How We Got Here, Market Crash of 2008, Housing Bubble

I am worried just like many investors that Obama and his cabinet members do not know how to fix our present economic problems.  That is the reason, many investors have been continuing to dump stocks and pretty much keep their cash underneath their mattresses.  What is worse is that Obama and crew as well as many legislators do not seem to know how we got here.  If we do not know how we got here, how will we know how to get out?

Obama: Well, first of all, I don't think it's accurate to say that consumer spending got us into this mess.  What got us into this mess initially were banks taking exorbitant, wild risks with other people's monies based on shaky assets and because of the enormous leverage, where they had one dollar's worth of assets and they were betting thirty dollars on that one dollar, what we had was a crisis in the financial system….. My bottom line is to make sure that we are saving or creating 4 million jobs, we are making sure that the financial system is working again, that homeowners are getting some relief…..

Question: Thank you, Mr. President.  Many experts, from Nouriel Roubini to Sen. [Chuck] Schumer, have said that it will cost the government more than $1 trillion to really fix the financial system. During the campaign, you promised the American people that you won't just tell them what they want to hear, but what they need to hear.

Won't the government need far more than the $350 billion that's remaining in the financial rescue funds to really solve the credit crisis?

Obama: Well, the credit crisis is real, and it's not over.  We averted catastrophe by passing the TARP legislation.  But, as I said before, because of a lack of clarity and consistency in how it was applied, a lack of oversight in -- in how the money went out, we didn't get as big of a bang for the buck as we should have.

-end of news conference-

If I go by Obama’s first news conference, it is clear that he is not sure how we got HERE and how we are going to get out.  This is very reminiscent of the Carter Administration.

First, let us make it clear that Republicans tried to fix this problem (banking crisis) which the Democrats helped create through the creation of the CRA, Community Reinvestment Act.  In 2005 Republicans tried to reign in Fannie and Freddie.  The Senate Banking Committee passed a serious Fannie and Freddie reform bill, S.190, that would have required Fannie and Freddie to eliminate their investments in risky assets.  (See http://www.govtrack.us/congress/billtext.xpd?bill=s109-190).  As co-sponsor of S.190, Senator John McCain warned of the forthcoming economic crisis.  But the bill failed in the senate.

Foreclosures started increasing in 2005 due to the fact that sub-prime mortgage borrowers could no longer afford their monthly payments.  Many of these loans were NINJA (no income, no job, no asset) loans offered by banks to under-qualified borrowers who were willing to pay a premium interest rate and mortgage insurance to qualify.  Some were balloon mortgages with no interest for the first few years.  When mortgage rates went up from a low of approx 3.5% in May 2003 to more than double that in mid 2006, many homeowners just abandoned their houses.  This was the primary cause of the banking crisis, the “financial meltdown” as Obama refers to it.

The recession accelerated sharply due to the energy crisis of 2007-2008 with $4 per gallon gas and $140 per barrel oil.  This energy crisis like the specter of death reached all across America strangling many businesses.  The recession increased foreclosures and bailout mania followed.

It is interesting to note that Obama and Geithner do not seem to know where the first part of the bailout (TARP) money went.  It is like this Mr. President:  Let’s say BANKONE takes in a one year time deposit of $1000 from John promising to pay him 3% interest per annum.  Then BANKONE lends $1000 to Peter for a period of one year at 7% interest rate.  Nice profit.  But at the end of one year, Peter has lost his job and can only pay $500.  But now John wants his full $1000 plus interest.  The bank does not have the money.  Where will he get it?  From the government.  That is how the first part of the bailout money is being used.  The banks simply deposited the money and entered it on their balance sheet, i.e. debit cash and credit loan from the government.  They are being over cautious and prudent as well they should be in their lending practices because the opposite is what got them into this mess in the first place.  Now Obama, Geithner and the democrats are asking where did the TARP money go?  Why are the banks not lending money?  Where is the help for the homeowners?

Finally, another interesting observation is that bailout mania appears to have pervaded our free market system and even our entire society seemingly making us ripe for a transition into something like European socialism.  Bailout for the auto industry, health care industry, the states, auto rental companies, adult entertainment industry, etc.  A woman during one of Obama’s town hall meetings even wanted a personal bailout….a new kitchen, a new car.

My neighbors and I, about 8 of us, are getting together this weekend so we can put together a plan for a bailout of our own from our banks which hold our home mortgages in our subdivision.  We found out that the bank reduced the principal owed by one of our neighbors from $795,000 to $400,000 because he had been 6 months late on his mortgage payments and he can only afford amortization payment on $400k.  Meanwhile, the 8 of us who have about the same mortgage balances have been paying our mortgages on time.  The bank says, “no bailout for you unless you are delinquent on your mortgage payment”.  Well, we do not want to be delinquent but we want some of that bailout money!

 

 

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