The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.
Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.
This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.
Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.
The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.
The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.
Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.
In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This “moral hazard” generates enormous distortions in an economy’s allocation of its financial resources.
Found by John Ligums.
#25 Kreg. I have a safe place for you to store all your money…
My Mattress! I PROMISE to keep it safe! 😉
Hey, John and Adam – here’s another nutcase who’s been talking about all this for more than the past few months.
http://www.larouchepub.com/pr_lar/2008/lar_pac/080927there_is_plan_b.html
His ideas sound good anyway. Don’t know if it would work but it does force you to think differently about things.
No bail out.
At first I was for it, but the more I read about this bullshit, the more I realize its bullshit. No money to these crooks, let them suffer for their greediness.
#7 it makes perfect sense. Fanny and Freddie May benefits the poor home buyer. What party does the poor using vote. I rest my case. It would be great if everyone could afford a house, but the reality is, McDonalds doesn’t pay enough to make this happen. If these people had cared about school instead of rap music and the thug life, then maybe they would have a job that pays enough.
#17″if these companies are allowed to fail, i personally will be in a world of hurt — my credit card interest rates will skyrocket, the adjustable portion of my mortgage will skyrocket, and no one will be able to buy the house i have on the market.”
Someone should have told you this before but I am now. CUT UP YOUR CREDIT CARDS. If you can not aford to pay cash you do not need it. ARM MORTGAGES ARE FOR PEOPLE WHO CAN NOT AFFORD A HOME. If you do not qualify for a fix rate mortgage you can not afford a home. OVER PRICED HOMES DO NOT SELL.Some one will buy your house if it is priced right.
38..
CORRECT..
and the way the market is…
TAKe the state tax evaluation and subtract 25-30%.
And there is a good chance you wont have to pay the tax on what you get, as WELL as you get OUT of the house FAST.
Well Thank you for the Great Post John.
Thanks also to the president in 1977 #39 – Jimmy Carter for starting us down this path of destruction.
And lets also tip our hats to the democrat majority & speaker of the house folks such as Tip O’Neill, for helping this all get started!
Let’s face it the corruption within our system of government has gotten to such an amazing level that we are all becoming subjects, and have lost our citizen status. The “Representatives” continually fail to do any responsible representation (with exception to failing this bailout). The proof if this failure is the total loss of checks and balances which our original forefathers intended there to be. When our government pays more attention to bailing out a bad business versus placing a ban on milk products, lead tainted childrens toys, and tainted toothpaste, from China it’s an obvious failure. Can anyone substantially explain why our legislative branch should be conducting any investigation into why a athlete whom may have taken an illegal steroid?
Finally, any person who believes the a single president or person in our government system is or should be held responsible for any singular problem or failure has lost their mind. Simple high school history classes teach us all how there is to be a checks and balances. Lets vote right and change the Good ol’ Boy Network the hell out.
Thank you, John for highlighting this. However, I feel that the government is not entirely to blame. The citizens themselves have also to accept part of it because of the fact people are generally greedy and do not know when to say enough is enough eg. when offered low downpayment mortgages and overextending with their credit cards debts and generally living beyond their means. Unfortunately the fatcats on wall street know and understand how to exploit this. All you have to say is no!
SOMETHING WICKED THIS WAY COMES
By Darrell L. Castle
Constitution Party 2008 Vice-Presidential Candidate
Crystal water turns to dark
Where ere it’s presence leaves it’s mark
And boiling currents pound like drums
When something wicked this way comes.
(Original poem by Ray Bradbury)
Laws, originally evolving out of the New Deal legislation written in response to the great depression, once protected the American financial system. Starting in the 1990’s, in response to intense lobbying efforts by the financial industry, those laws were stripped away. The most important one was Glass Steagall which separated commercial banking from the type of investment work of a stockbroker. Glass Steagall was signed out of existence in 1999 by President Clinton and less than 10 years later the entire financial system is bankrupt. Another law, known as The Uptick rule, prevented companies from crashing due to large scale shorting of company stock. A company’s stock could not be sold short as long as it was in continuous decline. Short sellers had to wait for an uptick in the stock before shorting. The Uptick Rule ended in 2007 just about one year ago.
