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Government intervention is not the answer

September 14, 2008

I am not an economist. I am not a financier (wealthy or otherwise). I do not have a stock portfolio. I do not own a home. I am not a politician. So why do I think that I am qualified to write about economics, markets and government? You might question whether Ben Bernanke or Hank Paulson is qualified to discuss those topics. If their performance as orchestrators of the manipulation and government subsidization of the supposedly free market were an indicator of qualifications, I would venture to say neither of them is qualified.

I write about things as I see them. My goal is to stimulate thought by offering an open discussion of things that matter to me. What matters to me today is the selling out of my children, their children and their children by our own government. Those elected to represent us, have instead sold us into financial slavery for generations to come. Before you dismiss these comments as drivel, consider the following:

  • The government financed buy-out of Bear Stearns by JPMorgan Chase
  • The government takeover of Fannie Mae and Freddie Mac
  • The current financial woes of Lehman Brothers

“But wait,” you say. “Didn’t The Fed help Bear Stearns, and didn’t JP Morgan Chase inject financial support into Bear, saving many jobs and precluding a major financial meltdown?”

No! However, Wall Street bankers, your government and the Federal Reserve appreciate your continued trust and confidence.

For the sake of accuracy, let’s review some of the events that led to Bear’s demise and subsequent “resurrection.”

  • June 14th 2007, a full two months prior to the realization of the subprime mortgage meltdown, Bear Stearns reported a 10 percent decline in quarterly earnings
  • Four days later, Merrill Lynch reportedly seized collateral from a Bear Stearns hedge fund heavily invested in subprime loans (loans made to people who would not ordinarily qualify for a home loan)
  • Four days later, on June 22nd, Bear committed $3.2 billion in secured loans for the bailout of its High-Grade Structured Credit Fund
  • A month later, on July 17th, one of Bear’s troubled funds featured worthless assets and another contained assets which lost 91 percent of their value over the previous 3 months
  • Fifteen days later, the two troubled funds file for bankruptcy protection and quickly freezes the assets of a third fund
  • On the 52nd anniversary of the Enola Gay’s dropping of the bomb on Hiroshima, Bear reassures clients, telling them that the company is financially sound
  • The 20th of September Bear announces a 68 percent drop in quarterly income and that the company’s accounts lost $42 billion in value over the previous three months
  •  By the end of November, Bear’s workforce saw employee layoffs of 6 percent
  • Five days before Christmas, Bear writes down $1.9 billion in losses. Bear’s CEO, Cayne, magnanimously foregoes his 2007 bonus.
  • March 10th rumors of a cashflow problem began to bubble to the surface, prompting a denial from the company
  • Two days later, Bear’s Schwartz, appearing on CNBC tells investors that Bear has adequate liquidity
  • March 14th, just two days after reassurances by Schwartz, the Federal Reserve and JPMorgan Chase & Co offer “emergency funding” to stem the run on Bear’s stock and assets. The Federal Reserve loaned money to JPMorgan Chase, which it then re
  • Two days later, on March 16th, JPMorgan acquired Bear Stearns for $2 per share. Bear’s assets, valued at $55 billion, sold for a mere $236 million

Bear’s demise, precipitated by rumors of insolvency, resulted in a risk born by the American taxpayer, not JPMorgan Chase. The Private New York Fed lent $25 billion to Bear Stearns and $30 billion to JPMorgan to cover the purchase of Bear. Collateral for the buyout consists of assets, valued by Bear Stearns at $55 billion in Bear’s assets. In other words a loan equal to 100% of the appraised value of Bear’s assets. JPMorgan assumes only limited liability in this deal.

If the survival of Bear Stearns was crucial to the survival of the U.S. economy, why didn’t the Fed simply lend the $55 billion directly to Bear Stearns? Imagine the result in a turn-around in Bear’s stock value; all short sellers and put buyers encountering massive losses instead of gains. So, instead of the illegal insider short sellers taking the losses, Bear’s employees and stockholders suffered the losses. This deal smells so bad that even a former top Fed official felt it necessary to speak out. And people wonder how conspiracy theories start…

Next on the agenda is the takeover of Fannie Mae and Freddie Mac. We’ve all heard how the government takeover of the nation’s two top mortgage guarantors ensures the availabililty of home loans for Americans. This, on the heels of July’s “homeowner rescue” that came with the passing of HR 3221 just two months ago. Today, Fannie and Freddie own $5.2 trillion in total debt via purchasing or guarantying about half of the nation’s home mortgages.

