debt and save them from large losses.
With the Fed lowering interest rates and Fannie and Freddie buying up their junk bonds, the hedge fund managers may be able to make it through the housing market crash relatively unscathed. It might take a lot of help from the government to ensure their fortunes, but the rich are different from you and me.
This, by the way, is not an exclusively Republican response to the pain of the rich. When it comes to insuring that the rich stay rich, the Democrats are almost as zealous as the Republicans
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