OK, I admit it, much as I hate to. The current financial crisis is a result of a lack of governmental oversight and regulation. I hate to admit it because it is a given, as far as I’m concerned, that the government in no way has the requisite knowledge, wisdom, experience, or motivation, to make good decisions about the financial marketplace. And yet, obviously, neither does the management of Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac, Merrill Lynch, or AIG. And the thing is, if it is up to the government (i.e. the taxpayer) to come to the rescue when it all goes South, which it necessarily is, then clearly it must also be up to the government to see to it that this never happens.
The investment banks and hedge funds were investing in packages of home mortgages, turned into complicated bundles passed from hand to hand, growing ever more complicated as they traversed up the chain. And they were doing it at a leveraged ratio of 30 to 1. In other words, they were gambling on weird financial instruments that nobody really understood, by borrowing 97% of the cost of their investments. Fannie Mae and Freddie Mac were leveraging at a ratio of 60 to 1, i.e., they were borrowing 98.3% of the value of their investments. This was being done based on the belief that real estate only goes up and never comes down, and is therefore risk-free. Investment bank and hedge fund managers have walked away from this debacle with billions of dollars in their pockets, while the taxpayers, living and as yet unborn, are left holding the bag. Risk free indeed.
In my margin account with my stock broker, I am legally not allowed to buy stock on margin past a ratio of 4 to 1. In other words, I can only borrow 75% of the value of the stock. The thing about leverage is, when whatever you are investing in is going up, leverage makes you rich quick. The problem is, when your investment is going down, leverage makes you poor just as quick. And when the value of your investment sinks below what you have borrowed, you have to come up with the cash. The real estate bubble, as all bubbles from tulips to internet companies eventually do, has popped.
Even though the underlying basis of this crisis is just the home mortgages that are in default because some home loans were authorized that shouldn’t have been, and even though that still only represents a relatively small percentage of home mortages, nevertheless we have a crisis because the great financial houses on Wall Street leveraged these loans way beyond any rational level. If they had been leveraged at 4 to 1, and the value of home mortgages dropped 25%, they would still be OK. But when you are leveraged at 97% or 98%, then your investments can’t drop at all or you are in big trouble. You can’t meet the margin calls. It’s 1929 all over again.
A major component of the problem is the fact that Fannie Mae and Freddie Mac, and the investment bankers, were making very generous donations to various Congressional Representatives’ and Senators’ campaign funds. The number one recipient of these contributions was, coincidentally, the Democratic Chairman of the Senate Banking Committee, Christopher Dodd, who also got a sweetheart deal from Countrywide, America’s largest home lender, for his own home mortgage. The number two recipient of the largesse of Fannie and Freddie was (hold onto your hats) a freshman Senator named Barack Obama. He got more money from these guys than any other member of the Senate except for the Chairman of the Banking Committee. How do you suppose that happened?
On the other hand, in 2005, three years ago, Senator John McCain introduced a bill in the Senate called the Federal Housing Enterprise Regulatory Reform Act of 2005, which would have placed the exact restraints on Fannie Mae and Freddie Mac that might have prevented this crisis. What happened to the bill? It was killed by Chris Dodd’s committee.
This is all a little bit too complex to be the subject of a TV campaign ad, so Obama blames George Bush, and therefore John McCain, because, as everybody knows, they are one and the same, and McCain blusters about promising to go after the greedy Wall Street bankers. Oversimplifications R Us.
But the real truth is, in this economic crisis, McCain is the prescient reformer, and Obama is the sold-out enabler.
not too complex at all. 30 second ad: number one recipient of funds from AIG, etc. Chris Dodd, number two Obama. sponsor of reform leg. McCain, killed by Chris Dodd. Crisis. McCain, reformer. fade out.
Terry opines, “I hate to admit it because it is a given, as far as I’m concerned, that the government in no way has the requisite knowledge, wisdom, experience, or motivation, to make good decisions about the financial marketplace.”
Let me make your statement more clear: I hate to admit it because it is a given, as far as I’m concerned, that the Republican government in no way has the requisite knowledge, wisdom, experience, or motivation, to make good decisions about the financial marketplace.
Selective memory can be transparent. The Republicans started off with a 50+ Billion surplus, after 8 years of the Democrats. As has been the pattern over the last half century at least, the “fiscal conservative” Republicans bury the American people in red ink. The only difference is in how spectacular they accomplish their end.
Actually, …. I think they Do have the requisite knowledge, wisdom and experience to make good decisions. They lack the motivation. They’re long caved to greed and behind all the smoke and mirrors, look who’s makin’ out like bandits.
I’d be very interested to see what a Republican executive would do after “winning” the stupendous mess, on all fronts, this neo-con strong-arm administration has created in *it’s* 8 years. Interesting though, how velocity in the wrong direction can still be as exhilarating as in the right direction…
You may have explained the change already Terry, and I missed it, but why is Bush deleted from your header?
I’m not sure who Terry is, but to answer your question, when I switched the blog to different blog software, I had to redo the banner graphic, and I only had room for one quote, without doing more work. So it’s just sheer laziness. I still like the George W. Bush quote, “The defense of freedom requires the advance of freedom.”
Oops, sorry Nick … and thanks for the answer to my question.
Cheers – Brandler
Well, he was already the clear winner, but the financial collapse has absolutely cinched G.W. Bush’s place as the worst president ever in American history.
Back in 2005, John McCain sponsored legislation, supported by the Republicans, including George Bush, to rein in Fannie Mae and Freddie Mac. It was killed by the Democrats in Chris Dodd’s Banking Committee. Chris Dodd is the number one recipient of cash from Fannie Mae and Freddie Mac. Barack Obama is number two.
My guess is that George Bush will be judged by history to be one of our greatest Presidents, but time will tell.
Yes, I know that’s been your appraisal of Bush for many years now. The great sphere of being changes and evolves continuously and everything moves on, and his final rank doesn’t make any difference except as mental entertainment. He’s done what he’s done and not done what he’s not done, and “that big river just keeps on rolling though.” I don’t excuse anybody in the financial collapse. No one gets a pass. I’m reminded of the warnings of you and The Farm folks thirty-five years ago about the inevitability of such a collapse due to American empire, army, ambition, excess, and greed. I, too, thought it would happen, though a quarter century before it actually did. I’m sure the remnant of The Farm for a moment at least wear a wan smile and find it hard to suppress a “we told you so.” It all sure makes good television. A trillion dollar bail-out. Wow! Nervous, sardonic laughter bubbles up in me without warning several times a day.
Bad news for America seems to make many people on the Left happy, whether it’s grim economic news or defeat in battle. I used to be one of them. I guess you still are.