The end of the laws protecting the American public from unscrupulous speculators disguised as bankers caused changes in the way our banks do business. The banks decided that simple banking, that is loaning money at interest, was not profitable enough so they began investing in risk paper. This changed them from banks into something akin to casinos. Now that the gamble has finally failed these new casinos are asking the American taxpayer to pick up the tab for their greed and excess.
Now all this risk paper, known in the financial world as “the derivatives market” is collapsing. Derivatives are not stocks or bonds or anything else substantial. They are simply paper derived from other paper such as futures and options. Futures and options are exchange traded derivatives, but the largest group of derivatives is not even traded on the exchanges. These are called “counter party derivatives” and consist of such things as collateralized debt obligations, mortgage backed securities, and credit default swaps. It is estimated that total derivative exposure of the financial system is between one quadrillion and one and a half quadrillion. A quadrillion is 1000 trillion. To put that in perspective, the entire GDP of all the world’s countries in 2007 was approximately 60 trillion. GDP is basically everything that is produced for sale. The American people are now being asked to shoulder the risk of the entire derivatives market and if they do, 700 billion will prove to be a drop in the bucket.
The rapid increase in the price of fuel during the last year is a good example of the destructive nature of the derivative market. Much of the price increase was due to speculation in futures especially by Goldman Sachs (Henry Paulson’s company) and Morgan Stanley. These companies, it is believed, are responsible for about 50% of the speculative price of oil. What that means is that every time we buy gas we subsidize the parasites who feed off us so they can continue their existence. We are now being asked to accept increased taxes to cover their losses.
Now that this mess has been created, what should be done to resolve it with the least amount of pain for the American People?
1. All failed and at risk financial companies, not just those we constantly read about, should be seized by the F.D.I.C. (Federal Deposit Insurance
Corporation) and put into involuntary Chapter 11 Bankruptcy. The money people have on deposit would carry the same FDIC guarantee as before so there would be no need for panic. The Chapter 11 trustee would examine the assets of these institutions and all derivative paper should be discharged in bankruptcy. The American people should not accept one penny of risk for derivative paper. The real assets such as mortgages on residential real estate should be separated and foreclosure should be indefinitely frozen. The at risk mortgages, whether subprime or not, could be written down to the current value of the property and re-amortized for a payment the homeowner could afford. The mortgage could then be returned to the bank for service or referred to Fannie and Freddie if the bank did not survive Chapter 11.
2. The Federal Reserve Banks should be seized by Congress under Article 1 Section 8 of the Constitution. The FED banks could survive as Clearinghouse banks but the Federal Reserve that has robbed the American people for 100 years would cease to exist. The debt owed by the American people to the FED banks would be discharged in bankruptcy. Congress would take monetary policy from the FED and would simply stand in place of the FED through a monetary board. The FED credit computers would be transferred to Congress who would issue new credit
(money) because under our present system 97% of all money originates as credit. This new credit would keep the system going and prevent collapse. It could all be done without interest and without debt. The backs of the international banking cartel would be broken forever and the American people through their elected representatives would control monetary policy i.e. money in circulation, interest rates, and credit availability.
3. Glass Steagall and the Uptick Rule should be returned. Speculation in the futures markets of essentials such as fuel, food, and medicine should be banned or at least have a punitive tax say 50% attached.
4. The Chapter 11 Bankruptcy Trustee would immediately move to seize any assets taken by the CEO’s and Boards of Directors from the bankrupt companies during the prescribed time period. No bankruptcy system would allow the CEO of the bankrupt company to keep hundreds of millions as in some of these cases. At the same time, the U.S. Attorney should be directed to examine the20process for criminal sanctions where laws have been violated.
In conclusion, this plan would return our monetary system to the American People and ignite a new wave of prosperity and liberty. Every crisis presents opportunities if we only look for them. This is an opportunity for the American people to throw off the yoke of debt bondage that has enslaved them for 100 years and gain direct control of monetary policy through representatives answerable directly to them. No particular philosophy has been respected or spared in this plan. I am more interested in saving the system for the American people than I am in respecting anyone’s philosophy of money or government. This is intended to be a simple, easy to understand, explanation of our banking crisis with a Constitutional solution.
#29 – Apparently its one hell of a lot safer than your money and where your greed has placed it.