Wednesday, October 8, 2008

Grab your helmet... the market has crashed

(Some of this is paraphrased and plagiarised, but it echoes how I feel. Nevertheless, it is me talking. - B)

There's a belief we as a society are beyond saving. We all hope this is wrong, but reality is I hear people talk about how they are hurting and the government must do something. If we expect the government to save us, then, yes we are doomed. I am still a relatively young guy, but at no time in my life do I ever recall people so unwilling to help themselves.

When times get tough, banks fail, capitalists make stupid choices, gas prices go up, hurricanes hit cities, the stock market goes down, people can't buy the newest and best toys - whatever it is, they immediately turn to government and tell them to do something... anything. We have grown weak as a nation and as a people. I believe like so many empires before us, we are in the waning days of what was once a great country and pray this is an inaccurate estimate.

There is a tone in the Obama campaign that the rich have placed us in harm's way. The "little man" can't get ahead. It's time to redistribute the wealth, he says. I'm no great student of history, but I think the Bolsheviks tried that in 1917, creating the Union of Soviet Socialist Republic. No, this isn't McCarthyism talking. I'm just saying I'm not rich, and I'm happy to work for my possessions and freedom.

In some of the editorials I read an argument was made. "It's a fundamental reality of human nature that as life becomes easier and better, people tend to become weaker." The media, right along with most of the populace, outrage (and rightly so) over America's financial collapse, pointing fingers at a collective bogeyman called "the rich," while missing the real problem - that a majority of Americans have become weak. If people in the U.S. were strong, anything would be possible. We proved that for more than 150 years of our existence. A weak people, on the other hand, can do nothing. A weak people throws tantrums and makes demands that "the state" restore their trips to Disneyland, dinners at The Cheesecake Factory, and the newest and latest versions of their electronic toys from China."

When you read this I think of Iraq and a quote that said, "There's a belief that America is at war. Wrong. The US Military is at war. America is at the mall."

One thing the American media likes to propagate if FUD - fear, uncertainty, and doubt. No kidding, there's plenty to fear out there. Financial implosion, rising healthcare costs, economic instability, inflation, threatened retirements, unemployment. When it comes to the current situation (banks crashing and financial crisis), Democrats and the media left would lead you, the sheeple, to believe it is all the Bush Administration's fault.

Wrong. It’s this guy’s fault. Alan Greenspan.

It goes back farther, but here’s a small piece of the genesis...

On November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933, which also created the FDIC. One of the effects of the repeal was to allow commercial and investment banks to consolidate. Some economists have criticized the repeal of the Glass-Steagall Act as contributing to the 2007 subprime mortgage financial crisis.

The banking industry had been seeking the repeal of Glass-Steagall since at least the 1980's. In 1987 the Congressional Research Service prepared a report which explored the case for preserving Glass-Steagall and the case against preserving the act.

The repeal enabled commercial lenders such as Citigroup, the largest U.S. bank by assets, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations and establish so-called structured investment vehicles, or SIVs, that bought those securities. Citigroup played a major part in the repeal. Then called Citicorp, the company merged with Travelers Insurance company the year before using loopholes in Glass-Steagall that allowed for temporary exemptions. With lobbying led by Roger Levy, the "finance, insurance and real estate industries together are regularly the largest campaign contributors and biggest spenders on lobbying of all business sectors [in 1999]. They laid out more than $200 million for lobbying in 1998, according to the Center for Responsive Politics..." These industries succeeded in their two decades long effort to repeal the act.

Another “gotcha” is the Community Reinvestment Act.

Take six minutes and watch this video which is a painful indictment of the Democrat's involvement in CRA and its role in our current financial predicament.

And, lastly, read this 1999 NY Times Article which points hard to the Clinton Administration and predicts the calamity of today. Ouch.

In a speech in February 2004,
[1] Greenspan suggested that more homeowners should consider taking out Adjustable Rate Mortgages (ARMs) where the interest rate adjusts itself to the current interest in the market. The Fed’s own funds rate was at an all-time-low of 1%. A few months after his recommendation, Greenspan began raising interest rates, in a series of rate hikes that would bring the funds rate to 5.25% about two years later.[2] A triggering factor in the 2007 subprime mortgage financial crisis is believed to be the many subprime ARMs that reset at much higher interest rates than what the borrower paid during the first few years of the mortgage.

In that same speech, Greenspan had suggested that lenders should offer to home purchasers a greater variety of "mortgage product alternatives" other than traditional fixed-rate mortgages.[3] Greenspan also praised the rise of the subprime mortgage industry and the tools with which it uses to assess credit-worthiness in an April 2005 speech:

"Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country… With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers… Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s."[4]

But what gets me is this - The Fed, even with Greenspan endorsing risky lending, saw this coming.

“Failed economic policies of the Bush Administration,” Obama would have you believe. Hey, Barrack. Guess what.. look to moves made during the Clinton presidency for the source of this country’s woes.

But whether you voted for Clinton or Bush or not. The real culprit is us – the American people. Neither Clinton or Bush or Greenspan advocated that we all go out and buy more house than we could afford. Neither stood on a mountain and said taking Detroit’s 0% financing offer for the truck or SUV was a good or bad idea. WE are victims of our own free will. The unpredictability of rising fuel costs, facilitated by tight supply and a weak dollar (thanks again, Alan), put the squeeze on us and we got caught.

Free enterprise. Capitalism. If the government is guilty of anything it is guilty of not protecting us from ourselves and our insatiable desire for stuff. Time to pay for our mistakes.

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