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There’s something rotten in the state of finance

By
September 21, 2008

As I sit here watching Chelsea losing to ManU live, the AIG logo on the chests of the ManU team keeps reminding me of the dismal financial state of America. There are many causes, but mostly three individuals stand out for blame.

Bill Clinton
Phil Gramm
George W. Bush

In 1929, the US stock market crashed, causing a tidal wave of trouble around the globe. Hyperinflation in Germany, (and a speeding up of conditions that brought us WWII) market collapses in England and Asia, African turmoil, and of course, the horrible US depression of the early 30s was the result.

Certain safeguards were erected, including the Glass-Steagall Act of 1933. It established the Federal Deposit Insurance Corporation (FDIC) and created massive bank rules and reforms.

In 1980, the Federal Reserve lost the power to regulate interest rates in savings accounts. In 1999, Bill Clinton signed the Gramm-Leach POS which repealed the ban on bank holding companies from owning other financial companies.

Further deregulation took place after the election of George Bush.

To put it simply, the rules keeping mortgages and securities on a sound financial footing were erased. To make matters worse, financial giants could package bad loans, sell them on a margin to other investors, and those investors could insure those securities against any losses. There are stories of tiny companies, with little or no assets, insuring billions of dollars of mortgages, for larger securities companies.

Add to the mix Hedge Funds and Derivatives, and you have a completely unregulated mess, with massive wealth transfer, huge potential profits, and greed providing far more incentive than rational thinking. When your secretive hedge fund is limited only by the contracts governing the particular fund, unadulterated greed led them to complex strategies such as short selling, entering into futures, swaps and other derivative contracts and leverage.

Hedge Funds and Derivatives, added to margin trading, caused these markets to have an estimated $37 TRILLION (get used to that word. You will hear it a lot) in alleged assets, covering $2 trillions in real property values. So long as money was cheap, interest rates low, and credit was flowing, rising property values would make everyone in Wall Street extremely, extremely wealthy.

But remove any growth in property values, and this artificial house of cards collapses. In just four days, previously greedy, unregulated, privatizing, free-marketers went from the Ultra-Friedman capitalists, to the most ardent Socialists, demanding the Uncle Sam save their butts.

Bush, even with his political tin ear, knows who his real master is. (Hint – It ain’t the American citizen.) When Wall St. calls, he responds. He scared Congress into giving the Treasury unlimited powers to help his buddies, the “Haves” and the “Have Mores”.

Even though you are reading about $700 BILLION as the magic number, the real cost will be closer to $1.5 TRILLION, perhaps even 2, to the US taxpayer. Worst yet, NO STRUCTURAL changes will be demanded, no re-regulation will be done, no penalties or sanctions will be assessed against the financial leaders who caused this mess, despite many experts warning about this exact mess. Paul Krugman at the NYT is not only a trained economist, he writes today about just how bad a deal this “fix” will be.

http://krugman.blogs.nytimes.com/2008/09/20/no-deal/

4,000,000 households are in foreclosure. This deal does nothing for those 16 million soon to be homeless individuals.
Thousands of families declare bankruptcy each week because, despite being insured, they cannot afford paying their health care bills.

Instead of helping those who hurting the most, this bailout and nationalization of Wall Street’s greediest bastards will do nothing to help them, nor will it help with the underlying cause of the trouble.

Watch for the market to realize what a bum deal this bailout is next week. And when you do, remember that John Bush McCain promised to do to Health Care what deregulation did to the Financial Market. And then recall that John Bush McCain still demands that your Social Security be privatized and be controlled by the US stock market. Then ask yourself whose judgment you trust when it comes to this country’s future.

17 Responses to There’s something rotten in the state of finance

  1. pollchecker

    September 22, 2008 at 12:21 pm

    This is absurd.

    Foreign Banks Hope Bailout Will Be Global

    So now we are paying to bail out foreign banks but we don’t get any relief?

