Another Voice Added against Bailout

166 economists sent a letter to Congress opposing the bailout plan. The following commentary is from Jeffrey A. Miron, a senior lecturer in economics at Harvard University on CNN.com (emphasis added).

CAMBRIDGE, Massachusetts (CNN) -- Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan,
the Treasury would have bought the "troubled assets" of financial institutions
in an attempt to avoid economic meltdown.

This bailout was a terrible idea.

Here's why.

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.

Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.

If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.

The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.

Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take.
The bailout will open the door to further federal meddling in financial markets.

So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.

I couldn't have said it better myself!

What Could $700 Billion Do?

Pay off half of all of the first mortgages currently on the books throughout the US.

I could go for that!

The Donald isn't in a Panic

My thanks to DJ MCGuire for this.

So you think the bailout failure is the end of all things? Are you subsumed by the fever of the panic? Are you seeing the Second Great Depression on the horizon?
Well then, Donald Trump would like to talk to you (Fox News via Mountain Sage):

Oil is going to drop down to nothing . . . and there’s nothing OPEC can do about it . . .
Every time they talk bailout, and every time it looks like it’s going to happen, oil goes up! Way up! It takes the juice out of whatever they’re doing!
. . .
Oil is going to drop and ultimately that’s going to lead to a very strong economy.

When Neil Cavuto then asked “the Donald” what else will happen if the status quo (no bailout) is maintained (emphasis added) . . .

I think it’s going to be a very interesting period of time and people with cash are going to make good deals and lots of interesting things are going to happen.
. . .
I would say this: people with cash will make very good deals and they won’t need the government. I think we’ll survive very nicely without it.

He then finishes by giving bailout opponents hope that, indeed, will we be spared this monstrosity: . . .

it seems hard to believe that it will be approved, knowing that oil is going to tank if it’s not.

It seems he agrees with Warren Buffet...time to buy!!!

A Little Historical Primer on Falling Skies

The sky is falling! The sky is falling!

The headlines today are SCREAMING about the failure of the bailout and the 777.68 drop in the Dow!

OMG!!! This was the LARGEST ONE-DAY DROP IN THE MARKET EVER!!!!

A little perspective, please! This was a fall of 6.98%. Where does this rank in truth?

Number 17...the largest since 10/27/1997--eleven years ago. Let's look at that date, the stock market was at 7,161.15. What happened if you invested that day? Your investment would have grown 44.7% over the last 11 years if you took it all out yesterday. Over the 11 years, you would be richer in real terms (adjusted for inflatioin) by nearly 6%.

Lesson? TIME TO BUY, BUY, BUY!!!

ALERT--The Bailout Bill Seems to be FAILING!!***UPDATE***IT HAS FAILED!!!

It is 1:54 pm--IT LOOKS LIKE IT HAS FAILED!!!!!

Thank the Lord!

I called my Congressman and told him he MUST NOT VOTE FOR IT--he barely became my representative in the Convention that we had to replace Jo Ann Davis when she died. I told his office that he would lose next time 2010 if he voted for it even if it meant I ran against him.

Looking good at this point!
***UPDATE

The bailout package failed 228 - 205. AP release on the failure.

FREE MARKETS STILL EXIST IN THE US!! Just say no to socialism!!!

Ten Reasons to Oppose the Bailout

From FreedomWorks today:

Ten Reasons to Oppose the Wall Street Bailout

1. NO REFORM: The plan attempts to mask, rather than reform, imbalances in credit markets and in U.S. economic public policy. The plan props up reckless and failed banks by buying "troubled assets" instead of focusing on real reforms that go after government sponsored culprits Fannie Mae and Freddie Mac, and sustainable policies that will increase the availability of private capital and expanded economic growth.

2. TREASURY POWER GRAB: The plan raises Constitutional concerns by dramatically expanding the power of the current and future Treasury Secretaries, giving the government agency power to directly purchase assets from for-profit financial and non-financial firms.

3. STUNNING PRICE TAG: The $700 billion bailout figure is as much money as the combined annual budgets of the Departments of Defense, Education and Health and Human Services. It amounts to $2,300 for every man, woman, and child in America.

