US Economy

[a_majoor]

An interesting video from Newt Gingrich

http://strongconservative.blogspot.com/2008/10/newt-on-fixing-bailout.html

Newt on Fixing the Bailout

Former Speaker of the House Newt Gingrich provides fascinating insight into the problems that led to the financial crisis triggered by the sub-prime mortgage meltdown.



The investigations into Chuck Schumer, Chris Dodd, Barack Obama, Frank Raines, and Jaime Gorelick and Barney Frank should begin immediately. They are at the very center of this debacle. They were filled with glee when Enron and Worldcom executives went to jail, and rightly so. The American people, and indeed the world, should be equally joyful to see these corrupt politicians go to jail for endangerous the entire financial system, ripping off taxpayers, and commiting acts of patronage that stink of the deepest corruption the USA has ever seen.

Follow link to see the video

 

[GAP]

Spoonful of pork may help bitter economic pill go down
Article Link

WASHINGTON (CNN) -- The Senate's financial rescue plan may have a better chance of passage because it's padded with pork that may be tasty enough to get reluctant House members to bite.

Most of the $110 billion in additions, such as a tax credit for research and development and an increase in insurance for bank accounts, would have broad economic impact.

The benefits of others, though, may not be so evident to most taxpayers.

For example, the proposal includes an excise tax exemption for a very specific type of arrow used by child archers.

According to Steve Ellis of Taxpayers for Common Sense, a nonpartisan watchdog group, current law places an excise tax of 39 cents on the first sale by the manufacturer, producer or importer of any shaft of a type used to produce certain types of arrows.

"This proposal would exempt from the excise tax any shaft consisting of all natural wood with no laminations or artificial means to enhance the spine of the shaft used in the manufacture of an arrow that measures 5/16 of an inch or less and is unsuited for use with a bow with a peak draw weight of 30 pounds or more," Ellis wrote.

The estimated cost of the proposal is $2 million over 10 years, he wrote.  Follow the progress of the $700 billion bailout plan »

Oregon Sens. Ron Wyden, a Democrat, and Gordon Smith, a Republican, were the initial sponsors of the arrow provision. According to Bloomberg News, the earmark provision would be worth $200,000 a year to Rose City Archery in Myrtle Point, Oregon.

A Wyden aide said the Oregon senator did not ask that the provision be added to bailout package, but that doesn't fly with Ellis.

"The bottom line is, this is benefiting a very few manufacturers, and I think most Americans who are either concerned about the bailout package or concerned about the economy are going to be wondering why a provision benefiting wooden arrow manufacturers is catching a ride on the package," Ellis said.

The Taxpayers for Common Sense also reports that the proposal includes such mouthwatering morsels as these:


Creation of a seven-year cost recovery period for construction of a motorsports racetrack: Track owners currently follow a seven-year depreciation schedule and write each year's depreciation off their taxes. The IRS wanted to increase the depreciation timetable to 15 years, which would mean the track owner's depreciation would be cut in half. The measure in the keeps the seven-year depreciation schedule for two years and would cost taxpayers $100 million.


A refund of excise taxes to Puerto Rico and the Virgin Islands for rum: A $13.50 per gallon excise tax is placed on rum imported into the United States. The measure extends to December 31, 2009, a refund of $13.25 per gallon tax back to Puerto Rico and the Virgin Islands, which are both U.S. territories. The refund has been in place since the early '90s. The measure would cost taxpayers $192 million.


Income averaging for amounts received in connection with the Exxon Valdez litigation: The measure would allow the plaintiffs who won damages from Exxon Mobile for the oil spilled by the Exxon Valdez to average the award over three years rather than treating it as income in a single year. The measure was backed by Alaska Rep. Don Young and would cost taxpayers $49 million.


Secure rural schools and community self-determination program: The program replaces revenue rural communities used to enjoy from the sale of federal forest land. The measure is sponsored by lawmakers from Oregon and Idaho. The program would cost taxpayers $3.3 billion.


Deduction of state and local sales taxes: The measure allows citizens who do not pay state income taxes to deduct the amount of sales tax they pay over a year from their federal income tax for two additional years. States that benefit include Texas, Nevada, Florida, Washington and Wyoming. The measure would cost taxpayers $3.3 billion.


Provisions related to film and television productions: In order to keep movie production in the U.S., production companies would be allowed to deduct the cost of producing the films from their taxes. Rep. Diane Watson, D-California, has been one of the program's biggest supporters. The measure would cost taxpayers $478 million over 10 years.
More on link

 

[tomahawk6]

This bailout plan is disgraceful.Whats worse is that according to the Constitution bills relating to money have to come out of the House first.

