The Case For Letting It Burn

While no one should want a major meltdown of the American and world economies, there is a common sense rationale for simply allowing it to burn. I see people going on about a trillion dollars in value lost. But in any real sense, that value wasn't really there.

America has been addicted to credit for almost as long as I can remember. In the real world, credits eventually come due. Over decades, spanning both parties, this government has leveraged our future, spent up social security - and consumers have leveraged themselves to the brink. And with the juice being applied to the Community Reinvestment Act, all this government did was extend downward that same buy it now, pay you Tuesday mentality - primarily dealing with real estate. But it didn't stop there.

More and people borrowed against equity they were, in effect, gambling they would have. Well, lo and behold, it isn't there. So does this cycle, this addiction ever end? Should Americans trust the very same people who first created, then abetted and eventually denied this problem to actually fix it? For heaven's sake, you should know better than that.

That even as they were cobbling together a plan they were looking to protect those same bad credit risks that have been benefiting all along should tell you all you need to know about where the liberal heads in control of Congress are really at. And don't kid yourself that this 700 billion dollars will be enough. As they show no real signs of curbing the types of behaviors that got us here in the first place, there's no reason to believe that problems won't continue to mount. And that just means transferring of wealth through increased taxation, again.

How many generations forward must we mortgage to sustain a standard of living for too many people, one which they don't actually deserve?

Some of the alarmists out there might want to take a moment to consider all the ramifications here. It may sound harsh, but the Great Depression produced many things - one of them was called the Greatest Generation.

The great economic boom of the last few decades propped up by dubious credit has produced a generation or two that thinks enough is never enough and if one can't earn it, than you either borrow it, or the government in the form of hard working taxpayers should make sure you get yours in the end.

I'm no financial expert. I realize that without some plan there will be serious pain. But I also know pain is unavoidable in life. And any government that would have its citizenry believe that isn't the case simply isn't telling them the truth.

Unfortunately, our government hasn't been telling us the truth for decades no matter which party was in control. Maybe it's time that they start. However, assuming they won't, it might not hurt for Americans to at least start telling the truth of the greater issue to themselves.

We're cashed out - and everyone is still worrying about politically or financially cashing in.

Next window please: this Teller is closed.

Comments

[mangun]

Date September 29, 2008

Author: John Mangun

BUSINESS MIRROR newspaper, Manila, Philippines

“Outside The Box”

Title: “The Crisis: The Future”

From this column last Thursday: “By mid-2008, the Western financial system was in deep trouble. The incredible corporate failures you have read about are because these companies do not have enough cash to fund their operations or to pay back their clients’ investments and deposits. These firms are holding their share of the hundreds of billions of dollars of non-performing loans, near worthless loans, backed by near-worthless collateral (houses) that have lost a large portion of value, and worse, cannot be sold for cash”.

In the 1928 American Presidential campaign, Republican Party candidate Herbert Hoover ran with this slogan: “A chicken in every pot and a car in every garage”. The thought behind that message was that a Hoover presidency would provide the framework that would lead to individual citizens creating their share of national prosperity, and therefore, having that chicken and car.

Unfortunately, the American public and their politicians took that campaign promise literally, that government could provide people with chickens and cars. Eighty years later, we see the fruits of their actions in the “Financial Crisis”.

In the 20th century, the political/economic/social philosophy was created that the government had the ability to give wealth to its citizens. Individuals no longer had to rely solely on their own efforts but could come to the government for at least a portion of their prosperity. It is a childish belief not unlike my five-year old son asking me to buy him a new toy. However, I have the wealth creation ability to do that; government cannot create wealth. It takes a portion of its citizens’ wealth through taxation.

In order to provide the “chickens”, government attempted to earn an income on its own by owning and operating businesses. The best example is post-war Great Britain where virtually all major industries, coal, transportation, power generation, petroleum, airlines, were government owned. The principle was that if government could generate legitimate income, then it would have the money to buy the chickens and cars. That policy failed miserably.

The only alternative to get the money was for government to borrow the funds. And this has created a 50 year philosophy that, if government could do it, then every person could borrow their way to personal prosperity.

Wealth as a result of personal productivity and innovation has been replaced by wealth through creative financing. America and Western Europe has conditioned two generations that a person can have everything they want and never have to pay for it as long as they can meet the monthly amortization.