    What about the people who were taken advantage of by these unscrupulous practices and lost their homes, as well as took a hit to their credit rating?

    This is BS!

    In 2006, I had an unscrupulous lender suggest I falsify my tax records so I could show more income in order to get a mortgage. That was the end of that deal. But I’m smarter than the average Joe who for the most part doesn’t have a clue mostly because they don’t care enough to pay attention to the truth.

    The fascist state is alive and flourishing in America.

    Watch this from last nights 60 minutes interview:

    McCain Defends Deregulating Wall Street

  2. ekaton

    September 22, 2008 at 12:28 pm

    “This is absurd.”

    You are the master of understatement.

    When I heard Paulson on TV yesterday morning advocating bailing out foreign banks I totally lost it. Good thing my pistols are locked in a safe or I’d have surely assassinated the TV set.

    Its bad enought the taxpayers are being required to bail out these thieves in our own country. Let the citizens of other countries bail out their own thieves.

    THIS IS CLASS WARFARE, NOTHING MORE, NOTHING LESS!!

    Kent Shaw

  3. DejaVuAllOver

    September 22, 2008 at 10:18 pm

    You’ve missed the important point, Rob. Who cares about the economy. Did Manchester United win?

  4. Malibu

    September 21, 2008 at 11:37 am

    Mr. Kezelis, just this morning, I opened my emails and found 58 different companies wanting my mortgage for my home. I normally receive about 5 or 6 each day but the panic for my equity is ridiculous. The greed in America is alive and well. A simple research of my credit rating should show that I have no mortgage and have not dealt in this kind of debt for many years. When we do decide to sell, I assume it would be easier if I simply sold it to the federal government and cut out the middle man. I’ve seen this credit mess fall out for years and chose to put my money in the property and sleep at night knowing that the feds would not be breaking down my door.

    Good commentary!

    Malcolm

  5. Youcanthandlethetruth

    September 21, 2008 at 1:07 pm

    Great article but you are well off on your numbers.
    Paulson said 5 million homes are in foreclosure. The loss from the housing market alone is 100 trillion dollars.

    5 million times an average price of 250k plus 250k in interest over 30 years is 5 million times 500k…2.5 trillion times 40 times leverage equals 100 trillion USD.

    The bill to taxpayers on residential mortgages is 100 Trillion dolllars…want that by check or shall I put it on my newly issued Government Master Card.

  6. Rob Kezelis

    September 21, 2008 at 1:20 pm

    FIVE million households now?
    Shit, that was 4 mill just a week ago.

    the rest of your math scares me too much to respond. Enough said, we are in a huge mess, and it has only just begun.

  7. ekaton

    September 21, 2008 at 2:55 pm

    “Even though you are reading about $700 BILLION as the magic number, the real cost will be closer to $1.5 TRILLION, perhaps even 2, to the US taxpayer.”

    It will be at LEAST this much, and probably even some multiple thereof.

    “There are stories of tiny companies, with little or no assets, insuring billions of dollars of mortgages, for larger securities companies.”

    ALSO, there are thousands of tiny mortgage brokers, as well as local banks, who were given a license to print money. They are allowed to loan large amounts of money backed by only a FRACTION of that amount represented by their true hard assets. Then they are allowed to sell these mortgages into a “secondary market”. Miraculously, they have created hard assets by the issuance of debt.

    For example, and for the sake of discussion, lets say a tiny mortgage company, or a local one-branch hometown bank has $100,000 dollars in assets. They make a mortgate loan for 250,000 dollars. They sell that loan for $240,000 into the secondary market. They now have $340,000 in real, hard assets. Just like MAGIC they are profiting, hand over fist. How is this not fraudulent?

