"If you can
keep your head when all about you are losing theirs, it's likely you don't
understand the problem."
If you're
paying no attention, oblivious to what's going on, it's like being on an
airplane when massive heart attacks strike the pilot and co-pilot
simultaneously. Paying no attention, you say, "What's the big deal about a
$700 billion bailout of the banks? Interesting, but that's the banks'
problem, not mine." Until a crash! The amount of money at stake is
incomprehensible.
The primary
cause of the depth and length of the Great Depression, most economists
agree, was a one-third decrease in the money supply by the Federal Reserve,
aggravated by Smoot-Hawley and some other government "cures" (see Milton
Friedman's "A Monetary History of the United States"). For every $3 in
circulation in 1929, only $2 was left in 1933. Unemployment reached 25
percent at the peak. Ask yourself: If one-third of your income disappeared
today, what impact would it have on your family's lifestyle?
Our current
situation, and why everyone in the know is running around crazy-like, is
that $700 billion to solve today's situation may be just the down payment.
You probably have read the true subprime loans losses may be closer to $1.5
trillion. And we haven't even addressed student loans, credit card or auto
loan defaults.
The big banks
that have recently fallen, or are about to fall, in some cases have
leveraged their assets/reserves by 25 to 40 to one according to the
Wall Street Journal. (Typically
local banks are closer to 10 to one). Real estate, by comparison, is usually
leveraged four to one with a 25 percent down payment. When $1.5 trillion is
written down across the entire system, it may decrease the money supply by
up to $40 trillion or more. That's TRILLION with a "T." This far exceeds the
country's Gross Domestic Product of $14 trillion. Is it any wonder that the
president called a special meeting at the White House and government types
and politicians are working 24/7 to head off a catastrophe? No one wants
decimated world credit markets, 25 percent unemployment, even more
foreclosed homes, farms, commercial properties and bankrupt businesses, with
plummeting city and state tax revenues.
It appears
the crisis was sparked by government entities, Fannie Mae and Freddie Mac.
(see WSJ and
Investor's Business Daily,
9/25/08). Some of you are aware that the San Diego Housing Commission was
selling condos with $5,000 "Silent" Trust Deeds, whereby if you made your
mortgage payments for five years, the $5,000 became a gift. CCDC was
offering $75,000 "Silent" Trust Deeds for low-income people to buy
"inclusionary" downtown condos in buildings together with million-dollar
condominiums. All these are sub-prime loans.
Reportedly
Wachovia, as a condition for acquiring World Savings Bank, agreed to give
away a billion dollars to first-time homebuyers, $25,000 a pop, so long as
they financed with Wachovia. These type deals were "encouraged" under the
Community Reinvestment Act. Some say banks were threatened, not encouraged.
Under
political pressure from Congress, Fannie Mae gladly purchased over a
trillion dollars in sub-prime loans (WSJ,
9/23/08), which in retrospect appears pretty stupid. But it was all done
with the best of intentions to help low-income families and minorities own a
home. And former Clinton White House Budget Director and former head of
Fannie Mae, Franklin Raines, was paid $91 million between 1998 and 2004 for
implementing the good intentions.
For those
screaming for more regulation, ask yourself, who will regulate the
regulators? For example: San Diego experienced devastating wildfires last
year. While started by a spark, the extent of the ensuing conflagration is
blamed on government regulations. Regulations that prohibited rural
homeowners from clearing dry brush from around their homes under the premise
that endangered birds could not find new habitat, environmental regulations
against fire breaks being maintained and against removal of dead trees and
underbrush tinder from public lands.
We're told
"deregulation" caused the banking meltdown. Others contend it was the
foolish Community Reinvestment Act and "Mark to Market" arbitrary accounting
standards adopted after Enron that is aggravating the problem -- not the
deregulation of the 1933 Glass-Steagall Act. Without Fannie and Freddie as
facilitators, the subprime loans might have been contained within a few
banks. One thing is for certain: We are flying without a pilot, a co-pilot
and a crew (President and Congress) -- and we need to find a pilot quickly,
before we all crash.
Nancy Pelosi
said on Sunday "We are not giving Wall Street a blank check." Obviously,
it's not a blank check -- it's a check for $700 billion -- just the down
payment.