Now because of this major global financial predicament, the West has learned that you cannot borrow your way to economic growth and prosperity. What will the future bring?

Over the next three years, major global economies (especially China) will slow significantly. American and European consumerism will fall like a rock, as they will actually have to pay for what they buy. Corporate expansion will come to a near halt for the same reason. More US jobs will disappear.

However, the net result will be a stronger and sounder Western economic base and that is good for everyone.

The global debt party is over and now we have to live through the morning-after hangover. Nevertheless, with the severity of this debt hangover, we will see fundamental changes in the way the West does business as happened in Asia after 1997.

This crisis had to happen not only because it is a result of the debt excesses but also because it was the only way to get the West off the drug of false wealth created by borrowed money.

Real global economic prosperity was sacrificed for the illusion of false wealth. That has now changed. The next decade will see global growth and prosperity such as the West experienced in the early 20th century prior to World War I with productivity and innovation creating sustainable wealth

[redherkey]

Your instinct is dead-on. As one who manages operational risk for a global financial processing corporation, we work very hard to take our lumps as soon as we can, as this kind of risk tends to accumulate "interest" at a geometric to exponential rate. Simply refinancing this disaster only ensures a collapse in 10-20 years of at least an order of magnitude greater impact. It's like trading a 6.0 earthquake for a 7.0, or a category 3 hurricane today for a category 4 in 10 years.

Sure, for Pelosi, Reid, Frank and the other engineers of this crisis, that's a deal to take if you can get it. They're retired in 10 years and the greater disaster occurs on someone elses watch. There's enough time to muddy the waters and plausibly blame it on someone else. It's also a deal for fools to take who aren't implicated in creating the mess. The House Republicans showed for the first time in years that they had some awareness of survival skills.

If they had further courage, they'd stand on the steps of Congress tomorrow and call for Reid, Pelosi, Frank and all other politicians implicated by donations and decisions to avoid appropriate oversight to resign. No reform can be done when the criminals are still running the show. Congress must start by recognizing where this problem originated: AT HOME. This isn't about Main Street or Wall Street (god help us if we hear that line any more). It's about Capital Circle.

The Republican House made some good steps forward today, joined by some principled House Democrats who listened to their constituency. Better yet, they let the criminals responsible for this mess expose themselves. Take that momentum and leverage it for reform.

[WAHOO WILLIE]

I liked the dissertation mangun except that it relies on one's ability to earn wealth, presumably through labor physical or mental. What then of those (like me) who are retired and for whatever reason do not want or cannot return to the work force? I'm young enough to go back to work if I must but not young enough to start over (safe enough I wont have to). There are those who were planning to supplement income from a realestate sale, or through a 401K, blah, blah. Do we also set those people, the middle class who were determined not to rely on socsec, adrift? There is a bigger picture and the Buffet's will do fine, but the Jone's may be ruined.

[aknot]

You don't know how bad that I want to take the position "Burn Baby, Burn". I actually think it could do us some good because somewhere in there I think we should, in theory, be able to find some basic principles of financial responsibility that would allow us to prosper for generations ahead. Ask me if I would be willing to suffer through four of five years of economic misery - misery so bad that I'm eating mayo sandwiches and ramen noodles for a good meal - misery so bad that I actually have to sell my cars to put food on the table - misery so bad that I use rabbit ears again instead of DirecTv or Cable - in order for my kids to have a prosperous future with a strong dollar, little government debt etc. and I will say right now "Hell yeah.. where do I sign up?"

But the problem is that when misery hits, America isn't going to suck it up and suck it in. Instead, government is going to start handing out trillions of dollars in new social programs to ease the pain. Programs that will still be around sucking money out of our economy when I'm dead and gone and my children are making similar decisions for their children. The pain will be felt, but it will be eased by big government and an even bigger government debt. The programs won't end when the pain passes but will instead be trumpted as what saved us from doom and be a fixture of American life. In this case the immunization is much better than the medicine.

[katablog.com]

The least Congress could have done, if they wanted the bill passed and I'm not convinced they really did, was show us that they had learned some lessons. Instead, the Democrats went about the whole process yelling and screaming the sky was falling while acting like kindergartners on a play ground.

