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The Bailout Is a Band-Aid: Housing Crisis Needs to Be Fixed

Thursday, September 25, 2008 4:18 PM

By: Christopher Ruddy

Yesterday Sen. Orrin Hatch was hitting the airwaves. The subprime crisis, he said, was the fault of the Clinton administration, who he said created the subprime mortgage crisis.
Other Republicans have been laying blame on the financial crisis on minorities and illegal immigrants who got mortgages they simply couldn’t pay. They offer no statistical proof on this point.
Nor does the usually sensible Senator Hatch offer evidence when it comes
to pointing the finger at the Clinton administration. The attempt to deflect blame for the crisis is not simply wrongheaded; I think it will compound Republican political woes and bring us disaster again in November.
Doesn’t Hatch and Co. know that Bill and Hillary Clinton voters in the swing states will decide who becomes the next president? They are wary of Obama, but love the Clintons and remember the good economic times of the’90s.
As a conservative Republican of the Reagan type, I find myself in this odd place cheering on some of the sensible things I hear from Democrats.
Barack Obama said any bailout to Wall Street must not be simply a cash payout or a loan, but be treated like an equity investment in these firms. We want our money back and then some. Yes to that, I say.
And demands by House Democrats that the secretary of the treasury alone not be given a blank check for more than a trillion dollars of our money, and that we have complete transparency in the transactions, I say yes to that, too. Fiscal responsibility, transparency and accountability — aren’t these things Republicans believe in?
The Democratic complaints about the Bush plan shows that our government is working. The executive branch tried to put a gun to the head of Congress and told them, “Sign this check or the whole U.S. banking system will collapse.”                Congress didn’t blink.
Don’t get me wrong. I am for a bailout, but one that is sensible and is a win-win for Wall Street, Main Street investors and taxpayers like you and me. But remember the government bailout plan proposed by the president and modifications supported by the Democrats won’t fix the underlying problem: the housing market collapse. Home prices are continuing to fall, and fewer people are buying homes than ever. Foreclosures will continue.
Unless this underlying problem is fixed, the economic symptoms will continue. There are some remedies. But before I get to them, let’s review what has happened:
The Federal Reserve under Alan Greenspan gave the U.S. economy shock treatment back in 2001 and 2002 when it lowered interest rates to 1 percent — the lowest Fed Funds rate in recent history.
By pushing the pedal to the metal and backed quietly by the White House, the Fed injected massive liquidity in the U.S. economy, creating the largest asset bubble in history, according to the Economist magazine.
Incredibly low rates by the Fed were accompanied by an acceptance of the central bank for all sorts of exotic mortgage loans. No down payments. Interest only. No job and income verification. Get the picture? Compounding this irresponsibility was then the “greed factor” that kicked in at several levels.
First were the local banks and mortgage companies that pushed mortgages, notably adjustable rate ones that offered extremely low introductory rates, and gave them to buyers who would not be able to pay back once the rates adjusted up.
Well rates have adjusted up and the crisis hit. Many mortgage providers also encouraged loan applicants to lie about incomes and qualifications to approve these mortgages.
Wall Street as a whole had little role at this stage. But later, Wall Street took these mortgages, which had been rolled up into collateralized debt instruments, better known as mortgage backed securities, and sold them off to investors globally.
Wall Street failed to compute the risks involved in these securities. It was a failure, not a crime. But many Wall Street firms, hedge funds and other investments took incredible, unwarranted risks using these securities. These firms would borrow money at low rates — say 4 percent — and invest in CDOs paying 6 to 7 percent. This small difference in rates of 2 to 3 percent, the arbitrage, would throw off enormous returns, especially considering little or no money had been placed on the table to buy the securities.
I have been told that Lehman and AIG played this leveraging game, investing only $1 for every $30 they held in such toxic suggestions. Again, what they did was not a crime. They took enormous risk and reaped huge returns — for a while.
Now they want us to pay for the huge losses that ultimately fell upon them. Washington played a role in the mess too. The White House pushed for easy money and easy lending practices, many weighted in favor of the banks and lenders and against the consumer.
Congress, dominated largely by Republicans from 1994 to 2006, did an awful job in oversight. This is especially true after President Bush took the oath of office. When Bill Clinton was president, the Republicans acted beautifully, working diligently to keep President Clinton on a center-right economic course. The results were great. This seems like ancient history, but it’s important to have a clear picture of how we got into this mess. It may help us get out of it.
First, we need to know the “crisis” the Bush administration presented to us just last week is not a crisis that just popped up. It was apparent to many two years ago the real estate market was in a bubble and would bust. And when the Fed moved in 2004 and raised rates from 1 percent to 5.25 percent by 2006 — a more than 400 percent increase in two years, it also led directly to those adjustable mortgages re-adjusting at very high rates. Homeowners got struck hard — with monthly mortgage payments on medium size homes mushrooming literally overnight.
The Fed increase rates started the credit crisis. The first tremors were apparent over a year ago when the Fed took emergency steps to give banks liquidity. It’s important to remember that most adjustable mortgages created in the boom years still have not reset – and will continue doing so through 2011. This problem will worsen unless Washington tackled the underlying problems.
The first thing the Fed must do to reduce the continuance of the problem is drop rates. It doesn’t have much wiggle room, because the dollar needs to be protected, but a small decrease in rates could have an enormous impact on those readjusting mortgages.
The second-most-important thing to do is for Congress to give a significant tax credit for new home buyers. Congress just passed a $7500 tax credit for new home buyers, though it’s not actually a credit but a loan at no interest.
The famed economist Edward Leamer of UCLA’s Anderson School says a $25,000 tax credit to new home buyers would put an immediate end to the fall in home prices. He suggests it would spur economic activity and government tax revenues would grow, more than covering the cost of the program.
Already home prices have fallen to reasonable prices and it should be a buyer’s market. But government can spur home buyers who keep staying on the sidelines think prices will fall more. If this is done, home prices will stabilize and likely begin rising. All of the sectors that relate to the housing market will find relief.
And, most important, the value of those mortgage backed securities will increase as the underlying mortgages become current. Foreclosures will also abate. The key to solving the financial crisis is not to simply send a blank check to Wall Street, but to get consumers buying homes again.
© 2008 Newsmax. All rights reserved.
Entry #6


