Let The Bubble Pop
Let’s NOT bail them out. Let’s assert our political independence from those who wish to drag the American people down with them. It’s time to assume control, and not just throw money at the problem. Right?
The situation has NOT been resolved and the cure is worse than the disease for the American public. At issue is are we going to join the lemmings of Wall Street and run over the cliff or do we make exercise our political rights to establish new rules for the conduct of those who have accumulated so much wealth and power? WE THE PEOPLE….
We have seen our atmosphere polluted and tied to Middle East oil by the refusal of politicians to heed the call of Jimmy Carter and break our dependence on oil. We have seen pension funds and investment portfolios wiped out in periodic crises from junk bonds to S&Ls to the dotcoms to derivatives. “Senator Phil Gramm, the second largest recipient of campaign contributions from Enron, succeeded in legislating California's energy commodity trading deregulation. Despite warnings from prominent consumer groups which stated that this law would give energy traders too much influence over energy commodity prices, the legislation was passed in December 2000.” We have seen deregulation dangle the sword of Damocles over commercial banking as “diversified” products put the FDIC guarantee (“the full faith and credit of the United States Government”) in question. Just recently, the nation’s biggest Savings and Loan, Washington Mutual has precipitously edged towards the brink of insolvency.
The apparent problem here is the absolute political determination of Democrats and Republicans to allow things to go one fundamentally the same as before. The proposed bailout is a repeat of other interventions that would make Keynes a very happy puppy. The artificially high prices of real estate over the last 20-30 years has resulted in the overvaluing of subsequent debts secured by mortgages or more importantly by homes, businesses and other assets. The last two years has seen an increasingly worse real estate market. But, nobody wants to be in the store when that happens.
Crises are inevitable and corrective
When money is cheap and readily available it moves quickly and often without a gatekeeper. New ways to move currency are created and all rules are off, as there are no penalties for bad investment. Deregulation was just the tip of the iceberg. Investment banks evolved from stock brokerages like Merrill-Lynch. Mortgages were bundled and sold to “institutional investors” with virtually no evaluation of their credit worthiness. Paper values replaced asset valuation. Currency was shuffled from place to place by companies like Enron, to hide their real losses. Legal action needs to be taken now and not a federal welfare program for investment bankers.
Oppose the bailout
This is not an effort to protect the investors or consumers of America. This is rapidly developing into a government nationalization of all losses for the investment banks. There is going to be real pain in this process and this should be assessed on any public funds already provided to corporations. “By agreeing to bail out insurance giant American International Group Inc. and mortgage lenders Fannie Mae and Freddie Mac, the federal government has put itself in the unprecedented position of running huge private companies. In the case of American International Group, or AIG, the government is now the majority shareholder, acquiring 80% of the company in exchange for lending it as much as $85 billion over two years to keep the business out of bankruptcy as it is dismantled.”
The first task that needs to be done is a review of all assets PRIOR to transfer. There is a need to establish a national office of financial assets management to establish new standards for regulation of investment portfolios. Consumer and commercial banks, S&Ls and Credit Unions should be defined as only authorized holders for mortgages. Investment banks truly deserve the death penalty for their demonstrated lack of responsibility and all financial institutions should be placed under the same legal guidelines and financial regulations.
Housing bubble must pop
Real estate values were pumped up over the last 20-30 years to entice buyers. Protections for home buyers (or homeowners as they used to be called) need to establish real values in appraisals and selling prices. One thing that could be done is to use the old FHA point system, at least its structure, in sales of property. This would establish criteria for sale of the house and property that are based on upgrading its condition at the time of purchase. New mortgage agreements can begin to tie in incentives for property improvements in mortgages. Second mortgages and home equity loans are rarely effective unless there is a small balance on the mortgages. It might also be beneficial to make mortgages non-transferrable to avoid any repeat of the practice of bundling them. This will establish financial accountability for loans approved. It does appear also as if it is necessary to increase the minimum equity/assets requirements for mortgages and commercial loans.
There needs to be established a guideline to follow in regards to the balance due on the first mortgage before the property can be used for additional credit. These are not revolutionary concepts. In fact, they are traditional concepts of sound banking prior to deregulation. New regulations need to protect homebuyers by providing a Federal mechanism for refinancing prior to any foreclosures.
The Fed has played a leading role in the easy availability of money that found derivatives and other products to direct quick cash without corresponding assets backing them. There is no vested interest in pumping more cash into the market right now. There really does need to be a cooling off period so that things can sort themselves out.
Increase federal corporate taxes