First they "forget" to invite the Republicans to their bi-partisan meeting. Next they lard the bill up with all their little goodies. Followed by Barack Obama going on Face the Nation, claiming he should get all the credit and McCain none. Follow that with lying to the American public about the safe guards and supposed cap on CEOs salaries. Any financial institution could take $300 million of that money and not change a thing. And if they took more than $300 million, they merely had to pay the tax on salaries they paid over $500,000 to their execs. Pelosi's speech was the straw that broke the camel's back. She's dumb, but that seemed like a purposeful spit in the eye - it would have changed my vote IF I'd been ready to guppy up - well that and all her buddies being allowed to vote "nay" and avoid the taxpayers' wrath.

Nope, if the Dems wanted it to pass, they should have been able to get their entire party to vote "Aye". I was pleased to see KS Democrat Nancy Boyda stood with the people she represents. I was was also proud of the Republicans who we've yelled at for years to stand up to pressure, stand up for the people they represent.

[seekeronos]

/agree with Dan and aknot...

We really do need to take our lumps over the next 4-5 or maybe even as long as 10 years (Japan weathered through 15 years of recession from 1990-2005) rather than attempt to pass this off to our children.

And I dimly remember growing up as an army brat, with Dad as a single earner, Mom a homemaker - somehow surviving on $160/month overseas. We'd get by with 10-cent boxes of Kraft Mac & Cheese mixed with sliced hotdogs, baloney sandwiches ... and sometimes, on those long stretches into payday (which in the army of the mid-1970s came only once a month), we'd get by on buttered bread or liverwurst sandwiches.

As I said, dimly remembered, but I don't remember complaining too loudly about it either - food was food.

And while I hope the oncoming decline isn't as bad as I think it might be, if it is, we will get through it nonetheless.

[Lala]

Reynolds just posted this on freerepublic

September 29, 2008

A READER AT A MAJOR NEWSROOM EMAILS: "Off the record, every suspicion you have about MSM being in the tank for O is true. We have a team of 4 people going thru dumpsters in Alaska and 4 in arizona. Not a single one looking into Acorn, Ayers or Freddiemae. Editor refuses to publish anything that would jeopardize election for O, and betting you dollars to donuts same is true at NYT, others. People cheer when CNN or NBC run another Palin-mocking but raising any reasonable inquiry into obama is derided or flat out ignored. The fix is in, and its working." I asked permission to reprint without attribution and it was granted.
posted at 09:22 PM by Glenn Reynolds

[WileECoyote]

Im counting on middle America to not buy nor drink the Koolaide. Obama is an empty suit. Big hat no Cattle kinda guy......unless its someone else's cattle

[Lala]

I like the human spay/neuter clinic part

http://whenwearequeen.squarespace.com/

excerpt

"I think the time has come to call everyone on the carpet. Not just the lenders, and the Ron Popeils of the market, but also those individuals who took what they should not have. No one can look me in the eye and tell me that many, many of the “little guys” taking those loans didn’t know they were not worthy of the risk. Not and keep a straight face, they can’t. If the majority of Americans who received these ultra-risky mortgages are that stupid and have to be saved from their own imbecility, then by all means, let’s bail them out at the same time we send them to the Human Spay/Neuter Clinic and strip them of their voting privileges. And we’ll put them all in one neighborhood with Barney and Chris and ACORN and all the community organizers they want. But we’ll never loan them money again. Not out of my paycheck."

[aknot]

seekeronos, you are missing my point. While I would find it worth it to go through the suffering that watching it burn would entail, our government won't let us watch it burn. We will have a million new social programs that will hold everything together with a bandaid for a little longer. Those social programs will be here forever and we will be much worse off in the long run.

The day of reckoning is is a certainty at some point. I prefer it now. Elected officials prefer it to be on someone else's watch so they will put it off as long as they can and we will pay much more because of it.

Knowing that our options are to 1. Pass the bailout bill and keep government from expanding much beyond the scope of the bailout or 2. Do nothing and watch the fire start only to be extinguished by way of trillions in new social programs that will become a staple of American life... I reluctantly prefer the first option. If you were to throw in the option of a hands off burn to the ground and start fresh... I'd take it in a heartbeat. But it's not on the table with the current congress.

[Worst President Ever]

Risk another Great Depression? You call that common sense? You might want to talk to some of the retirees that can't go back to work and are barely making it now. Get their opinion. See if they feel like spending the last years of their life in abject poverty. Or families that are close to retiring that have built up their 401ks. See if they want to lose all that and go back to work. That is, if they can find a job. 35% unemployment makes for an ugly job market. But hey, who cares, it's just a little pain.

