Friday, September 19, 2008

On the US Financial Crisis

Steel lays it out plain and simple.
Okay. Listen up. I am going to keep this as simple as possible because it really is that simple. Back in 1929, banks were letting everybody 'play' the stock market. From the guy who washed dishes at the local diner to the truck driver who transported the food to the wife in Waukegan who wanted to have her own nest egg - everybody could play - often with just pennies.

Back then, banks would take those pennies, nickels and dimes and combine them all into larger amounts and enter into the stock market orders to buy OR sell (short) the stocks chosen by all those 'little people'. Margins - the amount the bank required to make those trades of those 'little people' were very small - typically less than 10%. If the chosen stock moved in the wrong way a bit - the 'little people' would be asked to put up 10% of the total value of their holding in that stock. No big deal - confidence was high, the market was moving progressively upwards and everybody was getting rich.

One day, the market moved a lot in the wrong way. This caused a few banks to realize they did not have the funds on hand to 'cover' the trades made by all those 'little people'. But far worse, those banks didn't even have the money to cover the day-to-day transactions of those 'little people' and they were forced to close their doors. The 'little people' panicked and ran to the bank and demanded their money. Word traveled fast, and soon all the 'little people' were pounding on the doors of their own banks all across the land demanding their money, too.

All of this caused the Great Depression. Banks failed, people lost their entire savings and their mortgages went unpaid. At the time, 50% of all mortgages were in default, as compared to just 2% today. Businesses closed. Banks were shuttered. Brother can you spare a dime time. In their infinite wisdom, Democrats blamed the banks for allowing 'little people' to participate in what was obviously a far too complicated endeavor. So Congress passed the Glass-Steagall Act of 1933.

This forbade commercial banks from 'playing' the stock market and allowed for the creation of another kind of bank - the 'investment' bank. A place where smart rich people could risk their money, but whose account minimums and margin requirements were way out of reach of the 'little people'. 'Little people' were encouraged to save their meager funds in commercial banks with federally insured deposits and stay the hell out of the stock market. This was the law of the land until 1999.

Then came the Gramm-Leach-Bliley Act of 1999. The pie chart above shows the Senate vote allowing the final passage of GLB - the vote was 90-8 in favor. Only seven Democrats voted against the GLB Act. Bill Clinton signed it into law. This allowed banks to once again offer 'investment' services to 'little people'. Portfolio management. 401Ks. Retirement funds. All vehicles which traded the various markets - primarily the stock market, REITs and equity funds.

But once again, in their infinite wisdom, Congress allowed those commercial banks to seek their own asset protection. This was usually in the form of 'insurance' or trading into 'hedge funds' to alleviate or mitigate the risk involved. All was good. Everyone was getting rich again. They were getting so rich in fact, that they needed to find creative ways of avoiding taxation. The best way to avoid taxes for most people is to have a mortgage.

Well, the banks were only happy to oblige. They began offering mortgages to anyone. You may recall how several banks were even offering home loans to illegal aliens with nary a blush. The chairman of the Senate Housing Committee, Barney Frank, demanded that the requirements for home loans be reduced even further - to allow the participation of all races, colors and creeds - even more 'little people'. The banks knew there was an inherent risk in doing this and they balked. So Fannie Mae and Freddie Mac were created. Basically government entities which guaranteed all those risky loans. Subprime loans. Ninja (no income, no job, no assets) loans.

Along comes an Internet bubble burst, a spike in oil, unrest in the Middle East and WHAMMO! Lots of those 'little people' once again were unable to pay their mortgages, many now 'adjustable rate mortgages' - liberally offered as additional enticements to the 'little people'. Nothing down! Pay later! A few banks fail, no thanks in part to Chuck Schumer (who is the second most powerful Senator and who just happens to sit on ALL the committees involved in this mess) and large investors became uneasy. They withdrew their money and put it in safer places. This caused a liquidity problem, more banks failed, equity funds shrank to nothing, investment banks which had been buying all of that risk and the companies which insured all of that risk failed. Fannie Mae and Freddie Mac failed.

That brings up to today. Let's review, all of the Democrats who are screaming bloody murder about this crisis now - voted in favor of allowing it to happen - even in the face of historical fact. They repealed Glass-Steagall. They once again allowed banks to service 'little people'. They created government organizations to underwrite the risks. They DID NOT creat any new mechanism of overseeing any of it. In their infinite wisdom, they left that to organizations which were created in the 1930s along with Glass-Steagall. The SEC etc. We were driving Ferraris on dirt roads, all thanks to an accommodating Congress.

Now, you may ask yourself 'why' in THE hell would those idiots do that? Welp, that's easy. Fannie Mae and Freddie Mac became money machines for the Democratic party. Even though they were supposed to be 'quasi-governmental' entities, they were spreading around millions and millions in campaign contributions. And guess who got the lion's share? Yep. Democrats. In fact, Barack Obama, even though he's only been in the Senate for a couple of years was the second largest recipient of those donations in the entire Senate - over half a million dollars in just over three years. Oddly enough, the Democrat who sits at the chair of the Senate Banking Committee was the only guy who received more - Chris Dodd (D-CT).

I won't even mention Charles Rangel, currently under investigation for numerous tax evasion questions, who sits at the chair of the House Ways and Means Committee - the committee which writes all the laws pertaining to taxation and oversight. Are you starting to see a pattern here? Now, just today, Harry Reid and Nancy Pelosi have stated that this mess is 'just too hard' to solve and they are going to adjourn Congress early and let it all fester until after the elections. Both received lots of money from Freddie Mac and Fannie Mae and both voted in favor of repealing Glass-Steagall.

None of what is happening comes as any shock to George Bush. A independent bipartisan panel recommended to him that this might happen over five years ago and he asked Congress for some oversight. They did nothing. They continue to do nothing. Because everyone of those bastards has been bought and paid for by the various entities which are going belly up faster'n fish in a drying lake right now. In fact, most of 'em are so dirty with the money, they have given 'filthy lucre' a new definition - 'campaign contribution'.

You want change? Throw every incumbent legislator out of office in November - especially Democrats. Elect John McCain. He turned down private contributions and stuck to his pledge to use public funding for his campaign - unlike Barack Obama, who after pledging to do the same - reneged and is currently raking in millions from the same dirty sources. John McCain has fought 'special interests', like Freddie Mac, Fannie Mae and corporate lobbyist pork his entire political career. With a group of new and previously unpurchased politicians, he might be able to get some things done.


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Anonymous Anonymous said...

I just commented somehwhere that......if you were a street bookie and you ran out of money to pay your winners--you didn't get a $$ handout--you got your damn legs broke (at least).

7:51 AM GMT+12  
Anonymous jdr1228 said...

Too bad that no one is going to jail or even be shamed for this debacle.

Very excellent summaty of past and present mess. Thanls.

2:14 PM GMT+12  
Blogger Joe Ramen said...

Yeah, everybody suffers except the ones who need to.

And you're welcome, mate, but don't thank me. Thank Steel (see the link at the very beginning of the post.) He wrote it; I just borrowed it because he lays it out a lot better than I could have.

3:20 PM GMT+12  

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