4. INCREASES NATIONAL DEBT: Instead of cutting spending elsewhere, Congress will borrow all $700 billion on global capital markets, and the bill raises the national debt ceiling to a staggering $11.3 trillion.

5. GLOBAL BAILOUT: The plan includes taxpayer purchases of distressed assets from foreign banks.

6. HURTS RESPONSIBLE AMERICAN BANKS: The plan punishes responsible U.S. banks by keeping reckless, insolvent investment banks in business. As BB&T CEO John Allison wrote in a letter to Congress on Sept. 23rd, "....this is primarily a bailout of poorly run financial institutions.... Corrections are not all bad. The market correction process eliminates irrational competitors."

7. FLAWED PROCESS: Members of Congress and the public will have less than 24 hours and no hearings to discuss and understand the impact of this sweeping plan. This rush to pass a wildly unpopular plan without benefit of significant public debate and input will also undermine its legitimacy and effectiveness.

8. BY WALL STREET, FOR WALL STREET: Treasury Secretary Paulson, the architect of the plan, was formerly the head of Goldman Sachs, one of the firms responsible for the mess and a direct beneficiary of the bailout. Further, the advisers managing the bailout auctions and assets will be Wall Street firms and will likely receive billions of tax dollars in fees.

9. OTHER OPTIONS NOT EXHAUSTED: The idea that taxpayers will make money on the bailout is not credible. There are ready buyers for these "troubled assets" -- Merrill Lynch sold its entire portfolio of mortgage backed securities in July-- provided the price is low enough. If a profit was possible, private speculators would readily buy these troubled assets.

10. MORALLY OFFENSIVE: The plan violates basic principles of American capitalism and honest governance by creating a system of "private profits, socialized losses" that transfers money from taxpayers directly to Wall Street investment banks. Free market capitalism only functions if individuals and firms are held accountable and are allowed to both succeed and profit, and also to sustain losses and even fail.

36 days to Election Day--The Crap Sandwich

Minority Leader John Boehner calls it a “crap sandwich”.

I agree! But now it looks like enough people are on board to take a bite of it here in DC that this will be the main entree on this Congress's menu. What a horrible legacy for Ms. Pelosi and Mr. Reid. Then, of course, the Bush Administration will also add this to its menu--after all, it is their recipe for the most part--adding a big pile of steaming crap to his domestic policy legacy (will anyone notice, I wonder).

From Congressman Mike Pence (Human Events--emphasis added):

Dear Colleagues:

Our nation has been confronted by a serious crisis in our financial markets. The President and this Congress were right to act with all deliberate speed in addressing this crisis.

We now have a deal that promises to bring near-term stability to our financial turmoil, but at what price?

Economic freedom means the freedom to succeed and the freedom to fail.

The decision to give the federal government the ability to nationalize almost every bad mortgage in America interrupts this basic truth of our free market economy.

Republicans improved this bill but it remains the largest corporate bailout in American history, forever changes the relationship between government and the financial sector, and passes the cost along to the American people. I cannot support it.

Before you vote, ask yourself why you came here and vote with courage and integrity to those principles.

If you came here because you believe in limited government and the freedom of the American marketplace, vote in accordance with those convictions.

Duty is ours, outcomes belong to God.

We have fought the good fight. Now we need to finish the race and make sure that posterity and the American people know there were conservatives who opposed the leviathan state in this dark hour.

And if you do this I promise you, I will stand with you and, I believe with all my heart, the American people will stand with you as well.

MIKE PENCE

As my friend, DJ McGuire, says...this is principle. I call it character. Whatever you call it, unfortunately it is in short supply in Washington.

My thanks to DJ for also bringing my attention to Doug Mataconis over at Below the Beltway.

As DJ says, he has the line of the day (so far) on the bailout, and the blank check it will (almost literally) give Henry Paulson:

It’s the kind of unchecked authority that would have made even Alexander Hamilton blush . . .

Indeed!

38 Days to Election Day--The First Debate

Who won the debate? I assume everyone and anyone is trying to answer this question...

I think McCain won the debate...barely.