[Lala]

Well, a depression would cure the obesity problem.

[aknot]

Here's the part of this bailout that I am yet to understand. What's the paper worth on a micro scale.

Here's an example.
House bought in 2007. Owner paid $500,000. Put zero down. House value drops to $400,000. Interest rate is 8%. 30 year ARM. Owner hasn't paid a dime on the mortgage.

Estimate for me the value of this mortgage:
1. As it would have been valued at the time of origination assuming owner would have performed
2. What it's worth today to a buyer of the mortgage.
3. What the government would hope to pay for the mortgage to take it off of the books of the bank or holder?

I keep hearing "the Feds can buy this debt for 20 cents on the dollar". What does that mean in english? Does this mean they expect to pay $100,000 to have a first lien on a house worth $400,000 today that was originally worth $500,000? If so... sign me up as a buyer. What am I missing?

[seekeronos]

aknot:

"--- Knowing that our options are to 1. Pass the bailout bill and keep government from expanding much beyond the scope of the bailout or 2. Do nothing and watch the fire start only to be extinguished by way of trillions in new social programs that will become a staple of American life... I reluctantly prefer the first option. If you were to throw in the option of a hands off burn to the ground and start fresh... I'd take it in a heartbeat. But it's not on the table with the current congress. ---"

Well, I agree with you here as well: we (that's the collective we, as often [but not necessarily expressly] represented by our elected officials in D.C.) are not prone to removing ourselves from the comfort zone of persistent consumer debt.

The problem is that by choosing option 1 is that it WILL bring about the effects of option 2 - though delayed, but far, far worse.

It becomes a vicious circle which I believe started with the failure of LBJ's "Great Society" programmes; this lead to the stagflation of the 1970s-early 1980s which in turn lead to the deregulation of Reagan through Clinton eras.

But then that deregulation was further manipulated for (arguably criminal) political gain, and the "bread and circuses" show began (ACORNistas getting to effectively buy votes with subprime cheap loans).

Rome WILL burn. It is not a question of it, but WHEN. And the longer we try to forestall it, the uglier and more costly it will be.

I recall reading earlier today that the bailout was only 12% of the total load of bad debt/sub-prime debt which if the figures run correctly is about $5.8 TRILLION. Add to that the other $630B infusion, and the AIG bailout, and Fannie/Freddie, and we are looking at nearly 2/3 of our GDP.

We might be able to put that off for a few more years if we can find some other bubble to "jiggle the debt" into, but that too will pop.

Problem is, the Dems will likely re-spin that bailout bill into some other unpleasant thing festooned with social programmes.

I reckon we are well past the "people voting themselves increase from the treasury", and well on the path to ruinous oblivion, reduced to the dustbin of history... unless we repent of our greed and desires of something for nothing.

[mary]

"Thus, the Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown. It is pathetic that Congress did not consult any of the many professional economists that have presented - many on the RGE Monitor Finance blog forum - alternative plans that were more fair and efficient and less costly ways to resolve this crisis. This is again a case of privatizing the gains and socializing the losses; a bailout and socialism for the rich, the well-connected and Wall Street. And it is a scandal that even Congressional Democrats have fallen for this Treasury scam that does little to resolve the debt burden of millions of distressed home owners."

http://tinyurl.com/4nokgz

Maybe some of our representatives have been reading. In the end Meredith Whitney over at Oppenheimer, the history major hero and Professor Nouriel Roubini may be the unsung heroes in all of this.

[Philip McDaniel]

Good thread, Dan, and some very though provoking comments and ideas from all -- with the exception of one moonbat -- up to now. Excellent idea put forth by redherkey:

[seekeronos]

Ah, 'tis unusual, Philip, but methinks that the Moonbat Brigade that is responsible for paTROLLing here is off back at the Great Orange Hive Mind (DKos) or TPM or HUffPo, downloading their latest marching orders with visions of government-issued food stamps dancing in their heads.

[SUSAN]

Thanks for a good write up. Enjoyed reading it. So true.

[WAHOO WILLIE]

"Risk another Great Depression?"
Panic in the gray room, worst and I agree! Maybe we should be running the freekin house on this issue.