MADDOG10Comment by MADDOG10 - September 27, 2008, 6:54 pm
I have to somewhat agree with what has been said, but putting a democrat ( NOBAMA) in the White house at the present time is like lighting a fuse on 1,000 sticks of Dynamite. This crisis was created by both democrats and republicans alike, but neither is willing to accept responsibility because of their pride.
Senator McCain is definately more qualified for the job. Senator Obama has some good ideas, but unfortunately he's to busy trying to make the republicans look like the bad guys instead of being himself. This crisis was created by GREED alone. These hypocrits of Wall Street took other peoples money for all these years, now they'll drown in their own greed. This bailout should NOT include any severence for them period......!
ToadSchmodeComment by ToadSchmode - September 28, 2008, 12:51 am
The bail out should be the "crooks involved" calling a bondsmen...
AceKickaComment by AceKicka - September 28, 2008, 1:20 am
MADDOG10 - we can agree or we can disagree. As long as there is constructive dialogue - I welcome it. We're all in this together.

*And while I'm at it - let me apologize for some of my previous posts found elsewhere. I didn't have to come off so hard. Next time I'll just ignore comments that don't deserve my response. My success comes from being a positive thinker. Anyway.........

I was thinking along the same lines ToadSchmode. In jail WITHOUT the bail!

