America's Financial Crisis

[jgk3]

Re: America's Financial Crisis

good read Anon

[Anonymouse]

Re: America's Financial Crisis

How Crackpot Egalitarianism Caused the Sub-Prime Mortgage Crisis

by Thomas J. DiLorenzo

"In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing credit requirements on loans that it will purchase . . . [to] encourage . . . banks to extend home mortgages to individuals whose credit is generally not good . . . . Fannie Mae is taking on significantly more risk." ~ New York Times, September 30, 1999

The main cause of the current economic crisis is the boom-and-bust cycle that was caused by the Greenspan Fed. Years of artificially-lowered interest rates caused trillions of dollars in mal-investment in real estate and other industries, and now we must endure the bust. But crackpot egalitarianism within the Fed and, indeed, in the entire Washington establishment, has made the crisis infinitely worse.

In the early 1990s the Boston Fed did all that it could to fabricate "evidence" of widespread lending discrimination against racial minorities. But when Peter Brimelow and Leslie Spencer of Forbes magazine asked Boston Fed official Alicia Munnel what evidence of discrimination she really had, she was forced to admit that she had none.

Fighting discrimination was not the Fed’s real goal. The real goal was to achieve a more "egalitarian distribution" of housing, period. So under the phony guise of "fighting discrimination" the Fed, the Congress, Fannie Mae, Freddie Mac, and myriad other federal government agencies forced, bribed, and extorted mortgage lenders of all kinds into making literally trillions of dollars in bad loans to unqualified borrowers. Countrywide Bank alone was praised by the Fed for making $600 billion in such loans (shortly before it went bankrupt).

The Fed’s "smoking gun" in this entire charade is a Boston Fed publication entitled "Closing the Gap: A Guide to Equal Opportunity Lending." There is a gap, you see, between the value of real estate owned by middle- and upper-income Americans on the one hand, and lower-income Americans on the other. (There is also a luxury automobile gap, a two-week European vacation gap, a luxury boat gap, an expensive suit gap, and many others). The federal government has used all of its powers of threats, force, and intimidation over the past two decades to try to close the housing "gap." "The Federal Reserve Bank of Boston wants to be helpful to lenders as they work to close the mortgage gap," the publication states.

In addition to closing the "mortgage gap," the Fed also pressured lenders to adopt a more vigorous racial hiring quota system, presumably under the theory that minority loan officers would be more likely to acquiesce in the Fed’s dictates to make more mortgage loans to its political mascots, sub-prime borrowers.

The Boston Fed report claims that it is only offering lenders "guidelines," and "suggestions," but it is very clear that failure to obey the Fed’s "guidelines" can lead to serious financial problems for any mortgage lender. The report states in bold type that "Failure to comply with the Equal Credit Opportunity Act or Regulation B can subject a financial institution to civil liability for actual and punitive damages in individual or class actions. Liability for punitive damages can be as much as $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor’s net worth in class actions."

All lenders – banks, independent mortgage companies, etc. – were told that they needed to pay close attention to "such laws and regulations as the Equal Credit Opportunity Act (Regulation B), the Fair Housing Act, the Home Mortgage Disclosure Act (Regulation C), and the Community Reinvestment Act." A "conscientious [bank] Board will recognize the potential liability associated with noncompliance . . ." Ah, the subtle power of suggestion.

The Fed instructed lenders to ignore traditional measures of creditworthiness when it came to "minority and low-income consumers." Traditional underwriting standards were said to contain "arbitrary or unreasonable measures of creditworthiness." "Special standards" that "are appropriate to the economic culture of urban, lower-income, and non-traditional consumers" were urged. For example, traditional underwriting standards take into consideration such things as age, location, and condition of a house, but these should be abandoned when it comes to sub-prime borrowers, said the Fed.

Traditional ratios of mortgage payments to monthly income can also be ignored, said the Fed. And besides, "the secondary market [i.e., Fannie Mae and Freddie Mac] is willing to consider ratios above the standard" ones for other borrowers. "Lack of credit history" should not be a factor either. "Successful participation in credit counseling" was said to be an adequate substitute.

Lenders were repeatedly urged to "work with special secondary mortgage market programs" such as those administered by Fannie and Freddie. Lenders were told to "be aware that Fannie Mae and Freddie Mac have issued statements to the effect that they understand urban areas require different appraisal methods." If a sub-prime borrower has a property appraisal problem, then the Fed or Fannie Mae could help to find "another experienced appraiser" who would presumably see to it that the property was "correctly" reappraised so that the sub-prime loan could be made. Yours truly was always under the impression that shopping around for "the right" appraiser who would give you the number you wanted (for a fee) was fraudulent and illegal. Silly me.