 

[Redeye]

This bailout plan is disgraceful.Whats worse is that according to the Constitution bills relating to money have to come out of the House first.

Disgraceful, perhaps, but the potential damage to the broader US economy of basically frozen credit markets and liquidity evaporating is extremely dangerous.  Without access to credit facilities businesses grind to a halt - it's a vicious circle because those who lose their jobs then stand much greater chance of losing their homes.  Personally I'd love to see the "financial wizards" who thought all these sidebets on loan assets were a good idea hanged, drawn, and quartered - or gibbeted throughout Lower Manhattan, but that's not going to happen, nor really help.

Ideally a situation like the Swedish Bank Rescue would be an ideal way to deal with the problem while saving taxpayers money in the long run (because in exchange for the bailout the Treasury would take an equity stake in the recipients, later selling it off when the markets recover) but America just wouldn't stomach it because it is basically a socialist intervention... and while most Americans have no idea what socialism even really is they know it's evil.  What continues to gall me about the whole thing is some of the GOP types who talk about big spending while somehow glossing over the fact that a GOP President has basically run the US economy into the ground and continues to do so.  They talk about $700-bil for this plan while glossing over the $635-bil (if I remember the number right) that was handed to DoD last week - and the immense cost of Bush's Folly in Iraq.  It makes watching the debates there a hoot when they talk about Republicans being against out of control spending and "big government" when that's exactly what the Bush legacy is!

The worse thing I wonder about is when the mess spreads into Europe, especially the UK.

 

[tomahawk6]

I have come to the conclusion that this so called economic crisis is contrived for political gain. There does not seem to be a problem with people being able to get car loans, mortages and more credit cards.Most of the banks seem to be in decent shape. The current state of the economy is due more to the effects of high gas/fuel prices. So far all the problem players have been bought out,merged or were bailed out - except Lehman hardly the stuff of a depression.

Then look at the so called bailout with $150b in pork not at all related to the bailout.If the House passes the bill we will see a package of $1Trillion or more. The House will want to forgive these bad loans - so called NINJA loans given to minorities.A NINJA loan is short for no income,no job and no assets. All courtesy of our democrat friends running Freddie/Fannie with their allies in the Congress. I would have loved to get a home loan under those conditions.

I now feel that no bailout is the best thing for the country.
Look at Europe's bailout which say billions given to the banks to losen the so called credit crunch. Guess what ? The banks arent lending they are just sitting on the new money.

 

[GAP]

Soooo.....they pass the 700 billion bailout and the markets nosedive tomorrow, and the Monday after.....what do they do, commit ANOTHER 700 billion?

There's your proverbial 800 lb gorilla nobody is talking about.....

 

[oligarch]

You need a few hours to basically gain a pretty deep COCEPTUAL (not technical) knowledge on the financial cirsis currently underway, watch the playlist:

http://www.youtube.com/view_play_list?p=945E4F0ED131E4D1

If you want to save time, then I suggest watching the vids in this order

Mortgage Backed Securities I, II, III
Collaterelized Debt Obligations
Bailout 5, 6, 7, 8, 9, 10 (or all 10 if you dont know the basics of assets, liabilities, and owner's equity)

Enjoy the knowledge!

 

[Redeye]

There is no political gain to any identifiable party in this mess.  There is not going to be any loan forgiveness, and the net cost at the end of the day is not clear.  When the Treasury (in its neo-Resolution Trust plan) buys up all those mortgage-backed securities then credit markets should loosen up considerably (interbank loan rates are presently staggering and costs of funds are massive - so not a lot of lending is going on at high levels and the conditions are very austere).  In the end, a great deal of those subprime mortgages are not in default and are in fact being serviced, meaning those securities actually have some value in the long run.  It's not as good as what the Swedes did in 1992 but it's not a bad solution either.  Trying to be partisan about it is pretty foolish, but I'm not surprised as it's pretty clear which side of the spectrum you're on.  If you think that fuel prices have anything significant to do with the situation, then you're not really seeing what's happening, as that's got virtually nothing to do with it.  It's making things even tighter for the middle class/working class but it's not at all the root cause.  I do agree that it's hardly the stuff of a depression, but it's still a real mess and simply allowing the markets to clear without intervention will prolong and make worse a bad situation.

I will say I never cease to be amazed with the amount of pork that winds up in any US legislation, especially that has little or nothing to do with the actual subject at hand.  That's quite a difference from Canadian legislation which is generally free of such nonsense - but stronger party discipline mitigates the need to buy off factions.

