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Economic Crisis and the Failed Bailout

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  • Economic Crisis and the Failed Bailout

    Soooo, this is a topic we've yet to broach here. What are your opinions on the economic mess that is going on in the US? (and the world, too, I suppose, though I'm not that familiar with foreign economics personally)

    I personally am relieved that the bailout failed. Throwing more money into a broken system will only perpetuate the problem that was created by the subprime lending at the government's assistance in the 90's. I think bankruptcy is a more fair result. Why should the taxpayers bear the burden of risky loans and imprudent investments? Let those who had the poor judgement suffer the consequences. There will be a recession, but the great depression scare tactics are unneccessary because the stock market plummeting does not at all equal the same scenarios that occured in the early 30's.

    So, discuss....

  • #2
    The scare tactics are obscene, truly. The media, the banks, and the members of Congress (of a specific party) that enabled the bad lending, are coming together to whip up a panic and tried to get a huge government blank check issued to buy them out of their years of fraud and deceit. The American people, thankfully, were too smart, and 95 Democrat and 133 Republican House members listened to them.

    Here's a pretty damning video made up of clips in 2004 -- you'll see, amongst others, Democrat House members Barney Frank (now head of the House Financial Services Committee, that has direct oversight over the GSEs), Maxine Waters, and others, denying that there were any problems with Fannie Mae and Freddie Mac.

    2004 Democrat Montage About Fannie Mae and Freddie Mac

    President Bush has brought up reform of Fannie Mae and Freddie Mac accounting practices every year. John McCain co-sponsored two bills calling for serious reform. In the meantime, Sen. Chris Dodd (D-MA) and Sen. Barack Obama (D-IL) were both excepting millions of dollars in campaign donations from Fannie Mae and Freddie Mac. Jim Johnson, former CEO of Fannie Mae, was the head of Obama's VP selection committee. Franklin Raines, former CEO of Fannie Mae (who made $90 million in 6 years in that job), has acted as an advisor on finance and economics to the Obama campaign.

    Let's break down how we get to this point.

    In the late 70s, the U.S. Congress, then under Democrat control, begins to regulate banks, preventing them from refusing loans to low income and minority home owners without the then-standard 20% down payment. The policy objective was affordable housing (key buzzwords). It wasn't fair that just because they couldn't afford a mortgage payment or provide any collateral that low income people were denied mortgages.

    Pressure began to build, particularly on the GSEs, which were under Congress' thumb, to increase the lending rate to low income users. Members of Congress, particularly Democrats, were running on the promise of more affordable housing in their districts. Fannie Mae and Freddie Mac had compliant officers put in charge, and private banks began getting bullied by private lobbies with threats of lawsuits if they didn't begin to lend as well.

    As the worthless paper began to pile up, in order to keep the circular scheme going, the institutions had to shed their liability. So they began to package up the mortgages they knew were given to unqualified buyers into mortgage-backed securities, and selling them off. This is how men like Franklin Raines could make $90 million.

    In 2004, Bush and the GOP Congress loosened regulation on banks for purposes unrelated to the housing market. As a by-product, private banks were able to start playing the same pirate game that Fannie Mae and Freddie Mac had been (and to which their overseers and Congressional beneficiaries like Frank gave cover), and the better off CEOs were at keeping the bank's stock artificially high, the bigger bonuses they got.

    The bill has been coming due on these worthless assets for years. But the money was too good for the now-majority Democrats like Frank and Dodd who controlled the overseeing bodies. Affordable housing means reelection, and bad lending means affordable housing.

    Through all this, the artificial panic still wasn't enough to get this swept under the rug. 95 Democrats and 133 Republicans protected the American taxpayer from a $700 billion cover-up.

    What we hear now is the insistence that we "can't dwell on how we got here" -- raised by the members of Congress that benefited most directly, such as Frank, Rangel, Dodd, and, yes, Barack Obama ($9 million in campaign contributions from Fannie Mae and Freddie Mac in just three years). But not only can we, as we *take our time* and come up with the right answer, but we must, or we invite these things to happen again.

    Bush's Secretary of the Treasury and SEC Commissioner should both be asked to resign tomorrow. Barney Frank, Charley Rangel, and Chris Dodd (heads of the three key Congressional committees with oversight) should all resign their seats. Franklin Raines, and the CEOs of the failed banks like Lehman Bros, Goldman Sachs, WaMu, and Wachovia should be under criminal investigation.

    As for recovery itself... it's time to do away with our capital gains tax. We have a capital liquidity crisis and we need new capital. That's the best way to get it. We need to lower our corporate income tax ("corporations" don't pay tax anyway) so that we're competitive internationally for business investment. John McCain pointed out at the first debate, our "corporate" income tax rate is 35% and Ireland's is 11%. It's Ireland that's seeing the economic boom.

    As for the mortgages that can't be paid... I talked to our securities professor today about this, and he made the point that if this was *just* failing institutions who made bad lending choices, they would go to the borrower and say "okay, you can't afford your $250,000 mortgage. We're going to refinance this at $150,000 for 30 years and write off the loss." However, because of all this fraud to cover up the bad accounting, nobody knows who actually owns the debt anymore. It's been split up and shipped worldwide. The solution of a cash infusion can't fix that. We need mortgage insurance for the people who've borrowed from failing organizations, to be paid by the institutions, so that the 4% or so of these mortgages that will actually default will be covered.
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