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The Truth About What Crashed Our Economy

Posted by on September 4, 2012
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Okay, so if a free market economy is so great, what
caused everything to crash in late 2007? Liberals love to blame it
all on Bush (43), but in reality everything was put in place for it
to happen way before Bush ever came on the scene. In 1977
President Carter had a noble, albeit naive dream of creating an
opportunity of home ownership for all Americans. You may
have already guessed Carter was a Utopian. This dream was
borne out in the form of the Community Reinvestment Act
(CRA) which was designed to encourage banks to find ways of
making home loans possible to minorities and those in the lower
income brackets. It never really got rolling though because with
his ineptness in all other aspects of the economy we became
mired in the infamous Carter Malaise which ultimately defined
his presidency. As it turns out the CRA was his legacy. When
Reagan became President he still had to contend with a
democratic Congress so he couldn’t repeal it, instead it lay
dormant. Same thing happened under Bush (41). It wasn’t until
Clinton’s campaign for a second term, while looking to secure
minority votes that the act was dusted off and finally put to use.
Clinton gave teeth to this act by threatening the bankers
that if they didn’t comply they would risk losing their charter.
The bankers were then forced to become creative with high risk,
zero down, adjustable rate type mortgages and the sub-prime
lending market was born. Keep in mind this was not the natural
market strategy of the banking industry, otherwise there would
have been no need for the CRA in the first place. The
combination of government interference and one step forward
thinking strikes again.
Clinton didn’t want to leave the bankers high and dry with
all these high risk mortgages, so instead he made it easy for the
banks to off load them directly to quasi-governmental agencies
Fannie Mae and Freddie Mac once these loans were generated.
So as strange as it sounds the bankers were basically being forced
at gun point to create as many loans as possible, thus generating
huge profits with minimized risk. Darn, life was tough!
Suddenly there was a huge demand for housing as
millions of people who never dreamed home ownership would
ever be possible were having mortgage opportunities thrust in
their face. High minority states such as California, Arizona,
Nevada, and Florida saw their housing demand increase
exponentially. This created the first cracks in Carter’s theory.
When demand suddenly soared in those areas so did home prices
since housing is a commodity which follows the principle of
supply and demand. Now you not only had minorities
purchasing homes they couldn’t normally afford, but you also
had people who could easily afford housing in a normal market
suddenly being forced to buy their homes at inflated prices on
margin as well.
Things still seemed quite okay as long as interest rates
stayed relatively low and housing prices continued to increase.
However, the dam began to burst when the fed started turning up
the heat on rates in 2007 and the mortgage payments on all those
adjustable rate mortgages suddenly skyrocketed. People that
were scraping by trying to come up with a $1,500 mortgage
payment were now defaulting on a revised $2,500 payment. This
quickly dried up the demand for housing in those areas and the
over-inflated home values suddenly plummeted. This caused the
second round of defaults as those who had been forced to pay
$400,000 for a house found themselves “underwater” making the
same payments on a house that was now only worth $250,000.
They then began to walk away from those mortgages as well
further exacerbating the problem.
The government wasn’t exactly helping during all this
fiasco. Our good friends Fannie Mae and Freddie Mac had been
busily buying up all these high risk sub-prime loans. They would
then bundle them with normal loans to hide their greater risk of
default and then sell them to unsuspecting, mostly foreign
investors. The way it worked was that the investor would
purchase the bundled mortgages as an investment and as the
mortgage payments were made those payments became dividend
income for the investors. All the while, the two people who held
the top positions of oversight of these two institutions,
Representative Barney Frank and Senator Chuck Dodd, both
Democrats, were running around proudly proclaiming their
solvency. At the same time they were blocking the Bush
Administration as it tried to do an inquiry into the situation under
the belief it was all falling apart.
Nobody ever dreamed the housing bubble would burst,
but when it fell like a house of cards everyone got hurt. All those
foreign investors who had been duped by the government which
didn’t disclose the bundling of all those sub-prime mortgages
demanded to be reimbursed. The banks couldn’t possibly pay so
the government had to step in. That’s why such a large portion of
the bailout money ended up going over seas. Banks who were
holding the normal loans which had suddenly defaulted because
the owners were now underwater ran into an accounting issue. If
you default on a $200,000 loan the bank must write off the entire
value of the loan. What doesn’t show up on the books is that the
bank now owns the property. It can’t show a legitimate value on
its books as an asset because it doesn’t know what it will
ultimately sell for. This is where the whole mark-to-market issue
comes into play. Therefore, the banks now showed $ Billions in
losses which weren’t really there and thus needed to be bailed
out.
When the government first stepped forward with bailout
money many of the banks balked. They didn’t really want the
money because they knew two things. First, they would be
making a deal with the devil as they knew a whole plethora of
strings would surely be attached. Second, they understood that
once they could start moving these defaulted properties again
their books would clear up naturally. Instead, the government
stepped in and declared them as under-capitalized and forced
them to take the money under threat of insolvency. Over $300
Billion tax payer dollars were sunk into the bank bailout
program. Some banks were then ordered to take over others. An
order to which they willfully complied knowing full well that all
those mark-to-market balance sheet assets they were carrying
would someday be worth a fortune. Thus the government
takeover of the banking industry had begun as the government
started hand picking the winners and losers.