I have come to the conclusion that this so called economic crisis is contrived for political gain. There does not seem to be a problem with people being able to get car loans, mortages and more credit cards.Most of the banks seem to be in decent shape. The current state of the economy is due more to the effects of high gas/fuel prices. So far all the problem players have been bought out,merged or were bailed out - except Lehman hardly the stuff of a depression.

Then look at the so called bailout with $150b in pork not at all related to the bailout.If the House passes the bill we will see a package of $1Trillion or more. The House will want to forgive these bad loans - so called NINJA loans given to minorities.A NINJA loan is short for no income,no job and no assets. All courtesy of our democrat friends running Freddie/Fannie with their allies in the Congress. I would have loved to get a home loan under those conditions.

I now feel that no bailout is the best thing for the country.
Look at Europe's bailout which say billions given to the banks to losen the so called credit crunch. Guess what ? The banks arent lending they are just sitting on the new money.

 

[a_majoor]

The conclusion is more than a bit rosy (since the United States is the destination for fully 85% of our exports), but the fundamentals of our bank system are sound:

http://network.nationalpost.com/np/blogs/fullcomment/archive/2008/10/02/the-financial-crisis-for-dummies-why-canada-is-completely-immune-from-the-u-s-mortgage-meltdown-kind-of.aspx

The financial crisis for dummies: Why Canada is immune from a U.S.-style mortgage meltdown
Posted: October 02, 2008, 12:41 PM by Jonathan Kay
Jonathan Kay

I know very little about the world financial markets, or even about basic financial concepts. When Financial Post types talk about EBITDA, I assume they're talking about the baby soybeans they serve you in Japanese restaurants. And yet, I was still able to understand this very reassuring Sept. 25 report from Scotiabank that explains, quite persuasively, why Canada isn't going to suffer the same sort of subprime-mortgage-fueled financial-market meltdown that's wreaked so much havoc in the United States.
To make a simple report even simpler, here are the main points:

-- Less debt. In Canada, household liabilities as a percentage of assets sits at 20% — close to the stable, sustainable level it's been at since the late 1980s. In the United States, the figure sits at 26%, after spiking radically upwards over the last decade (as illustrated in Chart 2 of the report).

-- Less crappy mortgages. Canada's subprime mortgage market (to the extent the bottom end of our mortgage market can even be called "subprime" in the American sense) represents only about one in every 20 mortgages. In the United States, the peak figure was about one in six. Astoundingly, up to a quarter of mortgages issued in the 2004-2006 period were in the subprime category.

-- Less debt, Part 2: In the United States, homeowners' net equity as a percentage of home value has plummeted from around 65% to 45% over the last two decades. with more than half that drop coming since 2000. In Canada, on the other hand, this ratio has remained stable at between 65% and 70% since the 1980s. The phenomenon of mortgages going "underwater" — with homeowners owing the bank more than their homes are worth — is now tragically common in the United States. In Canada, it is virtually unknown.

-- Less off-balance-sheet mortgages. The frenzy of mortgage securitization that gripped the United States in recent years (famously explained/satirized in this comic strip) never really took off here. According to Scotiabank "The majority of mortgages are held on balance sheet in Canada, with only 24% having been securitized." That's huge, because it is the radioactive quality of these securities — many of which contain a tangled welter of mortgages of varying quality — that has really sunk the U.S. credit market: Since no one knows how much these complex instruments are really worth, they still haven't established an equilibrium price level, thereby freezing the credit market for any entity that has a large number of them on their books. (What's more, even those 24% have mostly been securitized through the CMHC, a Crown corp. with government backing.)

-- Smarter bankers, smarter standards. Finally, there is the fact that Canada simply has a different — and more prudent — banking culture: "Unlike many U.S. banks, Canada banks continue to apply prudent underwriting standards. In other words, they have always checked, and continue to check, incomes, verify job status, asks for sales contracts, etc., such that all those qursionts your banker asks in Canada have a purpose that somehow got lost on many American bankers. The no-income-no-job-no-asset ('Ninja') style, here-are-the-keys-to-your-brand-new-home lending just didn't take hold in Canada."
Looking beyond the Scotiabank report, I can see some other factors that should provide Canadians with comfort:

-- No bubble in the housing market: On average, Canadian home prices are roughly 200% what they were in 1989. In the United States, the corresponding ratio peaked at 260% before crashing down to 220%. In Canada, the more typical experience is that of my home, Toronto, which has witnessed steady increases in the 4-5% range every year, but none of the sudden surges and troughs that whipsawed homebuyers in U.S. markets such as Miami have witnessed.