The One's most repeated phrase? "John (or Senator McCain) is right..." said about a dozen times. OOPS! My suggestion to The One...saying this (although correct) is counter to your interests!

Senator McCain's most repeated phrase? "Senator Obama does not understand..." said several times and a much better strategy (I think all would agree, wouldn't we?).

But "who won the debate" misses the point, which is...were the objectives of each campaign met and to what extent?

In this...I believe The One surpassed expectations (which for me, of course, were low).

Objectives:
To show mastery of foreign policy: McCain 95% (as expected), The One 65% (higher than expected)
To show understanding of the financial crisis and policy solutions for it: McCain 75% (expected), The One 75% (higher)
To seem presidential in handling questions and communication: McCain 90% (expected), The One 85% (much higher than expected)
Explaining policy differences from opponent: McCain 95% (higher), The One 70% (lower than expected)
Putting opponent "off his game": McCain 35% (much lower than expected), The One 35% (much lower than expected)

The One did well and held his ground...much higher than my expectations from such a neophyte! Now we wait to see the changes in the polls...

By the way, current Gallup daily tracking poll...46 to 46 tied again! The Electoral standing...The One has made some gains in VA, MO, and PA and McCain has made gains in MI and CO. Current score The One 273, McCain 265.

More Evidence

My brother John seems to think that I am being partisan in my analysis of the current debacle.

Unfortunately for him, the facts keep getting in the way. Take a look at this article by Steven Holmes from the venerable liberal bastion of the New York Times on September 30, 1999 (emphasis added):

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

Well now, isn't that interesting.

By the way, about Franklin Raines--the CEO of Fannie at the time--
On July 16, 2008, The Washington Post reported that Franklin Raines had "taken calls from Barack Obama's presidential campaign seeking his advice on mortgage and housing policy matters."
Also, in an editorial in August 27, 2008 titled "Tough Decision Coming", the Washington Post editorial staff wrote that "Two members of Mr. Obama's political circle, James A. Johnson and Franklin D. Raines, are former chief executives of Fannie Mae."

More support can also be found in another liberal bastion--the Los Angeles Times. In an article by Ronald Brownstein on May 31, 1999, several interesting nuggets can be found:

Under Clinton, bank regulators have breathed the first real life into enforcement of the Community Reinvestment Act, a 20-year-old statute meant to combat “redlining” by requiring banks to serve their low-income communities. The administration also has sent a clear message by stiffening enforcement of the fair housing and fair lending laws. The bottom line: Between 1993 and 1997, home loans grew by 72% to blacks and by 45% to Latinos, far faster than the total growth rate.

Lenders also have opened the door wider to minorities because of new initiatives at Fannie Mae and Freddie Mac–the giant federally chartered corporations that play critical, if obscure, roles in the home finance system. Fannie Mae and Freddie Mac buy mortgages from lenders and bundle them into securities; that provides lenders the funds to lend more.

In 1992, Congress mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers. Operating under that requirement, Fannie Mae, in particular, has been aggressive and creative in stimulating minority gains. It has aimed extensive advertising campaigns at minorities that explain how to buy a home and opened three dozen local offices to encourage lenders to serve these markets. Most importantly, Fannie Mae has agreed to buy more loans with very low down payments–or with mortgage payments that represent an unusually high percentage of a buyer’s income. That’s made banks willing to lend to lower-income families they once might have rejected.

The top priority may be to ask more of Fannie Mae and Freddie Mac. The two companies are now required to devote 42% of their portfolios to loans for low- and moderate-income borrowers; HUD, which has the authority to set the targets, is poised to propose an increase this summer. Although Fannie Mae actually has exceeded its target since 1994, it is resisting any hike. It argues that a higher target would only produce more loan defaults by pressuring banks to accept unsafe borrowers. HUD says Fannie Mae is resisting more low-income loans because they are less profitable.

So, John, are the New York Times and the Los Angeles Times being partisan as well?

Another source worth reading...

Investor's Business Daily has an excellent three-part series that walks you through the history of the housing/financial/credit crisis. It is hard to argue with the facts when they are laid out so clearly!

