Boom, Bust & Bailout

Growing up as a child I picked up a few useful life tips that helped shape the person I am today.

They were simple, some would say common sense things such as hot things burn skin, loud things hurt ears and alcoholic things… well they do all sorts of things that I don’t have time to go into here.

Around the age of 17 I also figured out that it’s not smart to buy things you can’t afford, especially when you have a part-time student job in a low-paying retail outlet and an unhealthy obsession with expensive consumer electronics.

In retrospect, as a teenager I could probably be forgiven for having run up a few grand on a Visa card. But when the Federal Government – which is supposed to consist of some of the greatest minds in the country – announces a record budget deficit of $482 billion, I find it slightly trickier to forgive and forget.

That’s exactly what was announced last week when Jim Nussle, the White House Budget Director, told reporters that George W. Bush’s successor could expect to inherit the credit card bill from hell. Let’s hope the Feds signed up for a good points reward program (does that mean every American will be receiving a free toaster or travel alarm clock in the mail?).

When the elected government displays such a staggering inability to control how it spends your – our – money, it becomes crystal clear how broken our system is.

Ron Paul has been one of the very few voices of fiscal reason to speak out about the reckless spending by politicians who clearly have no plan to put away the plastic. More money for an illegal foreign war? Sure, stick it on our People’s Republic of China Credit Card. Need a few billion to prop up irresponsible home lenders who played the roulette wheel and lost? Here’s a few billion that our buddy Ben Bernanke printed fresh from the presses yesterday. Don’t worry about the falling rate of the dollar – it’s really not THAT important.

Ron Paul is the only Congressman and former Presidential candidate who is actually looking out for ordinary Americans and wants to rein in this boom, bust and bail-out form of castrated capitalism.

As Ron points out, the way to deal with this problem is to:

  • End the war in Iraq and stop pouring billions of dollars into this endless conflict
  • Stop printing money whenever we need to prop-up another reckless bank or mortgage lender
  • End the “buy now, pay later” mentality that exists throughout Washington
  • Cut back government spending and liberate millions of Americans by letting them keep more of their own money

America faces a number of challenges in the coming months and years. We need to focus on solutions, and end the culture of Las Vegas party-time economics. After all, we all know who eventually picks up the tab.

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  • Scott Carter

    This financial thing is the beginning of the end for the American Empire. I look forward to not being responsible for the worlds security etc.