I’ve been reading of the problems with government intervention in the home mortgage market for years. If only Congress had acted on legislation introduced on Sep 10, 2003 by Rep Ron Paul (R-TX). He proposed elimination of the government subsidies for Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac). This address before the House was probably one of the first times I started asking “why doesn’t this man run for President?”

How did these two government sponsored enterprises become so central to the financial malaise that is seemingly spreading to almost every sector of our economy? At this point, a definition of subprime lending is in order. Wikipedia defines subprime as “…loans that do not meet Fannie Mae or Freddie Mac guidelines.” In other words, home loans made to people who do not qualify for a regular home loan.

Widespread mortgage discrimination led to easing of mortgage lending requirements. In his July 8, 2002 remarks on the faith-based welfare initiative in Milwaukee WI, President Bush echoed this concern. Here is a portion of that speech:

“We’ve got a homeownership gap in America: 75 percent of Anglos or white people own their homes; less than 50 percent of minority own their homes. That’s a gap that needs to change. And so my goal–my goal is that by 2010, we have 5.5 million additional minority homeowners.

There are ways the Government, obviously, can help. One is to help people with their downpayment. People think about owning their home, and they say, “I can’t afford the downpayment. Forget ownership. I’ll just continue to rent.” And so we’re going to have Federal monies available to help people afford the downpayment so they can make the first big step into homeownership.

Secondly, we will work with the Tax Code to provide tax credits so that affordable new homes can be built, for example, in this neighborhood, so that people–low-income and moderate-income people will be able to have a new supply of homes from which they can choose and purchase if they want to own a home.

Thirdly, the private sector must do more, starting with freeing up capital. Fannie Mae and Freddie Mac must, as part of their vision and mission, encourage minority ownership by helping more capital to be available. We’re talking about over $400 billion available over the next 10 years for people to be able to purchase their own home.”

These policy statements opened the door to legislation and rules that created the subprime crisis. You can also read an article from Taki’s Magazine for Steve Sailer’s take on the cause of the housing crisis.

Management at Fannie and Freddie is a tale of cronyism and corruption. Here’s a smattering of the cast of characters provided by NPR from July 15, 2008:

Fannie Mae

James A. Johnson, former chairman and CEO: Aide to Vice President Walter Mondale; recently led Sen. Barack Obama’s vice-presidential search team
Jamie Gorelick, former vice chairwoman: Deputy attorney general under President Bill Clinton; former Defense Department general counsel; member of 9/11 Commission
Franklin D. Raines, former chairman and CEO: Budget director under Clinton
Thomas E. Donilon, former executive vice president: Former assistant secretary of state under Clinton; senior adviser to Michael Dukakis’ presidential campaign; national campaign coordinator for Walter Mondale’s presidential campaign; congressional liaison for President Jimmy Carter.
Robert B. Zoellick, former executive vice president: Former deputy secretary of state and U.S. Trade Representative under President George W. Bush; currently president of the World Bank
Louis J. Freeh, board member: Director of the FBI under Clinton; federal judge
Stephen Friedman, former board member: Assistant to Bush for economic policy
Michele Davis, former senior vice president: Deputy assistant to Bush; currently assistant secretary of the Treasury.
Wayne Berman, outside lobbyist: Assistant Secretary of Commerce under President George H.W. Bush; senior adviser in Bush-Cheney presidential transition; currently a fundraiser for Sen. John McCain’s presidential campaign.
Steve Ricchetti, outside lobbyist: Deputy chief-of-staff to Clinton
Kirsten Chadwick, outside lobbyist: Special assistant to President George W. Bush for legislative affairs; currently a fundraiser for McCain’s campaign.

Freddie Mac

Richard F. Syron, chairman and CEO: Deputy assistant secretary of the Treasury Ralph F. Boyd Jr., executive vice president: Assistant attorney general for civil rights
Dennis DeConcini, former board member: U.S. senator from Arizona
Robert R. Glauber, board member: Undersecretary of the Treasury under President George H.W. Bush
David J. Gribbin III, former board member: Aide to Vice President Dick Cheney; assistant secretary of defense under President George H.W. Bush
Harold Ickes, former board member: Adviser to President Clinton and Sen. Hillary Clinton; member of the Democratic National Committee.
Rep. Rahm Emanuel, former board member: Senior adviser to President Clinton; former chairman of the Democratic Congressional Campaign Committee and chairman of the House Democratic Caucus.
Susan Hirschmann, outside lobbyist: Chief-of-staff to former House Majority Whip Tom DeLay of Texas
Michael J. Bates, outside lobbyist: Campaign official for President Reagan, presidential candidate Bob Dole, President Bush.
Martin Paone, outside lobbyist: Secretary of the Senate
J. Patrick Cave, outside lobbyist: Acting Assistant Secretary and Deputy Assistant Secretary of the Treasury
Susan Molinari, outside lobbyist: U.S. Congresswoman from New York