In sum, the Fed’s policy of housing market socialism (endorsed and supplemented by numerous federal laws and regulations), combined with the boom-and-bust cycle that it created, has been an unmitigated economic catastrophe for the entire world. Naturally, the Fed’s response has been to grant itself even more powers, while the executive branch and Congress are busy nationalizing the capital markets, a move that will kill American capitalism. Abolishing the Fed would be a very modest first step in dismantling our rotten Leviathan state so that the next generation can at least have some hope of living in a reasonably free and prosperous society.

[Anonymouse]

Re: America's Financial Crisis

Here is an article I posted several years ago portending the current financial crisis.

http://forum.hyeclub.com/showthread.php?t=2275&highlight=voting

Is there something to be said here? Could we be onto something?

[jgk3]

Re: America's Financial Crisis

more specifically, apartment buildings that pay for themselves with the rent of tenants instead of from your own pocket.

[Armanen]

Re: America's Financial Crisis

Unless you already have plenty of capital, especially liquid, I wouldn't go near the stock market period. Instead focus on real assets, such as real estate; land always has value.

[Azad]

Re: America's Financial Crisis

Holly crap. Is it time to buy?

I wouldn't touch any of them with a ten-foot pole.

"GM said to seek merger with Ford before Chrysler
October 12, 2008

DETROIT: Before General Motors began exploring a possible merger with Chrysler — talks that first came to light on Friday — GM proposed a similar deal with its other cross-town rival, Ford Motor, two people with knowledge of the talks said Saturday.

GM executives approached Ford about a possible merger in July, but Ford rejected the idea and ended the discussions last month, these people said.

After Ford decided to remain independent amid an increasingly difficult auto market, GM turned its attention to Chrysler. For the last month, it has been in preliminary merger talks with Chrysler's owner, the private-equity firm Cerberus Capital Management.

People with knowledge of the talks described the chances of a deal as "50-50."

http://www.iht.com/articles/2008/10/12/business/12auto.php

[skhara]

Re: America's Financial Crisis

By the way, I have a fairly conservative mutual fund that suffered ridiculous losses in the last few days.

[skhara]

Re: America's Financial Crisis

Ford in 2000 was trading at around $40.00 today under $2.00

Holly crap. Is it time to buy?

[Armenian]

Re: America's Financial Crisis

Nightmare on Wall Street as U.S. debt hits record high

America - the end of an era: http://www.youtube.com/watch?v=sM_SRhZcNFE

The United States has the highest level of foreign debt in the world, which has nearly doubled during the Presidency of George W. Bush. The country’s national debt has also just reached its ultimate high. A debt clock was put up in a New York street in 1989. Then the figure was around 2.7 trillion dollars. Nearly 20 years later, that number has increased almost fivefold and exceeded the expectations of the clock’s designers. Just a few weeks ago, the clock ran out of space. When the figure hit 10 trillion it forced the dollar sign out of its allocated space. A re-design is underway, with enough space for a quadrillion - a number so obscure that few could imagine what it amounts to. Manhattan's Times Square is a favourite tourist hotspot. Now, more and more Americans come to take photos of the frightening figure - because even though the economy is taking a kicking, this clock just keeps on ticking. Very few U.S. citizens can say they are free of the credit vice - and who can blame them? Low rates, alluring deals - and all you ever wanted, but couldn't afford, suddenly becomes possible. But this American Dream is turning into a nightmare. Wall Street is likely to take most of the blame. “During the age of Reagan Wall Street was immune to that kind of criticism and political attention,” says historian Steven Fraser. “Now we can see enormous widespread anger. I think in the foreseeable future Wall Street will be the object of great scrutiny, supervision, anger and suspicion.” Fraser has been fascinated by the enigma of Wall Street for years. History repeats itself in many ways, but the scenario right now reminded him of another famous figure. “They created a Frankenstein. Nobody knows what is going on, that’s what makes the moment so frightening,” he said. It seems history has presented this crisis in a new light. Ever since the end of WW2, national debt decreased with every Democratic administration. After the presidency of Ronald Reagan, every Republican term has seen a steep rise in debt. When George W Bush took office, the figure stood at 5.7 trillion dollars. But the fact that figure has nearly doubled has led to accusations he’s used the nation as an AmEx Black card. His time is about to run out, but someone else will have to pick up the tab.

Source: http://www.russiatoday.com/news/news/31727

[Armanen]

Re: America's Financial Crisis

Red Alert: The G-7 -- Geopolitics, Politics and the Financial Crisis

The finance ministers of the G-7 countries are meeting in Washington. The first announcements on the meetings will come this weekend. It is not too extreme to say that the outcome of these meetings could redefine how the financial markets work, certainly for months and perhaps for a generation. The Americans are arguing that the regime of intervention and bailouts be allowed to continue. Others, like the British, are arguing for what in effect would be the nationalization of financial markets on a global scale. It is not clear what will be decided, but it is clear that this meeting matters.