The House Republican Steering Committee (HRSC) has it right!

House Republican Steering Committee comments on the bailout
Their list of concerns with the bailout is a must read (via Leslie Carbone with my thanks to DJ McGuire):

1) Fundamentally alters the nation’s free-market system in that it broadly socializes firm’s money-losing mortgage assets and places the U.S. on a slippery slope whereby profits will also be nationalized. Even if one accepts the idea that such a proposal could work, valid questions about whether such a cost is an acceptable trade-off for the market turmoil we are hoping to avoid must be raised.

2) Fails to penalize the debtholders and shareholders (including many of the executives themselves), who should bear the risk of any losses, and indirectly infuses capital onto the books of financial institutions with no recourse.

3) Cedes massive authority to Treasury, with virtually no accountability. The Presidential election is a mere six weeks away and a new Secretary will take office in January 2009. Lawmakers and taxpayers have no idea what individual will ultimately be exercising this vast new authority over the long-term.

4) What if it fails? The plan does not give any consideration to what would occur if this authority failed to solve the current crisis. Those reasons could potentially include risk from other private sector failures outside of mortgage-backed assets, international financial services failures, lack of willing sellers, lack of willing buyers, an understatement of the depth of the problem or the financial commitment needed to abate it, or even the fact that the program might work according to planned but produce no beneficial impact.

5) Forces Treasury to pay inflated prices for assets. Since there is nothing in the proposal that forces financial institutions to sell their assets at a discount rate, or even at all, many of these owners may simply wait out the government to increase their bid, leading to more inflated prices than the market would currently bear.

6) Increases the federal deficit and national debt. The new mandatory spending will cause a massive increase in the national debt and the federal deficit. These annual deficits are funded by selling government bonds purchased by a host of large investors, including foreign countries. There is a limit to the amount of bonds that a government can float without adverse financial effects.

7) Contains no taxpayer protections, such as requiring the cost of purchasing these assets to flow through the annual appropriations process or requiring a participation fee or premium so that firms have to “pay to play.”

8 Insulates financial institutions that do not even pose a systemic risk. Some companies may truly pose a systemic risk to the entire market. However, there is no requirement under the proposal that a company truly be “too big to fail.” Instead, any financial institution with mortgage-related assets would be eligible.

9) Contains no safeguards against favoritism. Treasury officials will have no criteria for which to prioritize which mortgage-related assets to purchase first, from who, and when.

10) Bails out foreign-owned banks. The latest incarnation of the proposal allows foreign-owned banks and their U.S. subsidiaries to participate. This change runs the risk of forcing taxpayers to subsidize the poor decisions of foreign companies at a time when their local governments are refusing to supply their own capital to make such a subsidy themselves.

The mess continues...

My sister, Jodi, had a blog post dealing with the situation. She posted a video from Rachel Maddow talking about the mess...the following is my answer to her blog...

Who gave the six-year-olds all of the candy to begin with? Congress--by manipulating the credit market and encouraging sub-prime loans. There is plenty of blame to go around as my analysis of the mess shows.

Even Bill Clinton agrees with me...as he said on GMA this morning responding to a question about the changes to Fannie and Freddie in 1999, "Well...I think the responsibility the Democrats have may rest more in resisting any efforts by Republicans in the Congress...to put some standards and tighten up a little on Fannie Mae and Freddie Mac."

The answer to the problem, however, is NOT to put taxpayers on the line with this bailout. As Rachel's piece mentions (very briefly, but...you know...consider the source)...very conservative members of Congress are balking at this. THIS PLAN IS NOT THE ANSWER...LET THE MARKET WORK IT OUT AND LET THE CHIPS FALL WHERE THEY WILL!!!

Remember (even with Ms. Maddow's snarky comment)...THE GOVERNMENT IS NOT THE SOLUTION TO THE PROBLEM...THE GOVERNMENT IS THE PROBLEM!!!

Oh, how I wish we had a leader in charge instead of a bunch of POPULISTS like Obama and McCain.