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  • Daniel Dinsmore

    This is about the program to bankrupt America and do just what was described in John Perkins Book The Secret History of The American Empire. It turns the American working class into slaves for the IMF. Just like they did to the Indoneasians in the 70’s.
    Load your guns ! ! !
    Congress is about to sell us the biggest fraud in American history.
    It’s been highly touted as an economic stimulus bill that will help millions of Americans – and has the backing of both President Bush and House Speaker Nancy Pelosi. In the coming year, individuals would receive rebates of up to $600 and families up to $1,200. There are other goodies, too, including tax write-offs for small businesses and an expansion of the child tax credit.
    But, as the old adage goes, nothing comes for free. As part of the bill, Congress is set to rush through an increase in the mortgage loan limits for Fannie Mae and Freddie Mac (and Federal Housing Administration insurance, too) – from $417,000 to $729,750 – the first step toward a massive financial disaster in which taxpayers will end up paying through the nose.
    Here’s how we got to this point. Domestic and international investors hold hundreds of billions of dollars in bad debt, because U.S. investment houses sold them junk securities based on often fraudulent mortgages. Many of these mortgages were sold to unqualified buyers under terms that made widespread foreclosures a certainty once the housing market began to fall.
    Investment banks and bond rating agencies sat down and tried to figure out how to describe Americans with insufficient incomes and little for a down payment as great credit risks on loans too big for their incomes. The new rules focused on credit scores, because it was a good excuse to avoid looking at income and down payment, factors that would have restricted this moneymaking fiasco.
    Now, thanks to Congress, junk bond investors will be able to pawn off their bad debt to Fannie and Freddie, instead of suing the big investment houses for ripping them off. This shift will certainly doom Fannie Mae and Freddie Mac, so don’t be surprised if we, the taxpayers, have to bail out poor Fannie and Freddie – to the tune of more than $1 trillion.
    Why more than $1 trillion? If Goldman Sachs is correct in its recent projections that home prices in California are going to drop 35 to 40 percent, the state’s losses alone would top $2 trillion, because California has a disproportionate number of jumbo loans. The irony here is that the collapse in housing prices could make Fannie insolvent even without raising the loan limit. Increasing Fannie’s limit is like going on a spending spree with your credit cards because you know you are going to file for bankruptcy in a few months. Only here the taxpayer is left holding the bag. Our children will pay interest on this debt in perpetuity. It is our debt. It is inescapable.
    In the coming months, Fannie and Freddie will buy up mortgages based on old, fraudulent appraisals and on loans with bogus inflated incomes. Unfortunately, many of these loans will still default.
    But that’s just the start. Brace yourself for another wave of faxes, phone calls and junk mail urging you to refinance at only 1 percent. With zero new regulation, the same bad actors that caused this crisis can once again inflate property appraisals and begin a new cycle of fraud.
    There are firms that rent assets to people to help them fraudulently qualify for a mortgage – like loaning them money to keep in their bank account for a couple months so they can fool the lender with documented savings that evaporate the day after the mortgage is signed. Another popular ruse: The borrower pays an employer to pay him a lot of money in a fake job for a month or two so he can show a fat paycheck in his loan docs. Some real estate agents and mortgage brokers actually refer buyers to these services.
    Contrary to popular myth, Fannie holds a lot of subprime debt, option ARM debt and other dodgy securities. Fannie and Freddie owned or guaranteed almost 45 percent of all mortgages in America last year. BusinessWeek noted in 2007 that Fannie and Freddie have “moved more prominently into low-documentation loans, which require little or no proof of the borrower’s income.” Expansion of Fannie and Freddie’s reckless lending is exactly what Congress wants because it’s plausibly deniable. Teary-eyed lawmakers can take to the airwaves a year from now and declare: “We had no idea Fannie could go under, but we can’t cut and run now. We have to bail out Fannie and Freddie for the good of America! It’s going to be a tough slog, but you’re getting used to those, no?”
    Those same lawmakers won’t mention the fact that they get paid far more by real estate lobbyists than they do from our Treasury.
    I’ve spoken with borrowers who stopped making mortgage payments seven or more months ago. None has received a default notice. Defaults may be much higher than banks are letting on. The data lags are growing suspiciously long. Nobody knows what’s going on. Seven months without making a single payment! Will Fannie guarantee those loans because they aren’t in formal default yet? Nobody wants to know, because if they know, they might be called to testify next year. That’s why lawmakers want to raise the limits now and ask questions later.
    This shortsighted plan poses a terrible risk to every American taxpayer, especially retirees, because Social Security money will be needed to bail out Fannie and Freddie. And even if you live in high-priced San Francisco, Los Angeles or New York – and stand to benefit from the increased loan limit – this is a horrible fraud on you, too, because raising the limit to $730,000 risks a systemic crisis that will cost far more than any temporary rebate check.
    In support of the economic stimulus bill, Bush will have to face “working American families” and explain that some of their tax money is going to be spent guaranteeing $730,000 mortgages on $1 million homes. It’s like some sort of upside-down communism where the poor pay the rich welfare. Why should taxes from families earning $48,000 a year be used to support expensive mortgages in New York, Los Angeles and San Francisco? Welfare for the hungry and homeless is evil, but welfare for million-dollar homeowners facing a tough refi … well, that’s called “helping the economy.”
    I can imagine the president’s radio address playing in the heartland: “We have some families with million-dollar homes on the coasts who are really hurting and so we need you, the working families of America, to stand together with them and help them avoid the kind of home price depreciation that might leave them without a new Lexus for years.”
    I guess Congress’ hope is that median-income families will be too busy using their rebates to buy much-needed groceries to notice that the rich folk are getting way with a new scam.
    Several months ago, economist Nouriel Roubini of New York University’s Stern School of Business suggested that the housing market has been effectively nationalized. At first it seemed crazy, but now it’s fairly obvious. In August alone, Fannie and Freddie increased their loan portfolios by $62 billion, and the Federal Home Loan Bank by $110 billion. That total of $172 billion would come to just over $2 trillion annually – not much less than the entire federal budget.
    Everyone seeking a loan, securitizing a mortgage, and buying or selling a mortgage security will now be dealing, in one way or another, with the U.S. government. This type of intervention is very expensive and will eat everything in its path, including Social Security.
    If we’re going to have a government-financed intervention, it should be to make sure that Social Security benefits go to those who paid for them, that the poor are fed and housed, or that the army of uninsured receive health benefits. If, as they say, we don’t have enough money for those important things, then I think we don’t have enough money to bail out banks and bond investors.
    Don’t let me down, my fellow Americans. Let’s vote out anyone0 who dares to vote for this scam.
    Sean Olender is an attorney in San Mateo. Contact us at insight@sfchronicle.com.

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  • http://www.forwhichitstood.org Daniel

    I look forward to the day when we, as Americans, will take a stand against the radical federal spending. It’s ridiculous, but it’s not a problem that is so simply ended.

    We’re on a dangerous, slippery slope and I fear things will have to get a lot worse before they get much better.

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