    FRACTIONAL RESERVE LENDING is the ROOT of the problem. It is nothing more than fraud. Its negative effects were held at bay when the loans were held locally, because local lenders made sure the borrowers were on a sound financial footing, verified incomes, and required 20% down payments, so that the borrower would make a good faith effort to keep up his mortgage payments in order to avoid the loss of his large down payment, his own true hard assets. When selling into a secondary market became legal, it was just a matter of time before the house of cards came tumbling down. There was no longer any effort to assure that the borrower could actually pay off the loan because the loan was immediately sold, transferring the risk to the secondary market. Profits exploded, greed took over, and caution was cast to the wind. The borrower was allowed to purchase with no money down, and he was not even required to show that he had any income at all. Default became much easier because the borrower had nothing much to lose, while the originating lender had everything to gain.

    And, then, as Mr. Kezelis writes,

    “There are stories of tiny companies, with little or no assets, insuring billions of dollars of mortgages, for larger securities companies.”

    And,

    “Add to the mix Hedge Funds and Derivatives, and you have a completely unregulated mess, with massive wealth transfer, huge potential profits, and greed providing far more incentive than rational thinking. When your secretive hedge fund is limited only by the contracts governing the particular fund, unadulterated greed led them to complex strategies such as short selling, entering into futures, swaps and other derivative contracts and leverage.”

    And, it is ALL built upon FRAUD.

    And, the taxpayers are required to repair the damage.

    And, yet, the people are not out in the streets, en masse, hanging the bastards from the nearest sturdy lamp posts. This is truly an ignorant, dumbed down, population.

    At least there are some good NFL games on this afternoon, right? And, don’t forget the season premier of “Desperate Housewives” this evening. At least we have our priorities straight, eh?

    Thank you, Rob, for a truly excellent commentary.

    Kent Shaw

  8. frank verismo

    September 21, 2008 at 5:36 pm

    If I told you I was going to remove all the fireproofing and insurance from your house, then re-furnish it with the most combustible materials possible – what would you think my intentions were?

    Provided you were still in posession of your senses you would come to the conclusion that I was deliberately looking to see your house destroyed, would you not?

    This bailout represents the final act in a coup on America. She has proven invaluable to the private international financiers who have built her up, drained her dry and are now disposing of the corpse.

    “We shall have World Government, whether or not we like it. The only question is whether World Government will be achieved by conquest or consent.”
    James Paul Warburg appearing before the Senate on 7th February 1950

    There is not a single event of any importance that this long-held goal of the bankers does not more than adequately explain. From the bulldozing of the Middle East to this latest manufactured crisis – global governance has ALWAYS been the motivation for those who really run things.

    Nothing will ever change until this is fully understood.

    “Some even believe we are part of a secret cabal working against the best interests of the United States, characterizing my family and me as “internationalists” and of conspiring with others around the world to build a more integrated global political and economic structure – one world, if you will. If that’s the charge, I stand guilty, and I am proud of it. -David Rockefeller, Memoirs

  9. Chick

    September 21, 2008 at 6:30 pm

    Malibu, A couple of questions.

    Why are you receiving so much email from mortgage companies while I receive none?

    Since I have no mortgage either, from your perspective, would it be wiser to sell now and run with the money, or hang onto the property?

  10. gazelle1929

    September 21, 2008 at 7:02 pm

    ” . . . would it be wiser to sell now. . ..”

    To whom? Getting a mortgage is gonna be really tough, I would think.

  11. woody188

    September 22, 2008 at 2:16 pm

    Keep your home. The money is about to become worth less than the paper and ink it’s printed on.

  12. ekaton

    September 21, 2008 at 11:33 pm

    There is one class of property that is growing in value, and that is the smaller home, the smaller townhouse, the smaller condo. Those “owning” the McMansions are defaulting, and those that are not are trying to get out of their monster mortgates. I bought my little two-bedroom townhouse, 1078 square feet, 18 years ago for $65,000, and today I would refuse to sell it for less than $200,000. In fact, I refuse to sell it at any price. I bought what I could afford. Many did not. However, rampant, engineered by design, inflation will soon tax me out of my home. When they come to evict me, they better come “heavy” as Tony Soprano’s uncle suggested. I will not go peacefully.