We should reform Sarbanes-Oxley, cut the capital gains tax to ZERO, (The natural influx of capital from that will take care of much of the fallout of this mess), and cut corporate taxes (currently the 2nd highest in the industrialized world). This would increase capital flow and alleviate the crisis in the credit market.

The Status of the Bailout Debate

My friend, DJ, has a great post on the bailout debate. If you are interested, it is a short read!

42 Days to Election Day--Finally, my analysis of the financial "crisis"

Well here we are at the end of September facing a proposed $700 Billion nationalization of the financial sector of our economy and likely with a gaggle of potential companies, industries, and individuals lining up with their hands out for the next big government giveaway...

How did we get here?

This is not an easy question...there are many policies, programs, and institutions with all sorts of culpability in this mess. One thing I can say, however, with certainty--THIS WAS NOT A FAILURE OF THE FREE MARKET!!! My friend, DJ McGuire, the free market was never tried! His post is worth reading (including several other of his posts related to this mess).

I believe the root of this problem goes back several decades, but can be diluted to a short phrase...AFFORDABLE HOUSING and Fannie Mae and Freddie Mac are the culprits along with several policies affecting their operations over the last 40 years. As Kevin Hasset posted on Bloomberg.com on 9/22, "Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened."

So, what are the policies which made Fannie and Freddie the liabilities they would become?

1. The creation of Fannie
   As part of FDR's New Deal, Fannie was created as a government agency in 1938 to provide liquidity to the mortgage market. As my friend, DJ McGuire, said in a well-researched post, Fannie was "set up to provide loans to banks that they themselves could loan out to homeowners. Since these were government loans created from a policy deliberately designed to make homes 'affordable,' the banks treated it like the free money it really was, and loaned it out like they were supposed to do. Thus did the government begin artificially inflating property demand."


2. The quasi-privatization of Fannie and the creation of Freddie
   In 1968, to remove the activity of Fannie Mae from the annual balance sheet of the federal budget, the Johnson Administration converted into a private corporation. To provide competition in the secondary mortgage market, and to end Fannie Mae's monopoly, Freddie Mac was created by the Democratic Congress as a private corporation in the Emergency Home Finance Act of 1970 created. The goal was to create a secondary market for conventional mortgages, as indicated in the Fannie Mae charter.
   Again, from DJ's post, "So now, there were two companies, both ostensibly private but with obvious government favors, government ties, and the implied government backing that came with them..." (emphasis added). It was this implied government backing that propped these entities up, with investors knowing that the government would never let them fail!


3. The Community Reinvestment Act
   The Community Reinvestment Act (CRA) was passed during the Carter Administration. It was passed in order to make sure that each banking institution was meeting the "credit needs of its entire community." It sounds harmless enough, but it was used to force lenders to begin to extend credit to less-than-creditworthy people in the name of "fairness" and "diversity."
   According to a commentary by Yaron Brook in Forbes, "The CRA forces banks to make loans in poor communities, loans that banks may otherwise reject as financially unsound. Under the CRA, banks must convince a set of bureaucracies that they are not engaging in discrimination, a charge that the act encourages any CRA-recognized community group to bring forward. Otherwise, any merger or expansion the banks attempt will likely be denied. But what counts as discrimination?"


4. The Community Reinvestment Act Revised and Extended
   In 1995, the Clinton Administration further liberalized the CRA and the Reno Justice Department warned lenders against "redlining" and stated that the Adminstration would take strong action against any suspected instances of the practice. Again, seems harmless enough--even noble--but it was used to force more sub-prime mortgages onto the books. These revisions with an effective starting date of January 31, 1995, were credited with substantially increasing the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans (sub-prime). These changes were very controversial.
   According to Yaron Brook's article, "In a free market, lending large amounts of money to low-income, low-credit borrowers with no down payment would quickly prove disastrous. But the Federal Reserve Board's inflationary policy of artificially low interest rates made investing in subprime loans extraordinarily profitable. Subprime borrowers who would normally not be able to pay off their expensive houses could do so, thanks to payments that plummeted along with Fed rates. And the inflationary housing boom meant homeowners rarely defaulted; so long as housing prices went up, even the worst-credit borrowers could always sell or refinance." (emphasis added)
   