The Fannie and Freddie story get strange when you consider the political contributions made to members of Congress that may decide on legislation relevant to Fannie and Freddie. Here’s an interesting post detailing contributions to current members of Congress.

Finally, it’s time to discuss Lehman Brothers and the potential impact on the American taxpayer. Much has been written of late regarding the financial woes of Lehman Brothers. Contrary to press releases and assurances, chips began to show in Lehman’s financial foundation in June of this year.

When it appeared as though Leman hedge funds appeared poised to lose $500 million to $700 million, the Financial Times, ended its report with this paragraph:

“Dick Fuld, the chief executive, has said the Federal Reserve’s decision to lend directly to investment banks this year should take questions about Lehman’s liquidity “off the table”. The Fed lending facility for investment banks is scheduled to expire in September but bankers expect it will be extended if markets remain challenging.”

(Note: I find it interesting, to say the least, that with a decision to lend directly to investment banks, the Fed felt it necessary to lend to JPMorgan instead of lending directly to Bear.)

We haven’t quite reached the end of September and the Financial Times reports that US Treasury Secretary Paulson wants to halt (for how long?) public bail-outs of private corporations.

The Lehman “rescue” looks stalled as players, such as Barclays seem concerned because the US government hadn’t provided a financial safety net for a takeover. In other words, they’d have to risk their own capital in the acquisition. It’s always much safer when you know that the U.S. taxpayer insures any debt arising from the acquisition. It would be nice to know with certainty that Hank Paulson’s abrupt decision to halt public bailouts is due to concern for the good of the country, rather than from loyalty to his former employer (Goldman Sachs).

If Paulson’s newfound care for the good of the country holds, the Lehman debacle is one blight on the economy for which the taxpayer won’t pick up the tab.

This missive stems from elements of an economic tsunami that some say is the fault of falling house prices in America. That’s nothing short of liberal propaganda. The real cause is the foundation of the subprime crisis; making home loans to unqualified buyers. Those loans, made possible by relaxed lending standards to stem complaints of mortgage discrimination and the Federal Reserve’s easy money policies of the late 1990s and early 2000s drove the price of housing up. In some cases, homes doubled in price in less than three years.

That rate of increase, applied to any other sector of the economy is known as hyperinflation. To home owners and real estate speculators, it’s called a return on investment. But is a home really an investment?

I read an interesting piece in mid 2005. Written by Eric Englund, in which he argues that houses are consumer durables, not investments. If you’re interested, you can find the article here

What does it all mean and exactly how does it support my earlier claim that these bailouts are selling our children and future generations into economic slavery? Put simply, we’re living in times of serious debt and the distinct possibility of default. Each and every time the Federal government “pays” for something, it does so with an IOU signed by the taxpaying citizens of this country. The current accounting of unpaid IOUs stands at approximately $9,500,000,000,000 and will increase by over $850 billion this year. If Bear Stearns goes down, we stand to lose up to $40 billion. In the event of a total default on Fannie Mae and Freddie Mac mortgages, we add another $5.5 trillion to that number.

We are now at a point in time that someone must stand up and lead this country out of the economic tar pit in which we are beginning to flail. Raising taxes or cutting taxes is not the answer. It is spending which must be brought under control, or our national debt will only continue to grow and with it the very real probability of a disastrours default.

Businesses either succeed of fail. Government cannot repeatedly intervene in markets every time a series of financial blunders is made. Those blunders are the responsibility of those individuals whom corporations pay millions of dollars each year in return for leadership and wise decisions, which result in a positive cash flow and a solid return on investment for shareholders. With each government intervention, the systemic problems, which were caused by bad business decisions, merely retreat below the surface only to reappear in more catastrophic form at a later date.

We can no longer afford to bail out billionaires. There is no place for government interventionism in a free market. That practice must be stopped now.

Until next time,
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