who’s gonna save the economy??

By: Kelly Karpenske

Today our country faces its greatest financial crisis since the Great Depression. The blame does not fall on the hands of a few people, the president, the Wall Street investor, the secretary of the treasury. It is not the fault of a few greedy investors who are trying to dig themselves out of a hole. New government regulations will not solve these problems; maybe government regulations are a part of the problem. Our economy needs to grow. This crisis was not expected. There was no way to look into the future and predict that this fall was coming. There was obvious danger, but there was no specific way to calculate what has occurred in the past few weeks.

What has brought us to this financial crisis? Possibly, money has been too cheap. The Federal Reserve to sustain our economy through the 9/11 and other difficulties set interest rates lower than they have been at any point in modern history. http://www.rsfsocialfinance.org/investing/summary-of-rates-terms/past-interest-rates/

This move came at a time when global investment funds were many times larger than at any point previously. As a result, billions of dollars were looking for an investment home. With interest rates historically low, it was possible to borrow even more money and loan it out at a higher rate, still very attractive, in the form of home mortgages, making a profit on the difference in interest rates. That opportunity was in part made possible by a long-standing government policy. It has been the goal of both major parties since the Second World War to increase home ownership among our citizens. New laws and regulations have sought to encourage mortgage lending to an ever-wider circle of Americans. Private investors, encouraged by those policies, created mortgage-backed securities to provide money for buying homes.

Home ownership in the United States is at a historic high. If it is good for people to own their own home, and for many people it certainly is, then our government has pursued a wise and honorable policy. http://www.danter.com/statistics/homeown.htm

As it became appealing for investors to enter the mortgage market, they had the strong encouragement from our nation’s laws and regulations, and the means. Investment banks, when they bought mortgage-backed securities, were doing what the government encouraged them to do. Truth is… we all want to live in a country where it’s easy to get a mortgage and buy a home. And we elect a government that aids in that goal, investors only follow these processes.

When too much economic interest develops it tends to grow in one direction creating a disproportional “bubble.” These tend to burst. This is not the first or the last bubble to burst on America. Bubbles result from the greed driven economy that we call America, from every level of society, not just the wealthy.

The reason that this bubble is seriously bursting now has to do with what the government did in response to the Enron crisis. When the Enron corporation collapsed there was no correct value for their investments and so Congress passed a bill forcing corporations to put an immediate value on their investments in order for immediate sale if necessary, to protect American from the future Enrons. http://www.whitehouse.gov/news/releases/2002/07/20020709-4.html

Investments in these mortgage-backed securities right now are almost impossible to sell because no one knows how many of the mortgages are actually in default. Though the housing crisis is severe, it is not lethal. Almost 95% of American homeowners are paying their mortgages on time.

The vagueness of these mortgage-backed securities has meant that their market is not cashable, meaning; buyers are not ready to buy them immediately at a realistic price. Investment banks holding those securities have been forced to value them at zero because the market for them has disappeared. The securities aren’t worth nothing being that the vast majority of mortgages are being paid off, and those that aren’t, are collateralized. With time the value of those securities will be much clearer. But the rule requires that these investment banks take an immediate loss on their books for these securities. When a bank has to devalue its assets, it must raise more capital to continue to operate. Because more than just these companies are affected, there is not enough capital to go around. Only the government, having such vast quantities of money can step in.

This “bailout” is not a deal to save the rich and let the poor suffer further demise; it is a investment into the future of America, keeping money in the economy. If these banks fail then we have no money in our economy to buy cars, or homes, or pay for college. Businesses would lack the ability to purchase goods; manufacturers would lack the ability to buy raw materials. This “bailout” is to keep America out of poverty. These banks are where our money lies and without their investments we have no economy.

This bailout is not the first in our nation’s history. Alexander Hamilton and George Washington worked up the first government bailout. Clearly it worked, it’s not for nothing that Washington’s picture is on our one-dollar bill and Hamilton’s on the ten. They did the right thing, as did other national leaders throughout the years.
The treasury department had to act quickly. $900 billion dollars is a lot of money but that money can be remade as the assets acquired in this “bailout” are sold. America may even make money from these actions. http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=348876&story_id=12281280

The future president, the current presidential candidates, really have no place in solving this crisis. By the time they take office in January 2009 the solution will be well underway and this “crisis” will not be on the agenda. However, the economy is important and will continue to be an important issue in American politics. But no one can predict what the economy will look like on inauguration day. The president does not manage the economy. They do not create jobs; this credit goes to the hard working Americans who create capital in creating businesses and jobs, money and investments. There is no end to the cycle of our economy, it has its ups and downs because people act based on what they know, not what they don’t know yet. Humans run and influence the economy; therefore the economy is consequence of human action. The government, although a part of the solution, cannot solve the ever pose able problem.