5. Sarbanes-Oxley (SOX)
   In an overreaction to a number of major corporate and accounting scandals from 2000 to 2002, President George W. Bush signed SOX into law, on July 30, 2002, stating it included "the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt." Indeed--complete with the unintended consequences of these types of market-interfering legislation.
   SOX has crippled entrepreneurial start ups, driven public companies private, driven smart business people off public boards, and driven offerings from New York to London. Congressman and presidential candidate Ron Paul has been a vocal critic of SOX, specifically Section 404, citing, among other things, that "Financial analysts have identified Section 404 as the major reason why American corporations are hoarding cash instead of investing it in new ventures."(emphasis added).
   Taking such a large amount of capital out of the market has added to this current "crisis".


6. Refusal to heed warning signs
   In a commentary on Bloomberg.com, Kevin Hasset points out when the "turning point" happened in this mess.
   "Back in 2005, Fannie and Freddie were....enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004...the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even 'on the page' of allowable interpretations.
   "Then legislative momentum emerged for an attempt to create a 'world-class regulator' that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.
   "The clear gravity of the situation pushed the legislation forward.
   "What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.
   "But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter."

Now, I realize that the preponderance of this focuses on the Democrats and what they did over the last four decades. However, I also blame the Bush Administration for not taking a much stronger position in this mess much earlier. Bush's SOX policy and the lack of pushing for the 2005 reform of Fannie and Freddy were also inexcusable! As mentioned in a Politico.com article by Jeanne Cummings, "One of the Bush administration’s signature goals has been promoting an 'ownership society.' To achieve that end, the administration promoted a series of programs designed to encourage consumers to buy homes, stocks and other goods that would convert them into free market advocates."

The Bush Administration has also been quick to bail out the actors in this mess...as I have quipped, we are nationalizing faster than Chavez and Venezuela! Unfortunately, we have a lack of true leadership in this country--and what passes for it often is a poorly disguised populism (as we can see from The One and McCain). The Administration should have said in no uncertain terms that Fannie and Freddie are private entities and not secured by the US government. If that meant the two of them had to go bankrupt, so be it and let their investors take the hit! That is what happens in the free market--entities must be free to FAIL!!!

There is a great article that captures much of my sentiment on all of this in the Washington Post, of all places. Here is a short excerpt (emphasis added):

"I've been financially responsible with my own money. Why should I now be responsible for the fact that you were not?" he said.
This may be a Main Street bailout backlash in the making. The details of the financial crisis are still hard for most people to follow -- what with talk of exotic "derivatives" known as "credit-default swaps" and so on -- but the central fact of the matter hasn't been lost on anyone in this Northern Virginia community: The taxpayers are on the hook for the bad judgment of others.
And they say they don't like it. They didn't break it, but now they've bought it. Political leaders and financial titans say the bailout is necessary to save the economy, but on the ground, in such places as Manassas Park, people think that the bailout will reward the wrong people. There's a sense that too many folks bought houses they couldn't really afford, banks urged them on, common sense went on vacation, and now the grown-ups have to clean up the mess.
"If I spent more money than I have, I don't deserve to have somebody bail me out," said John Owens, 45, a developer who lives on Eagle Court, where three houses have gone through foreclosure.
The anti-bailout sentiment appears to cut across class lines. You hear it from one end of Manassas Drive, the main drag through town, to the other -- from the small, Cape Cod-style homes built with G.I. Bill money after World War II to the muscle-bound houses newly risen along the golf course.
"I'm not overextended," Merkle said. "I didn't buy a large home that I can't afford. I'm not behind on any of my payments. I'm not sure I want the government to take my tax dollars and buy someone else's house for them."

Thank you for your patience and your attention...will get back to the election tomorrow!

Election update--43 days until Election Day!

My analysis of the financial mess is coming...I promise!

Here is the status of the race as of today (and over the weekend):

Electoral-vote.com has a good overview of several new polls over the weekend (a total of 34 state polls--15 released on Saturday, 11 on Sunday, and 8 today).