-- Fewer foreclosure notices — a lot fewer. This is the most shocking stat of all. In the United States, a full 4.5% of mortgages are in 90-day arrears (i.e. the local sheriff is ready to move in and tack a notice to the door). In Canada, the figure is one 20th that level — just 0.27%. Amazingly, while the U.S. figure of 4.5% represents a doubling of the 2002 level of 2.2%, Canada's 0.27% level reflects a halving from the (still low) level of 0.5% six years ago.

All in all, what do these figures show? A prudent, risk-averse, well-regulated Canadian real estate and mortgage community that — on both the seller, mortgagor and buyer sides — has avoided the pitfalls swallowing up the United states. It's something that Canadians might want to remember the next time Stéphane Dion or one of the other opposition party leaders starts sputtering fatuously about Stephen Harper's "Bush-style" economic policies.
[email protected]

Update: Commenter IMacRae added the following very fine comment, citing two other factors I'd missed. The comment is so good that I'm going to haul it up here into the post itself …

Oct 02 2008
2:51 PM
Two other elements play their part.

Most Cdn mortgages are sold by the lender ie. the bank. Since they are lending their own money, credit quality is a factor in the mortgage officer's compensation. In the US, mortgage brokers arrange loans from a variety of sources on a commission basis. This biases the deal to the highest mortgage amount and encourages fudged income numbers on the applicaiton.

Second, the local loan requirements applied to US banks was threatened in Canada but not enacted. This has generated much of the sub-prime portfolio in the lower-income US neighbourhoods. That most of these mortgages end in default should not have surprised anyone, except the rosy-lensed Democrats who had the dumb idea in the first place.

 

[muskrat89]

but I'm not surprised as it's pretty clear which side of the spectrum you're on.

the fact that a GOP President has basically run the US economy into the ground and continues to do so.

and the immense cost of Bush's Folly in Iraq.

 

[Redeye]

Now, it wasn't meant to say there's anything wrong with that - though on re-reading it may have seemed that way - and to be fair my wife is a very, very committed Democrat (probably the only one from the county she is registered to vote in, but nevertheless...)  but in the case of tomahawk6's posts on US politics there is no ambiguity in his opinion.  It remains to be seen - and I'm interested to see - how this all ends.

 

[oligarch]

In the end, a great deal of those subprime mortgages are not in default and are in fact being serviced, meaning those securities actually have some value in the long run. 

Therefore, as a tax-paying individual who also has a mortgage that ends up in one of these residential CDOs, I in effect will be buying my house twice! Once with the debt that I will continue to dilligently pay, the other with the tax-payer dollars I will provide the government with (part of which being inflation tax in the future, once they get the printing presses going). What a great plan!!

Why not take those 700 billion and pay off the toxic debt? or establish a 'rescue fund' for INDIVIDUALS who can't pay their mortgage? Or better yet, establish a fund and would take over SME lending while the banks are allowed to go bankrupt? Or, given that 700 billion > book equity of all the large i-banks, ESTABLISH NEW i-BANKS!!! The new banks can loan to the old ones and the strong ones will survive! Sheesh of all the posibilities the US manages to take the stupidest one, but the one most profitable to the high ranking executives. Things will never change.

 

[tomahawk6]

Why not take those 700 billion and pay off the toxic debt? or establish a 'rescue fund' for INDIVIDUALS who can't pay their mortgage? Or better yet, establish a fund and would take over SME lending while the banks are allowed to go bankrupt? Or, given that 700 billion > book equity of all the large i-banks, ESTABLISH NEW i-BANKS!!! The new banks can loan to the old ones and the strong ones will survive! Sheesh of all the posibilities the US manages to take the stupidest one, but the one most profitable to the high ranking executives. Things will never change.

:

 

[Lockness]

Lessons from the Japan Credit Crisis...

"Responding to Financial Crises: Lessons to Learn from Japan’s Experience"
Koyo Ozeki | August 2008

http://www.pimco.com/LeftNav/Global+Markets/Japan+Credit+Perspectives/2008/Japan+Credit+Perspectives+Aug+2008.htm

Excerpt....

The financial crisis sparked by the subprime loan problem has intensified to the point where U.S. and European governments have had to extend support to financial institutions, and we believe that governments will need to widen and deepen the scope of this support framework in the near future. Japan’s experience in dealing with bad loans and financial crises serves as an insightful lesson about public support. In this special edition of Japan Credit Perspectives, we reflect on Japan’s financial crisis in the 1990s and early 2000s, then compare it to the present situation in the U.S., and consider the implications for government action.

