Understanding what happened to us so that we can resolve our economic crisis. [View All]

[keopeli]

What if?

Assumption:

We live in a global economy.

Since this perspective is universally viewed, and because the need for a solution is pressing, defense for this assumption must be postponed. Thus, if a reader disagrees with the assumption, the remaining argument fails to take the initial pose needed to proceed convincingly.

Proposition:

To resolve the current market confidence crisis worldwide, there must be a unifying event.
The world is currently in a storm with two fronts: the global financial situation is in recession, and the U.S government has caused a collapse of confidence in a previously reliable system of market evaluation.

How did this happen?

How did the U. S. cause the collapse of confidence? Allow me to summarize a more enlightened viewpoint than my own.

http://www.huffingtonpost.com/david-fiderer/emtimeem-rewrote-history_b_168503.html

Because the U.S. currency and economic system has been built on a foundation of regulation and self-scrutiny together with a protracted history of growth (over 50 years), much of the world, including the most recent contributor, China, has invested heavily into the long-term stability of the U.S. economic system.

Many different steps over a course of years by two classes of people precipitated this event. The first is a class of fraudsters. It goes without saying that many people come by large sums of money through fraud. Fraud is the antagonist of confidence. When fraud prevails, confidence erodes and vice-versa.

The second are a class of ideologues who believe that the government should not in any way oversee or regulate economic affairs. This is not to condemn those who believe this as a philosophy to be sound overall. This is only about those who, in the face of real hard evidence to the contrary in an individual circumstance remain staunch in their idealistic position without leaving room for the variables that life affords. That is what makes one an ideologue.

In the U.S. political climate since the mid 1990s, the Republican party has been increasingly composed of these such ideologues. Through a course of successive ventures which solidified their position and entrenched them against any negotiations or discussions (i.e. the overtaking of both houses of congress for the first time in over 50 years, the successful gutting of regulations in various industries including how public resources are used and distributed, how laws are applied and enforced and how financial institutions are composed and regulated).

The same cannot be said of the Democrats. Although there may be some that concur with the principle of abandoning government’s traditional role, they were not in power during the crucial years that created our current conundrum.

The years in question are from December 2000 to January 2007. Note that these years are marked by complete control of both houses of Congress and the Executive Branch by the Republican Party.

*I recognize that in December 2000, Clinton was President and Congress was Republican. However, they key event in question was legislature inserted into an 11,000 page budget bill that The Republican Congress passed and Clinton signed during his lame-duck period before George Bush took office (and after the Supreme Court chose George Bush as the victor in the election). Clinton was in no position to veto a bill while Congress was in recess and he had one month remaining to serve. It was up to the next President to determine if there were problems with the legislation that needed review, just as today Obama is responsible for reviewing legislation that has passed since his election in November at the very least.

The period from January 2001 to December 2002, when republicans had near complete control (the Senate was evenly divided, ensuring deadlock at the very least) there were two historic reductions in revenue by the U.S. government. Taxes were reduced by unprecedented amounts which caused the country to go into debt…a lot of debt. (Ironically, this is the issue the Republicans ran on in the 90s and won – that the U.S. should not be running a debt but balancing a budget. During a speech immediately following Reagan’s term in 89 at Pepperdine University that I attended, he espoused that his number one wish for the future of our government was to adopt a balanced budget – a goal Clinton and a bi-partisan Congress achieved a few years later).

The Republicans gained full control of both the Congress and Executive in total in January 2003. Note that, not only is that precisely when the Iraq War began (a multi-trillion dollar proposition originally billed as a low-cost affair that would pay for itself), but it is also when the first subprime mortgages began to appear under the fraudulent terms of Ameriquest. It is also when the S&P and Moore’s security ratings detached themselves from oversight responsibility and simply rated mortgages and derivatives by what they industry said the value was. Congress, for their part, removed themselves from oversight by defunding the SEC – the body that oversees and regulates securities. The Executive, full of ideologues mentioned above, was pleased with the downgrade in regulation and concurred.

Then, in January 2004, the wolves were turned loose. Massive defunding of oversight by the SEC permitted the growth of dubious firms that practiced fraud by praying on the elderly and less-affluent, selling them mortgages they could not afford with terms that required no money down and were structured like time bombs to explode a few years down the road with massive interest rate increases.

By doing this, they created monetary instruments with no value – because they had no equity. To explain, consider this: what is the value of a normal house sold to a normal qualifying individual? What is the value of that mortgage if things go bad? First, there is the value of the property itself. By reclaiming the property (foreclosure) a bank or funding body can recoup at least a portion of their investment. Secondly, there is the initial deposit required. Normally, a 20% deposit is required in cash for a mortgage. Why? So that, if things go badly, there is some value in the mortgage. This cash infusion along with the property value and the steady employment of the individual create the equity for a mortgage.

When mortgages were given to individuals with no down payment, the first leg of the three-legged stool was removed. Alone, this might be ok. But, there was fraud in the lending practice. Without SEC oversight and because S&P and Moore’s stopped actually monitoring instruments to rate them and instead trusted the companies, fraud entered into the picture – a lot of it. Companies, knowing they would not be scrutinized, lent to people whose jobs did not qualify them for the mortgage. They could pay it as long as the interest rate was 0 with no money down. Once the rate increased dramatically, they could no longer afford to make monthly payments. This fraud knocked out the second leg of the stool. But the third remained – the value of the property.