The first problem with these presidential agendas is that there can be no promises appealing to the greed of some while raising the taxes of others. The richest paying a few more dollars in taxes will make the least fortunate no richer. No one ever taxed a country into prosperity. American tax rates can be adjusted to make us more competitive globally and more prosperous domestically. The fact that our corporate tax rate is second highest in the world does not help us keep jobs in this country.

“I believe that America’s free market has been the engine of America’s great progress. It’s created a prosperity that is the envy of the world. It’s led to a standard of living unmatched in history. Barack Obama

Second, we cannot ask for more oil and cheaper gas and all the while blame big oil for our problems. We cannot criminalize these corporations we need them. Third, there will inevitably be failure in business. Many more are asking for a “bailout” but the truth is these corporations are not being “saved.” These corporations are being sold off to preserve our financial system. There can be no special needs. Failure happens, but we can work to maintain governmental efforts for workers and industry when such failures occur.

Now is the time to take action to address this crisis and take action to put our economy back on a path of growth. –John Mccain

Lastly, there needs to be a clear line between government and business. Neither government nor business can fully provide the solution. Government creates law to make business possible and businesses must provide clearer dealings between their people. There has been failure of regulation and failure to regulate and these are both necessary for a sound economy. http://usinfo.state.gov/products/pubs/oecon/chap3.htm

Americans are blessed. At every level of our social class we enjoy housing, food, clothing, education, medical care more than at any time in our country’s history. Our economy is enriched as our country continues. We are all benefiting from the culture, constitution, and business that allow us to pursue life, liberty and happiness.

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4 Comments

Filed under McCain, Obama, Uncategorized

4 responses to “who’s gonna save the economy??

  1. Tony Robinson

    Kelly:

    Wow–that is a lengthy and involved post about a very complicated subject. I really appreciate how much energy you show in really trying to drill down into this topic, and the several links you have for readers to explore further. You have really tried to think carefully about this vital subject.

    I have a few comments about the overall thrust of your argument, however.

    1) You rest part of your argument on the notion that this crisis could not have been predicted and was not predicted. But that’s not quite right. Lots of economists and other observers gave many warnings that the housing bubble was false, that the securitization of mortgages and resale on the global market was a dangerous and unsustainable trend, that a giant collapse was coming. In the late 1990s, for example, the New York Times had reports on how Clinton banking reregulation would lead to this problem. In the last presidential election, Ron Paul has warned of this result over and over. So there were those who saw it coming–we just didn’t want to listen.

    2) You are exactly right that new laws and (de)regulations created this mess by encouraging certain kinds of lending and borrowing–so we could have predicted the result of those laws. Laws allowing commercial banks to speculate with people’s hard earned savings deposits and invest them in the speculative stock market/equities market for example are new, and they are the heart of the problem. People’s hard cash was gambled by their ever growing banks on a bubble economy.

    3) You say the economy is not so bad because 95% of the loans are being repaid–but when the 5% going into default have been used as collateral/down payments on much larger speculative purchases by banks, who then turned around and used the larger speculative purchase as down payment on yet another speculation–which is what has happened–then you have 5% of the loans guaranteeing a much larger loan, which in turn is guaranteeing another much larger loan–and then you have the bubble problem. Trillions of dollars of lending and world of investor confidence is wrapped up into those 5% bad loans.

    4) You say that we shouldn’t tax the rich investors especially heavily to get out of this dilemma–but that we all should pay our share. But how in the world is it fair that the Goldman Sachs team has paid an executive more than $1 BILLION in bonuses, and then they are can turn around and ask taxpayers to bail them out of their looming bankruptcy. The CEO is responsible for the bad debts and the collapse of the corporation, and if the taxpayers are now going to save the business, it only makes sense that the billionaire CEOs who have profited from this system now have to pay extra to help save it. The profit taking out of the financial system by the richest segment of society has shattered all world records in the last several years–and taxpayers certainly should expect those people to pay more than an “equal” share now that hte system is threatening the world economy. Take this fact for an example–the financial sector in the last five years (about) accounted for 40% of all earned profits in the economy, when it traditionally accounts for under 10%. How did the financial sector suddenly explode with record setting profits and billion dollar bonuses? By a fradulent system that inflated profits as more and more lending occured based on worse and worse bubble mortgage prices–and now it has collapsed. CEOs and others knew it was coming, they predicted it was coming, and they kept doing it. Even as the system began to collapse in the last two years, CEOs kept walking away with billions in bonus salaries. Yes, we can tax their greed more heavily than we tax the wages of teachers and store clerks earning $40,000 a year. They deserve to pay a bit more to save the system they wrecked.

    Enough of my rant.