Iowa seems to no longer be in play...in several polls, The One has shown significant leads (+11, +7, +14). However, might we have some more states becoming swingers? Maine is within the margin of error (The One +4) and Washington has tightened (The One +6); however, The One has been consistently ahead in both, so unless the wheels are coming off (wishful thinking on my part), I do not see these really being in play. Indiana continues to surprise with McCain showing only a 2-3 point lead. Indiana has been a solidly red state, though, and McCain has been consistently ahead there, so again, I do not think it is really in play either. Missouri continues to track toward McCain, with the latest poll showing a McCain +4. Missouri, which has been a swing state over the last several cycles, has been fairly consistently in McCain's column as well--I no longer think it is in play either.

The polls in FL, MI, MN, OH, PA, and VA over the weekend continue to show that these are indeed the ones to watch this year (along with NM, CO, NV, and NH). I believe that like IN and MO, Florida and Virginia are not really in play this year. McCain has shown a consistent lead in both (although only by 1-2 points currently in FL and 2 points in VA--the smallest amount in a while) and the strength of the military in both states make me think that the margin will not be that close in November. Meanwhile in MN, while only showing a 1 point lead for The One in today's poll, is unlikely to switch to red this year (although I will keep hoping!).

That leaves the Lake Erie states--OH, PA and MI. In the polls released this weekend, The One shows a lead in each of the states with Ohio continuing to be the closest (and the one with the most electoral votes). Ohio polled for The One +2 in one polll and for McCain +6 in antoher. Pennsylvania increasingly seems to be tilting back to The One, with a +5 advantage in the latest poll, while Michigan showed The One ahead in three polls by +1, +2, and +9.

Current electoral prediction (270 needed to win):
Saturday--McCain 265, Obama 273
Sunday--McCain 265, Obama 273
Today--McCain 265, Obama 273

Watch an animated map of the electoral vote since June...

46 days to go--The Financial Meltdown...my thoughts

Sorry, folks...I am trying to write about this mess...but because of the difficulties involved, it is taking more time than I thought. I will try to have a synopsis this weekend!

As for the presidential race...Electoral-vote.com has a good overview of several new polls out yesterday and today (a total of 68 state polls--either The One was closer to the real number of States in the Union than any of us realized, or there are several States being polled more than once!). It seems that the State polls continue to become closer in several swing states--CO, NH, IA in particular. Can it be that OR could come into play?

Current electoral prediction:
Wednesday--McCain 257, Obama 247, 34 tied (PA and VA)
Yesterday--McCain 274, Obama 243 (270 needed to win), 21 tied (PA)
Today--McCain 265, Obama 252, 21 tied (PA)

New Mexico switched back and forth on Wednesday to Thursday,
Colorado switched back and forth yesterday and today.

Watch an animated map of the electoral vote since June...

48 Days Until Election--Barak Obama

It will come as no surprise to any that know me that I have serious problems with the junior Senator from Illinois. My main problem has everything to do with his liberal worldview and his seeming naivete.

First let me say that I doubt that any person elected to the office of President can damage our country beyond repair in four years, so I do not share the near despair about a possible election of The One that some of my conservative brethren seem to have. An Obama presidency will significantly damage our military, our ability to respond to real threats, push our economy over the brink, damage industry, increase unemployment, and move us too close to socialism; however, these things can be overcome with time. I also have the view that it took a Carter to get a Reagan, so Carter II (which The One's administration is likely to be) may have the unintended consequence of giving the conservative movement a needed boost and finally strengthen the Regan Revolution to ascend to power for a much longer period.

I worry about the lack of experience that The One has. He has not had any executive experience and he has held high elected office (US Senate) for only two years before he decided to begin a run for president. During his tenure he has not written any major legislation--not that I am complaining, his politics would make just about anything he would write dreadful. His record in the Illinois State House is spotty, as he would often not vote at all. But my main concern is his belief system--his liberal worldview is very much in line with the socialism of Europe.

He will raise taxes on businesses (by the way, businesses do NOT pay taxes, they pass them on as a cost of doing business--who do you think ends up paying these taxes?) putting strain on them in an economy that is barely hanging on...this will cause less employment and likely increase unemployment. He calls it taxing the "rich"-remember, many small businessmen report their taxes on their personal tax returns...the "rich" are the ones that employ people.