Many people don’t understand today why banks now
aren’t lending money anymore, but why should they? They’ve
got a heck of a deal currently going on. What is happening is that
the Prime Rate, the rate which money gets loaned out from the
Federal Reserve directly to banks, is at around 0%. Basically, the
Federal Reserve is printing money and providing it to banks
almost free of charge. The Treasury, however, needs for
someone to buy its bonds and foreign investors aren’t showing
any interest. So the government is basically loaning money out
to banks virtually free via the Federal Reserve, and then
borrowing it straight back through the Treasury at 3½% interest.
So why would a bank want to loan money out to you or I and
take a risk of default, when they can loan it directly back to the
government risk free, and all the interest received becomes pure
profit?
So who’s really to blame for all this mess? Well there are
a lot of people guilty of acting in a less than professional manner:
Carter for being so naïve, all his successors for not recognizing
and thus slaying the beast known as the CRA: the Federal
Reserve who played too many games with interest rates, Bankers
who understood yet gleefully accepted their situation instead of
manning up and doing the right thing, Chris Dodd and Barney
Frank for not disclosing the dire situations with Fannie Mae and
Freddie Mack, and the current administration for exploiting the
situation to fulfill its own agenda.
So how do we dig our way out? The first step is to loosen
up the credit markets to business by getting the government out
of the way both from a credit demand and regulatory standpoint.
This will enable businesses to begin growing again and stimulate
the overall economy. Second, we need to curb our spending and
stabilize our currency by halting the process of monetization.
This will bring back the faith of foreign investors. Finally, we
need to stop tinkering with the overall market process and allow
the markets to ebb and flow naturally. Our government currently
acts like a doctor who prescribes 50 different antibiotics for a
simple common cold and then wonders why the patient is dying.
We now know what caused things to spin out of control
starting in 2007, but why haven’t things gotten any better since
then? The simple answer is liberalism. It’s the same foolish
ideas that got Jimmy Carter in trouble and brought us the
infamous Carter Malaise which are now destroying our economy
once again. It’s the same thing that not only brought us the
previous two depressions, but kept us in a prolonged one in the
1930’s. Yes, we’ve actually had two depressions, look it up. We
have different players, but it’s the same game. If you ask
someone from the Left they will swear Bush drove us into a
ditch. I’m not going to totally defend Bush because he did do
some foolish things as President, but let’s look at some simple
realities to judge the accuracy of such a statement.
The problem I have with this theory has to do with the
fact that it ignores history all together. When Bush first took
over from Clinton it was as the new millennium had just rolled in
and the Y2K scare had in essence created its own mini economy.
The internet had been booming but was about to go bust as both
private and public entities, which had been pouring $ Billions
into resolving a digit issue with anything related to computers,
saw these efforts finally coming to an end. A small but inevitable
recession ensued so that Bush himself didn’t exactly inherit the
best financial situation in the world. However, I’m not about to
blame Clinton on what Bush inherited. Bush only had 9 months
in office to get a handle on that situation when 9/11 struck and
the financial markets once again went into short term turmoil.
History clearly shows that as soon as we were able to pick
ourselves up and dust ourselves off from that crisis that under
Bush’s presidency and a republican controlled Congress, things
started improving and improved rather dramatically. During the
first 6 years of Bush’s presidency unemployment had dropped to
well under 5%, inflation was virtually non-existent, and interest
rates remained reasonably low. What the Left doesn’t like to
discuss is that there is a direct and undeniable correlation
between when things started to go sour and when Democrats had
regained control of both houses of Congress starting in 2007.
If you ask the Left to point to exactly which policies were
at the forefront of Bush’s poor economic driving skills to cause
such a crash the only thing they can point to is the two wars.
Well let’s see. The first war started in late 2001 and the second
war started in 2003, yet by the end of 2006 we were still on solid
economic footing. Hmmmm! What they don’t like to discuss is
that the total cost of those two wars combined up to that point
was a mere drop in the proverbial bucket compared to Obama’s
failed stimulus package. Another thing the Left doesn’t like to
have brought up is that while Obama is claiming things were far
worse than he was led to believe whenever he first assumed the
occupancy of the oval office, that as a Senator he was already
part of the system at the time things started falling apart. Okay,
so what he’s telling us are two things with this statement. First,
he’s telling us that since he was a U.S. Senator for the last two
years of Bush’s presidency, apparently he too was asleep at the
wheel and failed to notice things were crashing. Second, if he
was lied to then it had to be by fellow Democrat Nancy “let’s
pass this thing so we can find out what’s in it” Pelosi. After all,
all financial matters originate in the House of Representatives
and she was its speaker during his transition from Senator to
President. Add another Hmmmm onto the pile here.
The stark reality is Obama knew exactly what shape the
economy was in when he took over. He and his fellow Liberals
have used the Bush presidency as a scapegoat for far too long.
As of this writing we are over 3 ½ years into failed Keynesian
policies and the numbers prove it to be the dismal failure it
always is. Unemployment shot directly upward after Obama took
over and has yet to recede. Inflation is starting to dog us on a
daily basis as critical components such as food and fuel continue
to rise. Our debt has skyrocketed by over $5 Trillion since
Democrats took over Congress in 2007 which is crushing the
value of the dollar. So what’s Obama’s plan to get us out of this
economic mess? More of the same failed Keynesian policies that
got us here in the first place. The definition of insanity is doing
the same thing over and over and expecting different results.
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