[Neo]

This morning we hear that Obama wants to raise the FDIC level from $100,000 to $250,000 to "restore confidence". One easy question ..

exactly how many of those "middle class Americans" that have been living from paycheck to paycheck have $100,000 in their bank accounts, let along $250,000 ?

I know I don't. All it does is create a safe alternate to the mattress for those who bail out of the market. Some confidence building measure.

[ajacksonian]

The 'bailout' doesn't address anything - it is a band-aid.

To address the issue, Congress would have to repeal the CRA, get rid of Fannie and Freddie, stop meddling in how financial institutions are supposed to calculate credit worthiness, and stop complaining that someone who *can't* make a mortgage payment requires *my* help via the federal government. The only ones who get bailed out in the plan is: Congress.

No one believes they are serious, even in the Democratic Republic of California where Liberals Representatives get 1,500:1 against the bailout.

In PA Kanjorski summed it up as being two reactions from his constituents: 50% NO and 50% HELL NO.

If you want to 'build confidence' get back to sound accounting principles and repeal the damned legislation that caused this mess in the first place, liquidate the organizations supported by the Federal Government to give such asinine loans, and start staging large perp-walks for those who have led and are leading them, plus their lobbyists and those who took boodles of taxpayer cash from them. The bucket brigade can't help if you got too many holes in the hull... bailing isn't necessary. Kill the conduits and let the market and normal financial forces take over. And get Congress the hell away from deciding what is and is not a good credit risk as they are woefully prepared for that job.

[seekeronos]

Mad Money's Jim Cramer wanted to see the FDIC limits upped to $2,500,000.

I'd venture to say that despite the savings patterns of the typical Joe Six Pack (which is to say, no savings at all) there are many folks whose savings are tied to their small businesses, which frequently may exceed the 100k limit (in aggregate - the smarter folks will disperse their accounts across numerous banks to keep the under the 100K per account limit.

And this becomes a bit of a nuisance as more and more banks collapse.

If there is a massive tsunami of bank failures, the FDIC will not be able to pay out all the savings that have been serving as a basis for debt leveraging, and we may see some FEMA regulations activate which restrict cash withdrawals to some fixed amount per day, or very limited banking with hours/even-odd days keyed to account numbers or SSNs.

Beyond mere savings accounts, there are certain (not all) bank-sponsored money market mutual funds which may or may not fall under FDIC protection as well (I believe that if a typical walk-in consumer bank sponsors it, it is generally covered by FDIC or its investor-grade counterpart, the SIPC -- although there are exceptions, and generally trading in any security that requires a broker registered with the SEC will *not* be insured in any way, shape, or form.

Full SIPC disclaimer here: http://www.sipc.org/how/covers.cfm

[Lala]

Volokh has a discussion on his website - I find this interesting -

Monday, September 29, 2008
[Ilya Somin, September 29, 2008 at 9:29pm]

UPDATE: I also respectfully disagree with Eric's claim that "Nearly every knowledgeable person supported the bill – in the sense of believing that the bill was better than nothing, even if he or she believed that some variation would be even better than the actual bill." A recent petition signed by over 190 prominent economists from across the political spectrum stated that the bailout plan "is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise." They also contend that "If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, Americas dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted." It sure looks to me like this large group of highly knowledgeable people don't believe that "the bill was better than nothing."

http://volokh.com/archives/archive_2008_09_28-2008_10_04.shtml#1222777677

[tom]

Something else the Great Depression produced: Social Security, with no set-asides. A near-revolution on the Supreme Court that would have ended the constitution. The eventual wipe-out of any kind of conservative media. A near-unbroken Democratic majority in Congress for 70 years ensuring an every-bigger entitlement state. Two generations of die-hard blue collar democrats.

That is what comes of "watching it all burn." As the stock market shows, it is the politics that may drive the stock market, but I'm afraid the stock market can easily affect an election.

[Anon]

Obama has proven himself to be worse than my worst expectations of him, not only is he a hustler, with even fewer scruples than Hillary Clinton but he is unable to come up with EVEN ONE real world solution that doesn't involve the Federal government stepping in.

His behavior during the bailout negotiations was disgusting, but he gets a free pass from the media and he will continue to do so. At this point, a youtube video of him eating a live kitten would have to surface to make a dent in the media's fawing coveraging.

Every day I watch Obama I get more afraid of what the next 4 years will bring....I thought it was impossible for anyone to be a worse president than George Bush, but now I'm not so sure.