    — Kent Shaw

  13. pollchecker

    September 22, 2008 at 9:33 am

    Bill Clinton is out of office. GW Bush will be gone in approx 100 days. But Phil Gramm actually looms on the horizon as a probably Treasury Secretary (as in someone in charging of overseeing this bank mess). Check this out:

    McCain Campaign Can’t…Won’t…Rule Out Gramm As Treasury Secretary

    And if this bailout package is not bad enough, Big Financiers are already looking for more ways to get our tax money. Corporate welfare is alive and well in America under the watch of Bush/McCain.

    Big Financiers Start Lobbying for Wider Aid

    “Of course there will be fierce lobbying,” said Bert Ely, a financial services industry consultant in Alexandria, Va. “The real question is, Who wouldn’t want to be included in the package?”

    Mr. Ely said the open-ended nature of the Treasury’s plan could be interpreted to mean that the government was open to acquiring “any asset, anywhere in the world.”

    “The question that I am raising — is there any limit?” Mr. Ely said.

    And the reason I included McCain is this:

    Loan Titans Paid McCain Adviser Nearly $2 Million

    Senator John McCain’s campaign manager was paid more than $30,000 a month for five years as president of an advocacy group set up by the mortgage giants Fannie Mae and Freddie Mac to defend them against stricter regulations, current and former officials say.

    So this is just the beginning with no end in sight, ESPECIALLY if McCain, the Great DEREGULATOR gets control of our country. The insurance industry is just sitting there, waiting, frothing at the mouth, watching how this plays out.

    Capitalizing on Crisis: Insurance Profiteers Demand Deregulation

    So it comes as no surprise that, as the Bush White House and Democrats leaders of the Congress are hustling to avert a meltdown of American financial systems that even cautious observers are suggesting could be the worst since the Great Depression, insurance-industry lobbyists are working this week to slip a radical rewrite of regulations that currently empower states to protect consumers.

    Everyone gets their share except we, the people. We get royally screwed. Just bend over and kiss your money, your freedom, YOUR RIGHTS, bye-bye!

  14. JudyB

    September 22, 2008 at 11:16 am

    Blame Clinton only if you don’t care to know why!
    FYI: The REPUBLICANS CONTROLLED CONGRESS IN 1999. The Senate version of the bill, S. 900, The Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act, passed the Senate 90-8 (92%). The House version of the bill, H.R. 10, The Financial Services Act of 1999, was made to conform to the Senate bill in Conference. The Conference version of the bill passed the House 362-57 (83%). When a bill passes both houses of Congress with a greater than 66% margin, the bill is considered VETO PROOF!

    IN OTHER WORDS FOLKS… Clinton had no choice other than to sign the bill…Yes, he could have vetoed it. But Congress would have only voted again, and overridden his veto….and as an added tidbit the bill failed the first time (May 6 1999) passed the second time (Nov.4 1999) Biden voted nay in May but yea in Nov. McCain voted yea both times.

  15. ekaton

    September 22, 2008 at 12:55 pm

    Clinton should have vetoed the bill and forced congress to override. He is complicit. He is a “free trade” (which, with thousands of pages governing is anything but free) globalist. Truly free trade would mean simply no tariffs imposed by any trading partner.

    A real solution to the economic and employment crises in the U.S. would be to repeal ALL income and capital gains taxes and to impose tariffs of at least 250% on all foreign goods. This would finance government operations until reindustrialization in the U.S. is accomplished. Thereafter a 1% surtax on all financial transactions (stock and bond trading, restaurant meals, all goods and services purchases, etc., etc.) would raise literally trillions of dollars a year in lieu of income and capital gains taxes to cover the cost of all government operations, federal, state and local, including national medical care, social security, education and any other “entitlement” programs.