In January 2007, precisely when Democrats returned to control both houses of Congress (ironically due to the Iraq War mess, though the economic issue was more prescient), the truth about the fraud began to emerge. A fear among Wall Street Investors caused the value of many companies to plummet and confidence to fall. This occurred at the same times that many mortgages began to default due to the fraud perpetrated. As a result of this calamitous meeting of two unpleasant realities, the value of the properties that had been mortgage began to fall precipitously. Worse, there grew a lack of confidence in any valuation of the properties because the fraud had created a lack of trust. But, the solvency and reputation of the Central US Banking system reassured investors that their investments were secure.

By this time, the US economy was receding. The only principle holding investors’ confidence was the sound U.S. banking system’s backing of these institutions. That backing disappeared on September 12, 2008 when Henry Paulson, head of the Treasury, refused to back the sale of Lehman Brother’s to a potential buyer. They said they could not guarantee the value of their subprime mortgage investments (and there were a lot of them). Suddenly, investors looked at their current portfolios and did not know what the difference was between Lehman, Bears, Merril Lynch, etc. What’s worse, Lehman Brothers accounting was reportedly quarterly like everyone, but was scheduled a month ahead of most everyone else. Since the market had been declining, would all the other investment banks report disastrous losses in the coming month?

Confidence in the U.S. treasury and investment industry froze. There was no equity left in the many many subprime mortgages. Worse, current trends allowed (even encouraged) by the US Congress while in complete Republican control permitted instruments like subprime mortgages to be bundled with hundreds and hundreds of other instruments, so much so that separating them to value each became impractical. As such, all of the investment portfolios of all banks who held these combined instruments were called into question.

All lending froze…literally froze. With a US election one month away, the economy had completely frozen. When the outcome of the election saw the Republicans lose their last lever of control, the Executive, the Treasury made a final move of “harry-karry” when Paulson refused to dedicate the almost 800 Billion Dollars that the Democratic Congress had coughed up to restore confidence to bolster the subprime mortgage instruments. Instead, he said banks could do whatever they chose with the funds. Of course, this did nothing to restore confidence to investors. While it made some bankers very happy (and more rich), it did nothing to solve the problem and, in fact, made matters worse.

How do we overcome this problem?

Each leg of the stool must be replaced which will take time. The most important is confidence. Investors across the globe must initially believe that fraud is no longer being practiced. Second, the instruments in question must be weeded out of the system and revalued, then re-introduced into the system. This can only be done by the government, since all confidence has been lost in the private sector. This is why you hear about Bank Nationalization so much. The government must acquire, evaluate and re-distribute these toxic debts. Then, she can release them back into the private sector after the job is complete and confidence is restored. Finally, a system of oversight regulated by a broad swath of professionals who are mandated by law and chosen by both political and independent as well as global representatives must be established.

The first step is to realize that the value we had 10 years ago, the REAL value, is still there. All of the property, intelligence, people and resources are still there. While investors can see no bottom since they have no confidence after these horrible losses, the common person can see their house, the ground around them, their property, their jobs, their community and see that all this does have a great deal of value, even if an exact price can not be placed on it today. That REAL value is the bottom of this current crisis and is exactly where we should want to be.

Conclusion

It is no surprise to the author that ALL of the major factors contributing to the current crisis were implemented under the pens of the Republican Party. It should come as a surprise to no one that greed and idealogoy as well as some lingering social resentments and partisanship is what undermined our economy. In the 2000 election, the major theme of the Republican’s was “stop counting votes”, perhaps the most un-Democratic policy ever pursued. Any true Democracy wants every valid vote fairly counted. The Republicans accomplished their anti-democratic “stop counting the votes” meme by suing the Democrats in the Supreme Court (Bush v Gore…not Gore v. Bush) and winning with the support of 5 conservative Republican judges. The Republicans publicly courted the business community over societal interests through an abuse of lobbying that has seldom before been seen. A party who unilaterally entered into a war that, at best, was based on completely false information and, at worst, was deliberately undermining the autonomy of the U.S. so that oil and global US companies could profit.

Fortunately, we are finally arriving at a point where we can begin to see the big picture regarding the problem. Short term financial incentives, such as the 800 Billion Dollar law just passed in Congress, will help. But long term reparations will take many years. It is possible to see corrective measures produce positive results in as few as three quarters under new leadership, which allow for time for laws to be created, funds to be made available, oversight to be implemented, investments to be reviewed and rated, fraudsters to be caught and removed and sound business to resume. 2010 is an ambitious goal to see a turn around. The more likely scenario is that by 2012, the global economy should see recovery as apparent.

Question

Why have you voted for Republicans in the past? Did you know they were demolishing our economy actively? Were you’re / Are you’re primary political concerns value issues, such as loosening marriage license restrictions, advocating birth control measures and education for the poor, government regulation of the health care industry by standardizing insurance schemes and regulating medical companies, etc? If you had known 10 years ago what you know today, would you have felt the same way about the way you voted in 00, 02, 04? Finally, will you change what you consider to be important as you may election decisions in the future?

I hope, for all of our sakes and the sake of our children and future generations, that we eliminate religious rhetoric in politics and demand accountability, oversight and effective government for our great country.

Peace