Part 1: A Brief History of Japan’s Financial Crisis

Summary: The Four Phases of Japan’s Financial Crunch

Japan’s financial crisis persisted for nearly 14 years, from the burst of the economic bubble in 1991 until around 2004, but throughout that timeline there were transitions in the state of the markets and the nature of the crisis. Broadly speaking, we can divide the progression into four phases (Chart 1).

Phase 1 (1991–94): The real estate bubble collapsed, triggering an economic shock. The government responded typically with economic stimulus packages, such as public works projects.

Phase 2 (1995–96): Signs of instability appeared in the financial system. Even as banks failed due to financial difficulties, the government failed to come up with a comprehensive policy package that would address financial system issues.

Phase 3 (1997–99): The bankruptcy of major banks triggered a financial emergency. Through establishment of new laws and budgetary measures, the government nationalized failed banks and injected taxpayer money into large financial institutions. Even so, it was unable to resolve the situation. 

Phase 4 (2000–04): The system again reached a crisis point due to the massive volume of excess debt held by corporations. The Financial Revitalization Program (“Takenaka Plan”) promoted the disposal of non-performing loans, and the government supplied public funds to tottering Resona Bank. These measures finally helped bring the crisis to an end.

Many parallels to the U.S. credit crisis.  It appears the U.S. is in Phase 3 with bankruptcies of major banks and injecting taxpayer money into financial institutions to no avail.  Some good stuff in this report if you are interested.... See link

 

[tomahawk6]

O'Reilly Hammers Congressman Frank

http://www.youtube.com/watch?v=RAuOEdttjZQ&eurl

New Republican ad.
http://www.youtube.com/watch?v=exxVZTKq1vA&eurl\

 

[DBA]

Therefore, as a tax-paying individual who also has a mortgage that ends up in one of these residential CDOs, I in effect will be buying my house twice! Once with the debt that I will continue to dilligently pay, the other with the tax-payer dollars I will provide the government with (part of which being inflation tax in the future, once they get the printing presses going). What a great plan!!

Why not take those 700 billion and pay off the toxic debt? or establish a 'rescue fund' for INDIVIDUALS who can't pay their mortgage? Or better yet, establish a fund and would take over SME lending while the banks are allowed to go bankrupt? Or, given that 700 billion > book equity of all the large i-banks, ESTABLISH NEW i-BANKS!!! The new banks can loan to the old ones and the strong ones will survive! Sheesh of all the posibilities the US manages to take the stupidest one, but the one most profitable to the high ranking executives. Things will never change.

If your mortgage ends up in one of the CDOs it is then owned by the government with all the other mortgages purchased by the government at a discount over face value. If a lot of them don't default the government will end up making money. Possibly a *lot* of money. By clearing some bad debt off the books of the banks they will be more able to make mortgage loans. Hopefully to people who actually have a chance to pay them back so the problem doesn't repeat. The goal is to prevent a lock up of the credit/mortgage market which would harm even those with good mortgages like anybody having to refinance in the next year or two.

 

[a_majoor]

A video of hearings held in 2004 on the GSE's. Note the reaction of the Democratic members and consider what would have happened if the problems had been addressed in 2004 instead of festering until 2008.....

http://cjunk.blogspot.com/2008/10/blame.html

And a very interesting summary of the whole sad affair, with a positive prediction:

Edgelings.com - http://pajamasmedia.com/edgelings -

The End Of An Era

October 3, 2008 - by edgelings

By Michael S. Malone

What if the current Mortgage/Credit Crunch is not just an isolated financial crisis, but in fact the signal for the death of one era, and the (painful) birth of another?

If that is the case, it goes a long ways towards explaining the bizarre nature of what we’re seeing going on in Washington and on Wall Street… and suggests that we need a whole different set of solutions.

Living out here in Silicon Valley, the heartland of American innovation, it’s hard not to be appalled by the events taking place 3,000 miles away in the seats of American finance and government - and hard not to fall back on the ‘pox on both their houses’ attitude that polls say is increasingly common among American voters.

From where I sit, the United States government has embarked on two pieces of social engineering in the last few years. One was to make oil expensive as expensive as possible to drive people to greater use of alternative energy sources - because anything less would be irresponsible and destructive to the environment. The other was to enshrine home ownership (i.e., easy-to-obtain mortgages) as a new American right - because anything less would be unequal and racist.

None of us voted on these decisions - indeed, neither was even spoken about directly, much less debated. But nevertheless, both became national policy… and both have sparked national, now international, crises. Then, once they became crises, both were blamed on ‘greedy capitalism’, instead of what they really were: legislative interference into market forces.