The meetings will extend through the weekend to include members of the G-20 countries, which together account for about 90 percent of the global economy. This meeting was called because previous steps have not freed up lending between financial institutions, and the financial problem has increasingly become an economic one, affecting production and consumption in the global economy. The political leadership of these countries is under extreme pressure from the public to do something to solve — or at least alleviate — the problem.

Underlying this political pressure is a sense that the financial class, people who run global financial institutions, have failed to behave responsibly and effectively, and have therefore lost their legitimacy. The expectation, reasonable or not, is that the political system will now supplant these managers and impose at least a temporary solution. The finance ministers therefore have a political mandate, almost global in scope, to act decisively. The question is what they will do?

That question then divides further into two parts. The first is whether they will try to craft a single, global, integrated solution. The second is the degree to which they will take control of the financial system — and inter-financial institution lending in particular. (A primary reason for the credit crunch is that banks are currently afraid to lend — even to each other.) Thus far, attempts at solutions on the whole have been national rather than international. In addition, they have been built around incentivizing certain action and increasing the available money in the system.

So far, this hasn’t worked. The first problem is that financial institutions have not increased interbank lending significantly because they are concerned about the unknowns in the borrower’s balance sheet, and about the borrowers’ ability to repay the loans. With even large institutions failing, the fear is that other institutions will fail, but since the identity of the ones that will fail is unknown, lending on any terms — with or without government money — is imprudent. There is more lending to non-financial corporations than to financial ones because fewer unknowns are involved. Therefore, in the United States, infusions and promises of infusion of funds have not solved the basic problem: the uncertain solvency of the borrower.

The second problem is the international character of the crisis. An example from the Icelandic meltdown is relevant. The government of Iceland promised to repay Icelandic depositors in the island country’s failed banks. They did not extend the guarantee to non-Icelandic depositors. Partly they simply didn’t have the cash, but partly the view has been that taking care of one’s own takes priority. Countries do not want to bail out foreigners, and different governments do not want to assume the liabilities of other nations. The nature of political solutions is always that politicians respond to their own constituencies, not to people who can’t vote for them.

This weekend some basic decisions have to be made. The first is whether to give the bailouts time to work, to increase the packages or to accept that they have failed and move to the next step. The next step is for governments and central banks to take over decision making from financial institutions, and cause them to lend. This can be done in one of two ways. The first is to guarantee the loans made between financial institutions so that solvency is not an issue and risk is eliminated. The second is to directly take over the lending process, with the state dictating how much is lent to whom. In a real sense, the distinction between the two is not as significant as it appears. The market is abolished and wealth is distributed through mechanisms created by the state, with risk eliminated from the system, or more precisely, transferred from the lender to the taxing authority of the state.

The more complex issue is how to manage this on an international scale. For example, American banks lend to European banks. If the United States comes up with a plan which guarantees loans to U.S. banks but not European banks, and Europeans lend to Europe and not the United States, the integration of the global economy will very quickly shatter, leading to significant limitations on international trade, currency convertibility and so on. You will nationalize economies that can’t stand being purely national.

At the same time, there is no global mechanism for managing radical solutions. In taking over lending or guarantees, the administrative structure is everything. Managing the interbank-lending of the global economy is something for which there is no institution. And even with coordination, finance ministries and central banks would find it difficult to bear the burden — not to mention managing the system’s Herculean size and labyrinthine complexity. But if the G-7 in effect nationalize global financial systems and do it without international understandings and coordination, the consequences will be immediate and serious.

The G-7 is looking hard for a solution that will not require this level of intrusion, both because they don’t want to abolish markets even temporarily, and more important, because they have no idea how to manage this on a global scale. They very much want to have the problem solved with liquidity injections and bailouts. Their inclination is to give the current regime some more time. The problem is that the global equity markets are destroying value at extremely high rates and declines are approaching historic levels.

In other words, a crisis in the financial system is becoming an economic problem — and that means public pressure will surge, not decline. Therefore, it is plausible that they might choose to ask for what FDR did in 1933, a bank holiday, which in this case would be the suspension of trading on equity markets globally for several days while administrative solutions are reached. We have no information whatsoever that they are thinking of this, but in starting to grapple with a problem of this magnitude — and searching for solutions on this scale — it is totally understandable that they might like to buy some time.

It is not clear what they will decide. Fundamental issues to watch for are whether they move from manipulating markets through government intrusions that leave the markets fundamentally free, or do they abandon free markets at least temporarily.

Another such issue is whether they can find a way to do this globally or whether it will be done nationally. If they do go international and suspending markets, the question is how they will unwind this situation. It will be easier to start this than to end it and state-controlled markets are usually not very attractive in the long run. But then again, neither is where we are now.