[Peace-discuss] Re: Fw: Signs of the Time

[Jenifer Cartwright]

>From a friend's blog...  plus a link to the Swedish plan, for those of you as confused as I was (and still am, for that matter) about all this bailout business.  http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?em
 --Jenifer

--- On Sat, 9/27/08, Roger W  wrote:


In 1977 congress passed the Community Reinvestment Act (CRA) to end  
the disparity between blacks and whites in mortgage market. At that  
time blacks had a hard time getting mortgages, particularly if they  
lived in a black area. Banks did not like the CRA. At that time banks  
were regulated and usury laws limited interests rates banks could  
charge for loans. In the early 1980s the inflation rate was higher  
than the interests rates banks could offer on deposits. So people  
start pulling money out of banks and savings and loans. Congress  
removed the restriction on banks and savings and loans. But it was too  
late for the savings and loans. Many of the savings and loans went on  
a binge of high risk investing in hopes of striking it rich to save  
themselves. The resulting disaster cost US taxpayers $500 billion. It  
also nearly ended John McCain’s political career due to his  
involvement in the Lincoln Savings and Loan scandal known as the  
Keating 5.


Once banks were deregulated they realize that they could use CRA to  
make money. By 1995 %5 of the mortgages are subprime loans. When  
George Bush became president the federal government started borrowing  
huge amounts of money, basically doubling the national dept. This  
caused inflationary pressures on the economy. So Alan Greenspan  
lowered interests rates to historic lows to fight the inflation caused  
by the Bush Administration. When interest rates go down you can  
increase the price of a house and keep the cost to buyers the same.  
This helped set off the housing bubble. By 2006 about 50% of home- 
purchases and refinances were subprime loans.


I have read of cases were loan officers inflates the income, value of  
the house and assets of 70 year olds living on Social Security to give  
them a 30 year mortgage.  Given the number of subprime loans in 2006  
there must have been thousands if not tens of thousands of people in  
on this racket. Why didn’t someone notice the problem before banks  
started to fail? Where were the regulators? Something tells me that we  
will never investigate any of this.


Of course the house bubble burst. One reads about large banks and  
investment companies holding $10-$50 billion dollars in subprime  
loans. These companies pay extremely large salaries to lots of people  
to keep on top of their risk. So how did they end up holding all these  
bad loans? In the last N years people on Wall Street have created very  
complex financial instruments. The face value of derivative market  
alone has been estimated at one quadrillion dollars, which makes the  
subprime market small potatoes. If the banks and investment companies  
are failing because of losses in the relatively simple subprime market  
one loses confidence in their ability to hand these complex financial  
instruments.


Perhaps that is why Paulson was asking for $700 billion. One may ask  
why $700 billion. Forbes magazine quoted one Treasury official stating  
“the number is not based on any data point. We just wanted a big  
number.” And when Paulson testified before congress it was clear he  
did not have a plan on how to handle the money. He was going to ask  
advise from people in the field. No doubt he could hire some people  
from Lehman Brothers to help out. To be fair not many people have  
experience dealing with this problem. Except of course the Swedish,  
which had a similar problem in the early 90s. It took a couple of  
weeks before someone in congress, a senator from North Dakota,  
suggested that we should follow the Swedish solution.

Congress’ willingness to go along with this plan is surprising. First  
of all it comes from the Bush administration, which proved it  
competence (or lack of) with its response to Katrina. Secondly $700  
Billion is a lot of money. On thursday the conservative republicans  
started to rebel against the plan. These are the people that strongly  
believe in small government, fiscal responsibility and free markets.  
They are also the ones that kept silent as Bush greatly expanded the  
federal government, doubled the national debt and in the last month  
conducted the largest nationalization of private companies in US  
history. The New York Times reports that the house republicans were  
motivated to rebel in part because they felt the democrats were  
pushing to finalize the plan before McCain could get to Washington and  
claim credit. So it looks like we will have to wait until a democrat  
is in the White House for these conservative republicans to rediscover  
their principles and backbone.


Meanwhile people are still losing houses. Some Black communities are  
being really hard hit. I suspect none of the $700 billion will be used  
to help them out.

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