Friday, September 26, 2008

Financial Crisis? It's Certainly a Mess

I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale. -- Thomas Jefferson
Backtrack to 1977 when the Community Reinvestment Act was inacted during Jimmy Carter's term. The purpose of the CRA is to provide credit, including home ownership opportunities to underserved populations and commercial loans to small businesses. Call it Affirmative Action for home and small business loans.

This law was strengthened in 1995 by Congress, signed by Pres. Clinton, and it was then that this so-called sub-prime mortgage baloney really started to take off. It was part of the liberal plan to provide means of home ownership to those who could not qualify -- or afford -- a conventional mortgage. This was a nice idea, but one which could not work. The backbone of the lending industry is that lendees pay back loans to lenders.

You remember conventional mortgages? Up until recently, in order to buy a home, you had to work and save for the down payment, which was normally 20 percent of the cost of the house. Then you had to be able to prove to the bank that you could repay the loan on the remaining 80 percent. This provided immediate equity, which protected not only the bank, but the home owner as well.

Then along comes the "sub-prime" mortgage. Much pressure was put on mortgage lenders to offer these more risky loans. Fannie Mac offered to buy them. The Justice department threatened legal action if lenders didn't comply. In fact, the law firm that Barack Obama worked for at that time sued Citigroup because they weren't making enough sub-prime lonas. So as time went along, more and more of these risky mortgages were made, until it seemed that anyone could get a home loan. People were even getting loans that were more than the home was valued, expecting home prices would always go up. When will anyone learn that all things that go up, eventually come down?

In 1999, the New York Times observed that eventually the bill would come due because of these loans. How prophetic, even for this paper, which would be expected to fully support a liberal cause.

In 2001, after taking office, President Bush warned Congress to do something about this growing problem, and in 2003 upgraded his warning that the problem could create systemic problems, which means it could affect the entire financial system. Legislation introduced was blocked. Later, in February 2005, Alan Greenspan warned of a collapse. But Democrats, such as Barney Franks, said Fannie Mae should do even more to get low-income people into home ownership.

In 2006, Sen. John McCain co-sponsored a bill to increase regulatory measures over government-back mortgages. The bill passed the Senate (with all Democrats voting against), but never made it off the House floor. See the Fox News report below for a summary.

Now it's 2008. Back in June, we already coughed up $300 billion on this mess.

Now, the same people -- people like Chris Dodd and Barney Franks -- who helped created the problem, want the American taxpayer to bail out these financial institutions that are holding all this bad debt. These American taxpayers are the ones who are working, paying their mortgages, and trying to save for their futures. Now we should be expected to bail out not only the lending institutions, but the homeowners also.

I find it ironic that Dodd and his ilk will hold Congressional hearings to fix blame for this. But he should be a witness, not an investigator.

It just may be that the government -- us -- will have to do something drastic, like buy up all these bad mortgages. Bush says we'll get our money back. But don't count on it. Government has a bad track-record.

Politicians -- who pander for votes -- say this is a good plan. Several large banks will be saved from disaster, and a lot of homeowners who can't pay the bill will get bailed out. In the meantime, those of us who currently pay the bills (the top 50 percent of wage earners pay 95 percent of all income tax) will end up paying even more.

But there are now some 200 economists who say the plan is deeply flawed.

No matter which way it goes, one thing remains. Most of our problems have started with the Federal government meddling in free markets. Yes, there should be oversight against abuse. But when government starts telling free markets how to behave, disaster is around the corner. This has been proven over and over, yet our government does it over and over.

When will the madness stop?

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