    Payments on the national debt would be put on hold until the U.S. is back on its feet. Foreign and domestic holders of the debt would just have to suck it up and wait for a couple years to be paid back WITH INTEREST. NO MORE GOVERNMENT BORROWING WOULD BE ALLOWED. Pay as you go only.

    All American military must be recalled to the United States and all foreign bases closed. This amounts to a savings of 600 billion or more a year in savings on military expenditures. The only military defense required is that of our own borders, and the Department of Homeland Security would necessarily be disbanded. (Tough shit if North Korea overruns South Korea. Tough shit if Moscow moves into Georgia and Ukraine. Tough shit if civil wars develop in Iraq and Afghanistan. THESE ARE NOT OUR CONCERNS!)

    Sure, we might have to go without the latest and greatest HDTV, the latest and greatest imported car, the latest and greatest trinkets from China Mart, for a year or two, but you’d be amazed at how quickly industry would scramble to rebuild the American industrial base. NO FOREIGN LABOR ALLOWED with the following exception. Foreigners could be imported just long enough to train American workers if qualified skills have atrophied because of the “free trade” abuses of the last few years.

    Are these unprecedented and drastic and radical measures? Sure they are, almost as unprecedented as taxpayers constantly being required to bail out “private enterprise”. Do you want to save the country or do you want to continue on a greed-driven path to total ruin?

    Would a few “national banks” around the world fail including the FED? Probably. Tough shit. They’ve been inflating currencies worldwide, thereby robbing what meager wealth the poor possess for a hundred years. Would there be some “economic dislocations”, meaning relatively wealthy people thrown into the streets? Of course there would. There are already millions starving in the streets. We have little compassion for them. Let a few wealthy thieves suffer for a change.

    OR we can leave everything alone and continue to allow the wealthy crony capitalists to wage class warfare against the politically powerless. We can continue to allow the filthy rich to pocket the profits AND NOW OUR TAX DOLLARS, and socialize the costs (see immediately previous phrase in ALL CAPS).

    — Kent Shaw

  16. griff

    September 22, 2008 at 7:36 pm

    The Republicans didn’t have a veto-proof majority, so that argument doesn’t pass muster. What you had was the illusion of opposition to make you believe the Democrats were opposed.

    Besides, one could argue that the reason we had such “prosperity” during the Clinton regime is because of the Republican Congress. I don’t necessarily agree with that either, but the argument can be made.

    The reality is that the charade of opposing parties is just that…a f**cking act. These things were decades in the making with the full support of both parties.

  17. gazelle1929

    September 23, 2008 at 1:10 pm

    Draconian? Certainly. But would it help? Damn right it would. What you are really calling for, beyond extreme protectionism, is a national sales tax. I’m not a hundred percent certain that one percent is enough, and you might have to adjust some tax rates upward or downward. Certainly not going to be equitable, but when were taxes ever equitable? I am sitting here wondering just how Wall Street would react to a one-percent sales tax on stock transactions, and wishing I could see the faces of the day traders particularly.

    But you don’t go far enough. Do away with credit cards entirely. Put the fat old slobs in the US on a REAL diet. Then require that all cars get at least 50 miles to the gallon and require further that no car be allowed on the road until there is no lien against the title (this last was actually first proposed by Will Rogers a LONG time ago.)

    Ireland is using a tax structure to get rid of cars that pollute. The worst polluters are paying something like an extra 1000 euros PER YEAR just for a license plate(perhaps more, I cannot find the email I got from the tax people over there recently). Some years ago they did the same sort of thing to get rid of the gas guzzlers. Worked a charm it did.

    As to the military, I could not agree more. I read somewhere recently that we have as many as a thousand bases overseas, which I assume includes things like ten-to-twenty person radar setups in various countries. But do bring them all home. We have been playing Texas ranger to the world for FAR too long. And let the Russians have Georgia. Including Atlanta!