Thursday, September 25, 2008

It’s Broke: But this ain’t the way to fix it!

How we got here

The current financial crisis the United States finds itself in is something relatively responsible adults have seen coming for many years. Of course, many in the media, and certainly Democrats have been quick to lay the blame at the feet of George Bush. And while he and the Republicans deserve their share of blame, that’s not where this colossal problem began.

“To hear today's Democrats,” said Terry Jones in a September 18th Investor’s Business Daily piece, “you'd think all this started in the last couple years. But the crisis began much earlier. The Carter-era Community Reinvestment Act forced banks to lend to uncreditworthy borrowers, mostly in minority areas.”

Jones continues, “Age-old standards of banking prudence got thrown out the window. In their place came harsh new regulations requiring banks not only to lend to uncreditworthy borrowers, but to do so on the basis of race.

“These well-intended rules were supercharged in the early 1990s by President Clinton. Despite warnings from GOP members of Congress in 1992, Clinton pushed extensive changes to the rules requiring lenders to make questionable loans.

“Lenders who refused would find themselves castigated publicly as racists. As noted this week in an IBD editorial, no fewer than four federal bank regulators scrutinized financial firms' books to make sure they were in compliance….Failure to comply meant your bank might not be allowed to expand lending, add new branches or merge with other companies. Banks were given a so-called "CRA rating" that graded how diverse their lending portfolio was.”

Jones has further noted that this crisis did not just pop up unexpectedly. There were warnings. There were calls for reform. “President Bush in 2003 tried desperately to stop Fannie Mae and Freddie Mac from metastasizing into the problem they have since become,” Jones reported. And indeed, The New York Times lead story on September 11, 2003 began, “The Bush Administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.”

John McCain stated just two years later, “If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole.” McCain said that over three years ago, and I could be considered a prophet, because he was right on.

Still, Congress would not act. Republicans, who were in the majority until 2006, were paralyzed by fear that they would be accused of “protecting the rich” or being “racists” who didn’t want the poor to own their own houses. In the end, their timidity cost the Republicans both the 2006 elections and control of both houses of Congress. It also all but insured the current crisis.

Then Congress fell into the hands of the best friends these irresponsible government programs ever had. Terry Jones notes that Democrats, flush with the “deep financial and patronage ties to the two government-sponsored agencies, Fannie and Freddie,” came to the defense of their bosom buddies.

"These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis," said Rep. Barney Frank, then ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

Exaggerate, Mr. Frank? Really?

That’s the reason the United States financial system now stands on the precipice, and may very well topple over the edge into depression. Not recession, depression.

How do we fix it?

Last night (September 24th), President Bush addressed the nation, and basically said ‘It’s a bailout, or a disaster.’

Really, Mr. Bush? One or the other?

Why does the idea of giving the Federal Government a $700 Billion blank check make me certifiably anxious? And, simply examining history will show that if the Government tells us it will cost “no more than $700 Billion,” the actual cost will almost certainly surpass $2 trillion.

Also consider the ramifications of this so called “bail out.” What this implies, on its face, is that the Government is about to nationalize the majority of our financial system. Kentucky Senator Jim Bunning mourned a few days ago on the Senate floor that this was “the death of free market capitalism.” And in fact, if US banks and financial institutions are taken over by the government in the fashion this bailout demands, our economy with be converted to state Socialism virtually overnight. The heart of Capitalism and a free market is an independent banking and finance industry. If that industry is overseen by government bureaucrats, the heart of Capitalism stops beating.

So, a summary of this “bailout plan” goes something like this: Over the last 2-3 decades, Congressional Democrats devised a way to use taxpayers money to create Freddie Mac and Fannie Mae, which allowed them to simultaneously buy the votes of their “underprivileged” constituencies by allowing them to purchase housing they could not afford, enrich their buddies who were running these programs into the ground, enjoy hefty campaign contributions and Lobbyist perks from those same wealthy friends, and now that these entities have collapsed, they demand $700 Billion MORE of the taxpayers money to fund the SAME system that has screwed us already – and they are holding our retirements, savings accounts and investments as hostages to get what they want.

I’m sorry, Mr. President. I trust neither you, nor Secretary Paulson, nor Ben Bernake, nor Congress with that kind of money and power. The answer is NO.

This problem cannot be fixed by MORE government control. In fact, some economists and financial experts say there are far simpler and less intrusive ways to preserve the free market, restore the integrity of the financial system, and thaw out the frozen credit system. The following are a few excellent ideas which are so simple and basic, most politicians probably haven’t even thought of them. But then, if they did, they would probably reject them because nothing would be in it for them.

