We are an opinionated country. We would be much better served by becoming informed.

http://pressherald.mainetoday.com/story.php?id=212416&ac=Insight

We have met the enemy and he looks familiar...

There's plenty of blame to go around for the crisis in the economy -- and we're guilty, too.

By TERRY DAVIES September 28, 2008

When President Bush introduced the Wall Street subsidy last Friday, he said that it was not the time for assigning blame. The public has had a week to ponder the implications of the starting price of $700 billion and other uses for the money. We can either bail out Goldman Sachs or we can: repair every single bridge and road in our neglected infrastructure: fund Social Security; fund Medicare; improve public education; insure everyone's retirement and make alternative energy a reality. The next day we could provide healthcare for every single American and get a new knee for Tom Brady.
Something has to be done to address the financial crisis. We have been pressured to accept the Paulson plan immediately as if it were the only possible option when a better approach has already been used. In 1992, the banking system in Sweden collapsed under a pile of bad loans caused by a real estate bubble. The government stepped in, but not right away and they did not use the Paulson approach of buying the bad loans from the banks at inflated prices. Instead, the banks were forced to write down all of their losses before they got a dime of public money. When they received funds, it was in exchange for equity in the banks -- so the public could participate in the return, not just shoulder the risk. They used capitalism. Like we did with AIG and Fannie Mae.
The largest bank, SEB, decided to fix its own balance sheet and turned a profit in 1993. Sweden is not a paragon of capitalism, but their banking bailout wound up costing very little. As a 26-year veteran of investing and trading, including 20 years with a large firm in New York City, I am a big believer in the free market and have a major issue with the government operating the financial sector. But I am also a big fan of what works. I trust reality over opinion. I also trust incentive-based compensation over a free handout. Why does Warren Buffett's lousy $5 billion get him a big piece of Goldman when our $700 billion gets us toxic waste?
We could start by blaming the government for this, since they are paid to watch out for us. Which they might have done, except for the deregulation binge that started under Reagan, continued through Bush I and Clinton and is carried on today by Bush II. This rush to deregulate gutted the SEC, abolished the Glass-Steagal Act and led to this mess. (Google away -- it is all there.) So it is their fault -- those Republican/Democratic administrations. Except that we Americans believe in less regulation, small government and free markets, don't we? The bad guys must be all those Wall Street types. We trust them with the keys and they drive the global economy into a ditch. Except, as noted above, we like our markets free and Wall Street exists to maximize profit. So it has to be sub-prime mortgages at the bottom of all this. But mortgages, sub-prime or otherwise, work out just fine as long as the borrower pays back the loan. Which would put the blame back on ... hang on, I don't like the way this is headed. Let's start over. How did we get here?
• Step one -- the housing bubble. In 1938, Fannie Mae was started to create a secondary market for mortgages so lower-income Americans could buy a house. In 1968, Fannie Mae was privatized, issued stock, and became a private corporation gambling public funds. Over the next 40 years, what was meant to be a small, special-purpose agency grew to control 50 percent of the U.S. mortgage market and issue roughly $2 trillion in debt. All that money was loaned to homebuyers, artificially pushing home prices higher. It became gospel that houses only went up in value, they didn't depreciate like other assets, so stretching to buy as much house as was possible was darned smart.
With the proceeds, Fannie Mae made a fortune -- and was regulated poorly if at all. One investigation found that Fannie Mae was taking on enormous risk by not adequately hedging for rising interest rates. In 2003,...
a plan to increase oversight of Fannie Mae and Freddie Mac was proposed by the anti-regulator George W. Bush. (Didn't see that one coming, did you?) Home builders and Democrats killed it, saying it would reduce loans to the poor.
• Step two -- Wall Street gets involved. Investment banks (IBs) make serious money buying and packaging mortgages, then slicing them up and selling the parts to institutions that need lots of fixed income (aka bonds) like insurance companies and banks. The IBs pushed mortgage banks to make more loans so they could make more money. This answers the fundamental question of why lenders made all these high-risk loans -- because it wasn't their money.
The slicing-up part gets interesting. The mortgages were sorted according to quality, then cut into tranches which were numbered according to when they got paid. The first tranche received the initial payments, down to the last tranche, which had the risk of being last in line but also had the potential for gain if there were extra funds at the end. The problem was, nobody wanted to buy the high-risk stuff. Time for magic!
The IBs gathered the toxic tranches, bundled them, sliced them into tranches and created more bonds -- called CDOs -- the majority of which received AAA ratings. Highly risky debt magically became AAA-rated bonds. The ratings companies deserve all kinds of blame. Their loan evaluations were based on data provided by the issuer from a time period when house values soared. Since that historical default rate was low, they assumed it would stay that way. Forever. The large brokers and banks sold CDOs to their clients and called them as good as cash.
Before all this mess started, we had a deal in America: Work hard, save your money and you could afford to own your own home. It changed over time. Anyone could get a loan; everyone was buying houses and housing prices went sky high. Based on those escalating prices, people could afford even bigger loans. The deal mutated to: Every American deserves to own a house, preferably 2,500 square feet with big-screen HD TVs in every room.
Spending was the new creed. After watching the restaurant where I courted my wife disappear in a dust cloud one September morning, I was told to shop. Spending would solve everything. For the last 20 years, U.S. economic growth came from debt-funded consumption. From 2002-2006, household borrowing grew 11 percent a year. We borrowed against our homes as well. Lenders say people spending 30 percent or more their income on housing are in trouble. That now applies to 38 percent of every American with a mortgage.
Will this rescue plan work? It will buy time for balance sheets to be repaired. But it has an essential flaw. It tries to maintain the status quo. Hank Paulson designed the plan to get the economy to "fund expansion." We cannot afford what we have. The plan should really be to shrink the economy back to a sane level. Shrink the massive debt down to a level where earned income can support it. In 1978, American households had total debt that amounted to 79 percent of total employee compensation. Today, this figure has more than doubled to 174 percent.
We have met the enemy and he is us -- our need for stuff, our reliance on experts, our unwillingness to sacrifice anything. We are an opinionated country. We would be much better served by becoming informed.