  2. Matthew Wolf

    Kelly:

    I agree with Tony that you have bitten off a big chunk here.

    You note that the bursting real estate bubble “…has to do with what the government did in response to the Enron crisis…” yet make no real argument in support of this claim.

    In fact, Generally Accepted Accounting Principles (GAAP) require that companies report assets at the lower of cost or market (LCM). The Financial Accounting Standards Board (FASB) makes very clear what the LCM accounting means, and SEC regulations require that publicly traded companies report financial information GAAP. This was the case for decades before I earned my geeky accounting degree in 1982 and CPA certificate in 1984.

    The FASB is continually fine tuning GAAP to close loop holes; some have existed, others are created by new technologies, business models, and market forces. While post-Enron legislation did define more clearly corporate executive responsibility for accurate financial reporting to the public, the real problem has been enforcement.

    For example, the addition of one hundred SEC enforcement personnel sounds good on the surface. However, in relation to the size of the US economy is tantamount to a gnat on the north end of a southbound elephant. (Subliminal stab at GOP?) A US Department of Justice attorney recently described to me the meager staff of fewer than a handful of attorneys she had prosecuting a case that is defended by over forty attorneys paid from corporate coffers and supported by extensive staff and other resources. “A joke!” is how she described, noting that this is the normal situation, and that they only are able to prosecute the most glaring cases of corporate fraud, and of those, only the one’s for which they have strong supporting evidence.

    An indicator of the Bush administration’s intent regarding its response to corporate fraud is seen in the Task Force on Energy. Cheney filled the task force with corporate executives from the energy industry. No one was surprised when the task force conclusions were not so critical of corporate practices. Like so many other aspects of the Bush solutions to corporate abuse, the task force was show and tell.

    For all of these reasons, I believe the blame does fall on the Legislative and Executive branches of our federal government, along with (more than) a few greedy investors AND that government regulations, especially the enforcement of them, is the solution.

    Furthermore, your blaming of the consumer, the home buyer, while at the same time glorifying home ownership and the results of the National Housing Act of 1934 and other such legislation is rather preposterous. Without going into detail, I will direct you to the Truth in Lending Act (1968) which is part of the Consumer Credit Protection Act. These laws are based on a fundamental philosophy that holds banks and other businesses to a higher standard of both practice and understanding than it does consumers. This was done so that individual consumers would not have to face the situation described above, which is now daily faced by the US Department of Justice; it recognizes that consumers are by nature outgunned from the start by corporate interests and war chests.

    One of the primary causes of this situation (wherein corporate America is neither made subject to existing law, nor penalizes for infractions of such) is the growing wealth disparity. For about thirty years, due in part to lack of law enforcement, tax breaks, and subsidies, wealth has been concentrating in the hands of corporations and wealthy individuals. This increases their ability to influence lawmakers and the executive branch to deregulate, lower taxes, and ignore infractions. The activities of the Department of the Interior’s Mineral Management Service, including regulators having sex and doing drugs with corporate employees, should provide a strong wake up call to the general public, let alone our government.

    Yet McCain would have us look at the rate of tax on corporate earnings alone and ignore the thousands of pages of breaks, incentives, and loopholes in the tax code that result in one of the least “effective” tax rates on corporate earnings in the world. This will only exacerbate these troubles. And the middle class end up paying the bill, as usual.

  3. Tony Robinson

    Thanks Matt for the insider geek perspective. And again, Kelly–thanks for the tremendous effort in producing a very detailed and informative post.

  4. Stephen Noriega

    I appreciate your detailed post. I learned a lot from your explanations and from Tony and Matt’s response. I will now throw in my perspective from a diferent school of thought. Marx was right. I am not talking about communism. I am talking about Marx’s economic theories about capitalism. This crisis is a materialism of many of his ideas. Marx wrote, in Das Capital, and in other publications, that capitalism, unrestrained especially, is simply not sustainable. Markets will always form bubbles (wordage Marx didn’t say exactly) as capital becomes more and more representative and more separated from the actual production of labor. In this, mortgages and credit flow became ethereal in that they had nothing to do with the consumer or the person actually making the product.

    Marx did not anticipate as much the formation of a middle class to bear these storms so capitalism could change, evolve and move on. He also did not see the way in which governments regulate capitalism so people retain some of their labor value and so that the Bourgeoisie would not suck up all the available capital. So it happened that when the deregulation allowed capitalism in these markets to become too free, Marx’s model played out and the system crashed.

    The engineers of capitalism found a way to blunt Marx’s prophesies by installing valves and brakes in currency systems. We need to remember that if we want to avoid economic disasters in the future. This is not communism or. This is the necessary fence we put around capitalism so it won’t run out into the road and get run over.

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