First, financial expert Dave Ramsey points to a single “rule change” that could potentially free us from as much as 60% of the problems that created this financial crisis. Ramsey says, “Remember Enron, WorldCom, Adelphia, and other companies had artificially put assets on the books? They'd say something was worth $10M when they bought it, but eventually it decreased in value, and they never updated the value in the books. That was part of the fraud. Under current laws at that time, they were all convicted and put in jail for fraud.

“Then we got all mad and made all these new laws that are coming out the wazoo called sarbanes oxley. It's a huge, massive law but the idea is that we were going to mandate ethics to corporate America because apparently they didn't have any, according to the Enron failure. It's now a total pain in the butt to execute it in a publicly traded company.

“It didn't work because you can't cause ethics to happen. However, it does make each company each day restate what their assets are worth if sold on the market. This accounting procedure is mark to market accounting--you need to remember that. It's a good concept and keeps companies from having loaded balance sheets….

“Economist [Brian] Wesbury is saying that if we change that one rule and don't force [the banks and mortgage holders] to mark down to market value and just let them hold on to all the stuff, and say just on sub-primes for this period of time you can change that rule -- a temporary change -- that'll free the market up. It's seized right now; it's frozen. This will thaw it out and get it going again. He says that'll solve 60% of the problem ... and I think he's right.”

Dave Ramsey’s proposal, which he picked up from Economist Brian Wesbury to just change one accounting rule, makes a lot more sense than the Government taking over the majority of mortgages in the nation! But that’s not the only possible fix-it that can be made easily. The next is SO simple – but the Democrats would literally rather die in a bloodbath of the House and Senate floor than to let it happen.

Ready? Suspend the Capital Gains Tax. That’s it. Right now, taxes are 15 percent on invested money and assets. If the capital gains rate is suspended – say, just until the end of 2009 – money would RUSH into the troubled markets by the dump truck loads. If people knew their gains on investments would NOT be taxed, they would be happy to take a little more risk – because the reward will be greater. Otherwise, expect further stock market loses as people pull their money out for fear of losing it.

Another possibility suggested by Dave Ramsey is to provide government “mortgage insurance,” but not to outright “buy” the mortgages. “Why don't we just take the FHA insurance program and extend it across these sub-primes? What that means is that you and I are guaranteeing the lender that they're not going to lose as much or any money on those mortgages. Now I don't like guaranteeing them, but I like it better than buying them. In other words, instead of $700 billion in tax-payer debt going out there to bail out these companies, just extend the insurance out. You could probably do that for less than $40 billion. It's like a 95% savings!” I think this idea has merit as well.

Yet another possibility is to allow states to set up “mortgage arbitration” plans, where a bank and/or mortgagee can appeal to have their loan terms restructured to make the loan perform again. Banks don’t want non-performing loans nor real property on their books. That’s what bogs them down and drives us to the point of financial collapse. Some banks have figured this out and have tried to renegotiate with borrowers, because “a little is better than nothing.” However, two problems have plagued these banks – many of the unfaithful borrowers have simply walked away from their responsibilities to repay the loan, and left the property on the books. Also, some borrowers are actually expecting the Government to swoop in like Super-Bureaucrats and save their bacon by buying their loans and letting them stay in “their” houses virtually for free.

Mortgage arbitration would allow for easier terms of repayment for borrowers, while requiring them to meet their responsibility to pay their debts. It would also allow the banks to have performing loans rather than dead loans and abandoned properties on their balance sheets.

Finally, the financial system as we know it now has no integrity. It has been abused by politicians and their patrons who have profiteered on the desires of the poor and on the dime of the taxpayers. The last element to fix this financial crisis, is the perp-walk. That’s right. Congressmen like Barney Frank and Charles Rangel, and Senators like Chris Dodd and Charles Schumer, all of whom sit on banking, finance and ways and means committees, who protected these blood sucking entities, should be investigated for possible fraud and bribery.

Additionally, Senators and Congressmen who have received large campaign donations from these entities should also be investigated for malfeiscence. Incidentally, Barack Obama has received more contributions from Freddie Mac and Fannie Mae than any other politician. His VP running mate, Joe Biden is third on that list. A coincidence? I think not.

In addition to these crooked politicians, those “executives” who oversaw the collapse of the financial institutions should be tried for violations of public trust and even outright theft. If they have received “golden parachute” deals when they left or retired from the institutions they’ve run into the ground, that money should be taken from them and distributed to those they stole it from – TAXPAYERS.

The United States financial system is in a place it has not been since October 1929. Government control will not solve the problem. FDR’s New Deal proved that. Even after 10 years of his virtually socialist economic policies, the Depression continued, and only the advent of American involvement in World War II brought the nation out of Depression. But this time, we’ve already had our “Pearl Harbor” on 9/11. This time we are already involved in a Global war. And our politicians did not learn. They did not stop spending. They did not stop playing the game. And that’s what brought us here.

Giving them ALL that money as a reward for their treachery would spell doom for us. And the People with any sense know it.


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