He will continue to oppose offshore drilling, drilling in ANWR, clean coal technology, and nuclear energy. All this will do is increase our dependence on foreign sources of oil. Let's be clear here, there are no viable alternatives to oil for our transportation infrastructure in the near future. There are areas where we can improve and should, but to ignore the reality that we MUST develop our own sources of crude production outside of the Gulf of Mexico--having 25% of our production concentrated in one area is a national security issue.

He wants to sieze the "excessive" profits of the oil companies. Does anyone believe that this will do anything but INCREASE the cost of this product to the consumer? Besides, making 9 to 10 cents of profit on every dollar of revenue is hardly "excessive". Coke, Pepsi, Anhieser Busch, Google, GE, etc., etc. all make MUCH MUCH more. How about siezing the "excessive" profits of trial lawyers, entertainers, movie studios, media outlets?

Abortion...he is wrong on this issue and I will leave it at that. His appointments to the Supreme Court would also be absolutely wrong, but since the most likely appointements will be to replace the liberals on the bench...it would be status quo. I would prefer more conservatives, but at least we will not lose there.

And finally, health care for all...can we trust the government, who cannot handle its duties that are already at its feet, to handle something as important as this??? Your new health care plan--brought to you by the same government who has bankrupted social security and could not handle Katrina.

There are so many other areas, but this is enough for now.

OK--Here We Go! 49 Days to Election Day

I am going to attempt daily blogging (except maybe the weekends) until the election. This election (like the three prior) is VERY IMPORTANT for so many reasons, and I feel I must get my thoughts down on virtual paper!

My friend, DJ McGuire in his latest post about the election has broken it into three main points. His blog is worth the read. I suggest that he is correct that the election is much closer than the conventional wisdom has been willing to mention (at least until lately) and that the election now seems to be trending toward McCain ever since the excellent selection of Governor Palin to be the VP candidate.

I have made no secret that I have not been a fan of the Republican presidential candidate. My longstanding view is that when conservatives do not have someone to vote for, the Republicans lose elections. Governor Palin gives us someone to vote for--perhaps McCain has snatched victory from the jaws of defeat! Over the next few days I will give my opinion on the candidates, the issues, and the current events swirling around the campaigns.

For this post, I will give my estimation of where we are currently...

I am a fan of Electoral-Vote.com and use this site to follow the election. The person who maintains this site is left-leaning, but he tends to give relatively good analysis. It has been this site that has helped me predict the last election.

As you should know, it is the Electoral College vote that counts, not the popular vote. There is a good chance that Senator Obama (who I will refer to as "The One") wins the popular vote by a greater margin than Mr. Gore in 2000, but loses the electoral vote.

I have the following 16 states solidly in The One's column: CA, CT, DC, DE, HI, IA, IL, MA, MD, ME, NJ, NY, OR, RI, VT, and WI. This is a total of 207 electoral votes.

I have the following 25 states solidly in Senator McCain's column: AL, AK, AR, AZ, FL, GA, ID, IN, KS, KY, LA, MO, MS, MT, NC, ND, NE, OK, SC, SD, TN, TX, UT, WV, and WY. This is a total of 227 electoral votes.

The nine swing states (at least as I see them now) are CO, MI, MN, NH, NM, NV, OH, PA, and VA. Right now, CO, MI, MN, NH, and PA are leaning toward The One (total of 61 EVs), and OH, NM, NV, and VA are leaning toward McCain (total of 43 EV's) . With leaning states in the respective columns, McCain leads 270 to 268. My opinion of the swing states is that CO, OH, PA, and NM are the most volitile and will be the ones to watch...

Interesting thought...if McCain takes PA and The One takes OH and all others stay in their respective columns, we get a 269-269 tie (there are several ways this could happen) and it is off to the House of Representatives where each state gets one vote for President (so the congressional delegations for each state vote...this could make for some interesting deal making) and to the Senate, where each Senator gets a vote for VP. Electoral-Vote.com had an analysis of this scenario on September 11 this year.