Well, it's coming down to CRUNCH TIME - let's see who "blinks"!
Comment by jim695 - September 28, 2008, 3:39 pm
"The Fed increase rates started the credit crisis. The first tremors were apparent over a year ago when the Fed took emergency steps to give banks liquidity."
   That's probably when they realized the situation was unrecoverable, but there were indications this would happen ten years ago, and we should have spoken up then. I didn't go to college until I retired from the Navy in 1995. In 1998, I had a very lengthy discussion with my economics professor concerning this very issue. A local bank had teamed up with Visa to set up booths at colleges and vocational schools. If a student filled out a Visa application, he'd get a free T-shirt, and the lines stretched out the door and around the block. They weren't interested in the credit cards as much as the T-shirts, though, because most of them believed they would never be approved. Next thing we knew, hundreds of young people who had never had a credit card suddenly found themselves with $1,000 of real, spendable cash in their pockets. They bought new clothes, jewelry, PlayStations, CD's, TV's and VCR's (DVD's were just beginning to make an appearance). Within just a few WEEKS, many of these students began to complain that they had maxed out their new credit cards and that their parents were plenty angry about it.
     At about the same time, many of the larger banks were offering 125%, zero-down mortgages. The ads read, "Bad Credit? No Credit? No Problem!" Soon after that, "Interest Only" loans were offered, in which the borrower had a choice whether to pay interest and principal or just interest with no further penalties. They sold hundreds of thousands of these types of loans to unsuspecting people, most of whom probably believed the banks truly had their best interest at heart.

   I asked Professor Mangus what was going to happen in another ten years when all or most of the free credit that was currently being handed out with such reckless abandon was deemed unrecoverable, because it had been loaned to borrowers who had no hope of paying back their loans under the terms to which they had agreed. She said that she believed the FDIC would take care of a lot of it, until I pointed out that the FDIC was federal insurance for deposits HELD by banks, not for loans MADE by them. She agreed and apologized for her error. She actually meant to say that Freddie Mac and Fannie Mae would buy the bad loans and resell them to other banks, who would in turn re-issue the mortgage at more favorable terms to another borrower. This way, she explained, everybody gets SOME of their money back. I countered that, if this was the case, then the whole thing was a zero-sum game, and that the entire structure of the banking industry, being supported by bad loans, MUST eventually collapse like any other pyramid scheme. Professor Mangus told me she thought I was overreacting, and that we'd just have to wait and see what happens. Well, we waited, and it took ten years, but now we've seen what happens.

     It's not like we've never seen this before; we saw EXACTLY the same thing happen with Chrysler and the Savings & Loan industry in the 1980's. Chrysler paid back every dime, wth interest, thanks entirely to the efforts and long-range vision of Lee Iacocca. The Savings & Loan executives walked away from any criminal liability with their pockets bursting with cash they didn't earn. Who paid for the resulting deficit? WE DID - the American taxpayer, and we'll pay for this one, too; and the next one, and the next one ...

     It bothers me a great deal that our government simply refuses to do ANYTHING until it's too late. It also bothers me that legislation exists that essentially prevents us from holding our lawmakers accountable for their criminal actions; THEY make the laws that govern the rest of us, but then they attach a caveat which exempts them from those laws. We do not elect royalty in this country; a democratic republic elects a "representative" government, meaning that those we elect to office are representative of our ilk and our respective economic classes. Admittedly, the lower and middle classes have been summarily phased out of our state and federal governments, because we have been conditioned to equate wealth with intelligence and leadership ability. Look around you, folks; do you really believe that? Don't you think it's time we say, "ENOUGH ALREADY?" Why does it, or why SHOULD it cost hundreds of millions of dollars to run a political campaign? This effectively puts public office well out of reach of the common man or woman, which means we have no choice but to elect someone who has no clue of how we struggle to make ends meet. They reason, "Well, if I can live on $140,000 per year, why can't everyone else do the same?" We probably could, but what they don't understand is that the vast majority of us don't make even one tenth of that. Why should our elected officials make any more money than a police officer, a teacher or a soldier?

     It's time we punish our government and those who have exploited it to satisfy their own greed. We NEED to adopt a ZERO-TOLERANCE policy on public corruption, even if it's just a cop who parks illegally. When we find our public officials do not uphold the highest standards of integrity and honor, we need to bounce them out on their ears, and hold them accountable for ANY criminal activity, just like any other crook. If we don't, we'll have only ourselves to blame when America falls, and we're much closer to the edge than our politicians would have us believe.


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