Fine. We’ve been through this before, and no doubt we will see similar, government-induced crises again - inevitably accompanied by Administration officials and our elected representatives pointing at everyone but themselves.

But what makes this particular economic crisis so appalling, at least from this vantage point, is the sheer scumminess, corruption, short-sightedness and general incompetence of everyone involved. At least in the business world, especially in the take-no-prisoners world of high-tech that kind of venality and ineptitude either gets you fired or kills the company; by comparison, in Washington, it puts you in charge of the recovery effort.

Nobody in this mess has covered himself or herself in glory. President Bush seems to have had the right instincts on this, but as a lame duck who long-ago burned up all of his public support, he mostly seems dithering and toothless. The Democrats declare that the nation is at risk… then go about as usual turning the bailout bill into another yet another partisan pay-off scheme to fund the next round of crisis-creating social engineering. It is a measure of just how corrupt the Dems have become that Senators Dodd and Frank, who perhaps more than anyone in Washington are responsible for this crisis, not only are allowed to keep their committee seats, but run the press conference on the bail-out. Quis custodiet ipsos custodes?

The crowning moment of course comes just before the vote on the bail-out package when Speaker Pelosi decided, putting the needs of her country first, to use the podium to attack the Administration and the GOP.

The Republicans, as we all heard, maturely responded to Pelosi by banging their little fists on the floor and refusing to play any more. Wah-wah-wah. Remember when Republicans were the outsiders in D.C.? Now they are such corrupt Washington insiders that, like a group of palace courtiers, they are willing to put the entire U.S. economy at risk over protocol and etiquette.

As for the two Presidential candidates, the less said the better. Senator McCain, sensing a great PR opportunity to show that he is both a leader and a Beltway Pharisee, blasted into Washington, made a lot of noise, accomplished little, and was all-but run back out of town. Senator Obama, who appears to be up to his neck in Fannie Mae ‘contributions’, did as he always does: said a few platitudes, (metaphorically) voted “Present” and took off as quickly as he could.

Meanwhile, while this absurdity is going on, the stock market tanks, and the U.S. economy loses $1 trillion.

It is impossible not to look upon all of this as a kind of a vast, predictable pantomime. The same people who created the mess are honored for (sorta) getting us out of it, a few scapegoats go to jail, the real perpetrators not only escape punishment but are often rewarded, a bunch of regular people get screwed (lose their jobs, go bankrupt) and a whole lot more end up paying the bill for two million failed mortgages that never should have been granted in the first place.

The American people know this, which is why:

1) They aren’t taking this current crisis as seriously as pundits say they should - after all, if our elected officials can play politics against their enemies, and take the time to lard the bailout bill with pork, why should they? And,

2) They have nominated for President two candidates who - ostensibly — represent ‘Maverick’ attitudes and ‘Change’.

To my mind, what makes this economic crisis different from ones in even the recent past is that it has exposed the fact that there are, apparently, no real leaders left in Washington - that the intellectual capital in the National Capitol has fallen to a new low - if that’s possible. Most of all, it shows that we can no longer look to D.C. for leadership into the rest of the 21st century.

Marxists and statists of all stripes are, as one might expect, rubbing their hands in glee and declaring this the final death crisis of Capitalism. But I think just the opposite is occurring. What we are in fact seeing are the final death throes of governmental social engineering. As I noted two weeks ago, we are in a kind of Mentos-in-coke world right now - where, thanks to tech, the sheer speed of transactions and the enormous breadth of response, almost any outside influence can quickly turn the whole economy (or culture) into an explosive brew.

As it happens, out here in Silicon Valley, we have been conducting our own social engineering experiments. Three, in fact, have been at least as sweeping as Freddie Mac’s changing of mortgage eligibility rules. One of them has been to wire the entire world in a huge, high-speed global information grid (the Internet). Another has been to restructure the entire entertainment industry and its pricing model (the iPod). And the third has been to empower the citizenry to form groups based upon common interests rather than the limitations of physical proximity (Web 2.0 - social networks).

Here’s the thing. All three of these multi-billion dollar projects have been pay-as-you-go, driven largely by individuals and companies that assume their own risk, they have instantly rewarded smart decisions and punished bad ones, they are tested every millisecond against human nature (i.e., the marketplace), they are biased towards efficiency over seniority, and most of all, they are voluntary.

And they are all succeeding.