[Peter W]

I agree with the sentiment but not the practical result. The truth is we are still living with the effects of the great depression on our income and wealth. Another depression would lower the incomes of generations not yet living. I understand that some of us have been living beyond our means but that doesn't require a major contraction to fix.

I agree with you 99.8% of the time otherwise.

[Ed]

Jeez, what's the matter with idiots like you? Burn baby burn indeed ... DUMB BABY DUMB ... Get out of the way and leave decent folk alone!

[JG]

"I'm no financial expert"

That would be correct.

You seem to conflate personal spending habits with institutional and government spending policies, and that is certainly troubling. But perhaps the worst part of your diatribe is your callous call for higher unemployment, massive price increases and severe hardship, all in the name of character building.

The conservative cause is morally bankrupt. And this is the proof.

[Peter W]

JG---"...all in the name of character building."

Whereas liberals do it in the name of socialism.

[mary]

"Posted by guest, Sep 30, 2008 2:04PM

"If we are determined to violate personal property rights, I prefer it be done through a forced debt forgiveness and a forced capital restructuring (debt for equity swaps), rather than through a massive bailout (any of the various forms of the Paulson Plan). The Paulson Plan destroys capitalism (those who stood to gain--and already made off with large gains--should bear the risk) and violates the spirit of democracy established by the Founding Fathers of the United States."

http://www.tavakolistructuredfinance.com/TSF8.html

What is really bothering most Americans is Hank's "my mind is made up, don't confuse me with facts" mentality. This mentality prevents him from thinking out of the box and reaching out to bankers and economists and "getting this done".

Maybe we need a financial "Manhattan Project"'

http://dealbreaker.com/2008/09/what-we-have-here-is-a-failure.php

[Barbyrah]

"How many generations forward must we mortgage to sustain a standard of living for too many people, one which they don't actually deserve?"
Question: What are your criteria re: who "deserves" a home? And what criteria do you use re: who doesn't?
As for me...me thinks the whole thing has been more than a little backwards. I meet people with huge hearts and an unabashed desire to contribute to the greater good...who get paid $10.00 an hour, not because they're not smart, or capable, or skilled, but because their line of work is seen as "less than"; I see others whose motto is "Screw everyone but me" while raking in the dough simply because of who they know, or of how they play "The System." So are you saying the former don't "deserve" a lovely place to live, and the latter do?
If indeed such is the case...maybe that's the real problem.
I wish you well.

[Mark Gillis]

"The Case For Letting It Burn
. . . .
Some of the alarmists out there might want to take a moment to consider all the ramifications here. It may sound harsh, but the Great Depression produced many things - one of them was called the Greatest Generation."

Uh, yeah, it does sound harsh. Building character is a great thing, but it should be a private matter, not one instigated by a huge public crisis. Further, in addition to creating the Greatest Generation (and I think that concept is bogus anyway), the Depression also had a number of very nasty side effects, such as quite nearly destroying the existing democratic regimes in favor of fascism or communism, and certainly contributed to the onset of World War II. Need I go on.

In closing, I would suggest you get Riehl. If you want to have your own private depression, be my guest, but I can do just fine without having the world crash in around us.

[George Bruce]

" At this point, a youtube video of him eating a live kitten would have to surface to make a dent in the media's fawing coveraging."

That wouldn't do it. The followers of the Dear Leader would simultaneously claim that it wasn't Obama, that he was only giving the kitten mouth-to-mouth resuscitation and in any even, the kitten was a racist, homophobic, sexist, greedy capitalist and really deserved it. Then they would say that Sarah Palin eats millions of kittens everyday. Obama would then pick up votes from left-wing kitten lovers everywhere because he only ate one.

As for letting it burn.....I want to them paper over it for a few more years. My house in the country is not ready yet.

$700 billion? Make it $1400 billion. It is not like that money will ever be repaid anyway.

[mangun]

Allow me to share a prior column
Date September 22, 2008

Author: John Mangun

BUSINESS MIRROR

“Outside The Box”

Title: “The Crisis: The Explanation”

It is as complicated as trying to trace one noodle in a plate of spaghetti. I was asked during a recent television interview, “Who is to blame?”. That is like asking who is to blame for a bowl of tangled pasta. The guy who invented spaghetti, the cook, the sauce, and the one who is eating. No one is to blame; everyone is to blame for “The Crisis”.