Hi,

And this today from a radio friend in Canada:


Hi humble,

Actually I was thinking about something along these lines yesterday. What if McCain/Palin were the Democrats in this election with exactly the same lives/backgrounds?

First the mass media would dig up every little bit of dirt on them and then endlessly and mercilessly crucify them. The fact that this duo are Republicans should not exempt them from proper scutiny. But they are exempted, just as the Bush regime has been despite 8 years of all manner of crime, incompetence, and outright treason.

Over many decades the conservative vested interests have invested hundreds of millions (if not billions) of dollars in so-called "think tanks" and other forms of propaganda mills to brainwash themselves, spread misinformation and outright lies, twist facts, and assassinate characters to skew the media and dumb down the public.

That a couple of twits like McCain/Palin are running for the highest office in the land when neither is fit for any kind of public office, is proof of how successful this stretegy has been.

I have noticed however that the supermarket tabloids have been slamming Palin from day one....

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exerpt from: http://www.hermes-press.com/driving_insane.htm (a truly scary site)

scroll down to PROPAGANDA

Most Americans are unaware that public agencies like the Corporation for Public Broadcasting (CPB) have been totally co-opted by forces of oppression--as their propaganda con games reveal.

CPB gives no hint that Americans are seeing through the deadly attempts to destroy their minds. Fortunately, many American military personnel are also waking up.


CPB and other propaganda rackets are so ham-fisted in their indoctrination efforts that more and more people are seeing through their subterfuge. For example, it was easily apparent to television viewers that CPB's featuring Richard Perle, a despicable, Neanderthal conservative in one segment of its program, proved that it has no journalistic integrity whatsoever. Allowing Perle to preach his lies with a straight face--with no genuine countervailing opinions being offered (you certainly can't suppose that Richard Holbrooke is anything but sympathetic to the cabal)--gives the lie to the entire series.
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