We will get out this current financial mess - not by government fiat, but because entrepreneurs and smart corporate executives and hard-working everyday people will innovate us out of it. They will come up with the new financial instruments that restructure this debt, the new technologies that will generate the wealth to make up for this loss (as they did after 9/11) and ultimately create more jobs than are right now being lost.

And if Washington really wanted to help Americans (and there is no indication right now that it does) it would, the instant it passes the bail-out bill, get to work not adding more regulations in response to this crisis, but stripping away the destructive ones we created after the last big one. And a good place to start would be Sarbanes-Oxley, which brilliantly keeps wealth out of the hands of regular workers (by keeping start-up companies from going public), all while costing, by my reckoning, $200 billion over the last six years.

If the last two weeks have taught us anything, it is that Washington is not going to get fixed, no matter who is elected. The world is moving on. Seven hundred thousand people are joining, via the Web, the Global Economy each day. If the prognosticators are right, we are now only 1000 days or so from crucial turning points in the world economy (the next billion consumers, universal wireless broadband, nanotech, thinking machines, etc.)

A new era - with new rules, new winners and new losers — is coming up on us fast, and we need to get ready for it right now. Our national leaders just had their chance to prove they were prepared for this new era - and they have failed miserably. We now have to look elsewhere for leadership… and quickly.

URL to article: http://pajamasmedia.com/edgelings/2008/10/03/the-end-of-an-era/

 

[a_majoor]

Salim Mansur on the history of the crisis:

Columnists / Salim Mansur
U.S. mess started with Carter

By SALIM MANSUR

Last Updated: 4th October 2008, 2:46am

The story of man's fall is in part the history of unintended effects of his initial actions.

Paris of Troy falls in love with Helen of Sparta that puts to sea a thousand Greek ships, and the Trojan War is unleashed. Gavrilo Princip, driven by his Serbian nationalist fervour, assassinates the Archduke Franz Ferdinand of Austria and it ignites the First World War. Neither Paris nor Princip calculated the unintended effects of his initial actions.

As the United States is rocked by the worst financial crisis since the Great Depression, and a deep recession or worse looms on the horizon threatening the global economy, politicians -- Democrats and Republicans -- have scrambled to work out a rescue package for the collapsing capital market.

But how could the U.S. government be unaware of the capital and liquidity crunch of such dimension building up over time so that a taxpayer bailout of Wall Street to the tune of a trillion dollars was urgently needed? How did this tsunami of bad loans come about in the first place?

The story is one of unintended effects. And politicians who unleashed it have remained in full throttle of denying responsibility.

The origin of the crisis goes back to 1977 when then president Jimmy Carter signed into law the Community Reinvestment Act (CRA) passed by the Democratic-controlled Congress.

MORTGAGES FOR ALL

The CRA required, as the U.S. Federal Reserve Board notes, "depository institutions to help meet the credit needs of the communities in which they operate, including low and moderate income neighbourhoods, consistent with safe and sound operations."

In other words, by law lending institutions were instructed to provide money as mortgages and commercial loans to underserved communities of mostly low income Afro-Americans and underprivileged minorities with poor credit history.

The reasoning behind CRA was to make housing affordable for that segment of the American population that could not meet credit tests of the financial industry. The CRA was civil rights action with roots going back to the Great Society push of president Lyndon Johnson's administration a decade earlier.

The CRA requirement brought loosening of underwriting standards by lending institutions, and the beginning of bad loans or the "sub-prime" mortgages. The two government-sponsored lending institutions -- Fannie Mae and Freddie Mac -- aggressively pushed sub-prime mortgages to high risk borrowers, and then covered the questionable mortgages by access to government-backed credit legislatively available from the U.S. Treasury.

In 1995 during Bill Clinton's administration, amendments to the CRA increased lending for home purchases and the bad loans piled up while a frenzy of buying led to a real estate bubble.

In 2003 President George W. Bush's administration sought a corrective overhaul of the lending practices and in 2005 Sen. John McCain pushed for reform oversight of Fannie Mae and Freddie Mac.

BUSH FIX DERAILED

On both occasions corrective measures were derailed in the Congress subcommittee hearings by the Democratic leadership led by Sen. Christopher Dodd in the Senate Committee on Banking and Congressman Barney Frank in the House Financial Services Committee.

The politics of affirmative action for affordable housing twisted sound financial practices, and over time it created a heated housing market that could not be sustained indefinitely.

A mountain of bad loans eventually crashed, and the U.S. capital market was frontally assaulted by the unintended effects of the CRA.