What is the root causes for this global financial crisis? There isn’t any. This crisis is the result of a progression of events. US government policies created a legal framework that the financial institutions maximized for their business interests and consumers participated so they could get wealthier, all for the purpose of a long term housing boom.

Home ownership is a critical part of Western economies. This is why government policies are geared to keeping a continuous boom in the housing industry.
In the United States:
Housing contributes about 14 percent of US GDP.
Home equity is the largest share of household wealth.
Residential assets are worth nearly $10 trillion, equal to one year of US GDP.
About 40 percent of monthly consumer spending is housing related.
Annually, more than $1 trillion exchanges hands from home sales.

However, in the West, no one ‘buys’ a house. They borrow the money.

During the Bill Clinton administration, lending institutions were strongly encouraged to broaden the base of homeowner borrowing. The power of government-backed financial institutions Fannie Mae and Freddie Mac to guarantee these loans was greatly expanded so that much lower-income people could buy a house. With more people being able to borrow-to-buy, the housing sector boomed as housing prices increased continuously over a decade and individual wealth grew fantastically as the value of their homes increased.

During the Clinton presidency in 1999, Congress passed the Financial Services Modernization Act (FSMA) that repealed the Glass-Steagall (GS) Acts of the 1930’s. In response to the Great Depression, GS separated commercial banking and investment banking. The Great Depression was caused in part by banks loaning money for speculative buying in the stock market. When the market fell, those loans could not be repaid and the banking system failed.

Commercial banks borrow money from depositors and loan money to businesses and consumers. Investment banks and stockbrokers use client funds for speculative investments like the stock market. GS prevented the banks from acting like stockbrokers and the reverse.

Since the 1970’s, banks and investment brokers often crossed line of their respective businesses. Brokers were paying interest on uninvested funds (money market funds). Banks were offering brokerage services through affiliates and subsidiaries. However, with FSMA, the line between banks and brokers was officially and legally eliminated. Investment companies such as Merrill Lynch and Lehman Brothers could now act as a bank would, offering depositor services, but using those funds for investments way outside of simple business and consumer loans. Banks bought out and took over investment companies, as Smith Barney (broker) becoming part of the Citigroup (bank/insurance). Banks were brokers and brokers were banks. Now they were called “Financial Services Companies” (FSC). And they were incredibly successful.

Although accounting for less than 3 percent of the total US GDP, FSCs eventually booked 30 percent of all US corporate profits.

Government policy was to increase home ownership and the lenders were making a fortune cooperating. One way to get more borrowers was to lower the credit standards to receive loans. These were called ‘sub-prime’ loans meaning the borrowers had less than a ‘prime’ credit rating. Government ignored these bad lending practices as they achieved the goal of more homeowners. The private sector did not care because it was making lots of money. Existing homeowners were happy because home values were always rising and with more credit available, they could buy home number two or three as an investment.

As lending criteria loosened significantly, the natural progression was the kind of loans finally made in the last two to three years; “NINJA” loans. “No Income No Job or Assets” loans. Home lending became almost like a pyramid scheme, with a constant demand for new participants to keep the pyramid of rising home prices going, and these new ‘investors’ were brought into the pyramid through borrowed money.

When the line between banking and investing disappeared, the banking side of the FSCs that loaned the money, put many of these loans in investment packages, and ‘sold’ them to investors on their brokerage side. This increased the amount of money available for lending. Institutions around the globe bought these packages as a good, safe investment vehicle. After all, Fannie Mae and Freddie Mac guaranteed almost half of all US housing loans. Further, ‘the packages’ included thousands of individual loans spreading the risk of loan default. Housing prices had increased almost without hesitation for more than a decade so the underlying collateral of the loan was solid. These were home loans and people will do almost anything to pay their loan to avoid losing their homes. Increased lending was also fueled by decreasing interest rates from 2001 (6.5%) to 2003 (1%) and rates remained flat for a year.

By mid-2004, the picture could not have been any better. The US stock market rose from 8,000 to 10,000 from 2003 to 2004. There was an almost unlimited amount of global funding for housing loans. Home loan interest rates were at the lowest level in 25 years. Home sales had never been any higher.

Date September 22, 2008

Author: John Mangun

BUSINESS MIRROR

“Outside The Box”

Title: “The Crisis: The Collapse”

From this column last Tuesday: “By mid-2004, the picture could not have been any better. The New York stock market had risen from 8,000 to 10,000 over 12 months. There was almost an unlimited amount of global funding for housing loans. Mortgage interest rates were at the lowest level in 25 years. Home sales had never been any higher”.

That is the backdrop of the near collapse of the US and Western banking system these last weeks.

From 2001 to 2005, buying a house was a guaranteed profitable investment. Hundreds of billions of dollars of lending nearly doubled the price of a house during those years. The lenders made huge profits fueling the housing boom.

The now infamous Lehman Brothers, one of the Financial Services Companies (FSC), saw corporate profits soar by 74% (2003), 39% (2004), 38% (2005), and 23% (2006). In 2007, profits rose 4.8% and now, less than a year later, Lehman Brothers is dead.

How could that happen?

The boom was built on a vicious circle, a complex series of events that reinforces itself through a feedback loop toward greater instability. Higher home prices means more loans which creates higher home prices that fuels more loans.

That economic model is simply a pyramid scheme.

Housing prices continuing to go higher was dependant on lending. The loans used the houses as collateral and the loans being solvent were dependant on home prices going up. As long as new buyers were able to get new loans, the boom would continue. By early 2005, the conditions that boosted the property sector (and the FSCs) from 2001 to 2004 were about to end.

In order to keep home buyers coming in, new loans had to be generated and this was accomplished by lower lending standards. Furthermore, more money was needed to fund the lending so bigger and more complicated loan ‘packages’ were created to attract global institutional money. Continued lending and the boom times depended on three critical factors.

The first was that home loan interest rates stay very low so that almost anyone could afford the monthly amortization. In order to make that amortization as low as possible, a large percentage of the loans, nearly all the ‘sub-prime’ loans, were ‘variable rate mortgages’ (VRM). The interest rates on VRMs are based on prevailing rates that change and perhaps go higher if general interest rates increase. ‘Fixed rate loans’ are higher than prevailing rates but the rates never change. From 2001 to 2204, interest rates were at historic lows.

From August 2004 to July 2006, interest rates increased every month going from 1% to 5.25%. Over this period, the cost of monthly amortization increased and thousands of these new homeowners could no longer afford to pay their loans and the FSCs found themselves with millions of dollars of loan defaults, with the amount growing rapidly. As buyers defaulted, the banks now had thousands of houses in foreclosure that suddenly flooded the market, stopping the rise of home prices. Housing prices peaked in January 2005.

The second factor was home loan borrowers be able to keep paying their amortization. But over a short time, oil prices doubled and people did not have the money to pay their loans. In January 2004, a barrel of crude was selling at $30. By mid-2006, consumers were paying $70. By mid-2007, prices took off, reaching $147 in 2008. Too many of the housing loans made from 2004 to 2006 were made to people that did not have the extra income to be able to fund their loans and also buy high-priced gasoline. More foreclosures hit the market.

The third critical factor was that the Dollar remain strong. In order to find the enormous amounts of fresh loan money needed, the FSCs looked overseas for new investors and sold Dollar-denominated loan packages. In January 2004, the Dollar Index, which is the value of the dollar against a basket of major foreign currencies, traded at 88. By May 2004, the index was at 90 and the foreign investors were making a killing on both the loans and the foreign currency rate. The interest rate they were receiving on their investment was good and the dollar was strong. From 92 in late 2005, the dollar bottomed out in April 2008 at 71. The lenders, which included great numbers of foreign banks, pension funds, and other financial institutions, were not only experiencing large payment defaults from their ‘investment packages’, but they were also losing money on foreign exchange rates.

The start of 2006 was the beginning of the end for everyone. Interest rates skyrocketed, high oil prices damaged borrowers’ finances, and the falling dollar affected foreign funds for lending. Home sales and housing prices had topped out. Housing loan defaults were accelerating. The housing/credit bubble was bursting because the pyramid scheme could not bring in new players.

The last loan packages created in late 2007 were filled with loans that eventually defaulted causing huge financial losses to financial institutions all over the world. By mid-2008, the Western financial system was in deep trouble. The incredible corporate failures you have read about are because these companies do not have enough cash to fund their operations or to pay back their clients’ investments and deposits. These firms are holding their share of the hundreds of billions of dollars of non-performing loans, near worthless loans, backed by near-worthless collateral (houses) that have lost a large portion of value, and worse, cannot be sold for cash.