 

[a_majoor]

Sweden had a similar problem, and here is how they fixed it. Maybe there are lessons for us in this?

http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?ei=5124&en=a70a39e48f33b9d5&ex=1380254400&partner=permalink&exprod=permalink&pagewanted=print

Stopping a Financial Crisis, the Swedish Way
By CARTER DOUGHERTY

Correction Appended

A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar?

It does to Sweden. The country was so far in the hole in 1992 — after years of imprudent regulation, short-sighted economic policy and the end of its property boom — that its banking system was, for all practical purposes, insolvent.

But Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing.

Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

“If I go into a bank,” said Bo Lundgren, who was Sweden’s deputy minister of finance at the time, “I’d rather get equity so that there is some upside for the taxpayer.”

Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated.

The tumultuous events of the last few weeks have produced a lot of tight-lipped nods in Stockholm. Mr. Lundgren even made the rounds in New York in early September, explaining what the country did in the early 1990s.

A few American commentators have proposed that the United States government extract equity from banks as a price for their rescue. But it does not seem to be under serious consideration yet in the Bush administration or Congress.

The reason is not quite clear. The government has already swapped its sovereign guarantee for equity in Fannie Mae and Freddie Mac, the mortgage finance institutions, and the American International Group, the global insurance giant.

Putting taxpayers on the hook without anything in return could be a mistake, said Urban Backstrom, a senior Swedish finance ministry official at the time. “The public will not support a plan if you leave the former shareholders with anything,” he said.

The Swedish crisis had strikingly similar origins to the American one, and its neighbors, Norway and Finland, were hobbled to the point of needing a government bailout to escape the morass as well.

Financial deregulation in the 1980s fed a frenzy of real estate lending by Sweden’s banks, which did not worry enough about whether the value of their collateral might evaporate in tougher times.

Property prices imploded. The bubble deflated fast in 1991 and 1992. A vain effort to defend Sweden’s currency, the krona, caused overnight interest rates to spike at one point to 500 percent. The Swedish economy contracted for two consecutive years after a long expansion, and unemployment, at 3 percent in 1990, quadrupled in three years.

After a series of bank failures and ad hoc solutions, the moment of truth arrived in September 1992, when the government of Prime Minister Carl Bildt decided it was time to clear the decks.

Standing shoulder-to-shoulder with the opposition center-left, Mr. Bildt’s conservative government announced that the Swedish state would guarantee all bank deposits and creditors of the nation’s 114 banks. Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.

Sweden told its banks to write down their losses promptly before coming to the state for recapitalization. Facing its own problem later in the decade, Japan made the mistake of dragging this process out, delaying a solution for years.

Then came the imperative to bleed shareholders first. Mr. Lundgren recalls a conversation with Peter Wallenberg, at the time chairman of SEB, Sweden’s largest bank. Mr. Wallenberg, the scion of the country’s most famous family and steward of large chunks of its economy, heard that there would be no sacred cows.

The Wallenbergs turned around and arranged a recapitalization on their own, obviating the need for a bailout. SEB turned a profit the following year, 1993.

“For every krona we put into the bank, we wanted the same influence,” Mr. Lundgren said. “That ensured that we did not have to go into certain banks at all.”

By the end of the crisis, the Swedish government had seized a vast portion of the banking sector, and the agency had mostly fulfilled its hard-nosed mandate to drain share capital before injecting cash. When markets stabilized, the Swedish state then reaped the benefits by taking the banks public again.

More money may yet come into official coffers. The government still owns 19.9 percent of Nordea, a Stockholm bank that was fully nationalized and is now a highly regarded giant in Scandinavia and the Baltic Sea region.

The politics of Sweden’s crisis management were similarly tough-minded, though much quieter.

Soon after the plan was announced, the Swedish government found that international confidence returned more quickly than expected, easing pressure on its currency and bringing money back into the country. The center-left opposition, while wary that the government might yet let the banks off the hook, made its points about penalizing shareholders privately.

“The only thing that held back an avalanche was the hope that the system was holding,” said Leif Pagrotzky, a senior member of the opposition at the time. “In public we stuck together 100 percent, but we fought behind the scenes.”

This article has been revised to reflect the following correction:

Correction: September 27, 2008
An article and a picture caption on Tuesday about Sweden’s response to its 1992 financial crisis misstated the position at the time of Bo Lundgren, who described Sweden’s strategy and commented on the United States’ proposals for resolving its own crisis. He was the deputy minister of finance — not the finance minister, a post held by Anne Wibble.

Copyright 2008 The New York Times Company

 

[tomahawk6]

Seven central banks this morning cut interest rates to help stabilize global financial rates. This is an important step to help turn the markets around. This is the exact opposite of what happened during the depression.