I wonder why I haven’t posted on this before. Not sure, but a good friend who sets on the other side of the planet from me politically posted today about the $800 Billion (say that real slow, let it roll off your tongue – 800 hundred billion dollars) and in it appeared to lay it at the doorstep of the Iraq war and followed it up by saying to me in an email how he had lived through 8 years of failed Bush policies and his shattered economy.
This was a quaint argument. He’s a nice guy, but has been totally unwilling to backup his points of view with facts. For example, President Bush had the second best record of consecutive months of economic growth – 27 months. (Bill Clinton had 32), President Bush also brought in more revenue – much more – with his tax cuts. If you check from 2001 to 2006, revenues were up just over 20%. If you narrow the focus to 2003 to 2006 revenues were up 35%. This was due the basic fact that when people keep their money, the look for ways to invest. Companies then grow and revenues to the federal government increase. It proved true for JFK in the 60s, Regan in the 80s and Bush in 2001-2006. Just a note – what happened in 2006?? Mmmmmm – let me see?? What happened in the fall of 2006???? Oh yeah, now I remember – Democrats took control of Congress. How could I have forgotten that? Not that it mattered a whole lot to be honest. The Republican Party of the Bush administration stopped any illusion of being conservative and became Democratic Lite in nature.
However, there was a problem brewing in the housing financial market – identified as early as 1999 as revealed during testimony before Senator Henry Waxman – brewing in the housing market, particularly with Fannie and Freddie. The problem was toxic (as they are called now) assets that they were backing. A problem that began with the Community Reinvestment Act of the 70s and compounded by Janet Reno’s aggressive targeting of banks threatening prosecution if they didn’t step up loans to folks who – honestly – did not meet the most basic criteria for the loan. To enlist the cooperation of the banks, Freddie and Fannie beefed up their loan guarantees, thus setting the stage for this catastrophe. Everyone knew it was coming. Yet, in testimony by Congressman Dodd and Senator Franks as recently as 2007 the program was adamantly defended. In a rather warped set of logic, many on the left claim that the major problem was a LACK of regulation of the banking industry that caused this problem. Honestly, just the opposite is true. Regulation of the banking industry for social engineering (making loans to poor people who could not repay the) figured mightily into our current problem. And, so it went. Here are a couple of links that will take you through the entire story.
First, a step by step slideshow, from the start of the process to where we are today:
http://www.youtube.com/watch?v=1RZVw3no2A4&annotation_id=annotation_918789&feature=iv
“Finally, a lecture by Peter Wallison, A co director of AEI's program on financial markets deregulation, Wallison studies banking, insurance, and Wall Street regulation. As general counsel of the U.S. Treasury department, he had a significant role in the development of the Reagan administration's proposals for the deregulation of the financial services industry. He was also general counsel of the Depository Institutions Deregulation Committee and later served as White House counsel to President Ronald Reagan. His latest book is Competitive Equity: A Better Way to Organize Mutual Funds (AEI Press, 2007).”
http://www.powerlineblog.com/archives/2008/12/022355.php
It has been generally agreed by conservative economists that housing needs to be solved first. But, solved is the key word. A number of recommendations have been made.
Dissolve Freddie and Fannie: Their policies have been disaster and just the words “too big to fail” should be a flag that they need to be split apart to spread the risk.
Allow banks to reassert loan requirements: Banks must be able to qualify folks looking for a loan and have a high degree of confidence that they will be able to pay it back.
Repeal Mark to Market: Banks need to be able to declare their holdings as assets that will have future value and not simply have their assets reduced to zero.
Actually use the TARP funds to purchase the toxic assets – according to the original plan – and then auction them off. Currently toxic assets are worth zero; this would set a base line for valuation.
The plan introduced this week, and apparently agreed to by the Democrats of the House and Senate, tackle none of this. In fact, they compound the problem by enhancing the power of Freddie and Fannie, putting increased expectations on banks to “loosen credit” and simply exercise an orgy of spending that does nothing to get a handle on our banking – or broader – financial problems. Yet, there we are.
Just to be fair, the Bush administration made tremendous errors during their term in office. Medicare Part D comes to mind first. This introduced an on-going commitment of over $8 Billion per year to our already staggering entitlement costs. Bush’s unwillingness to wield the veto pen a single time during his first term also did a lot to generate a feeling that there was nothing was off limits when it came to spending. The success of his tax cuts further exacerbated the problem. With more and more money coming into the treasury, Congress (both under Republican and Democrat control) saw fit to spend this windfall rather than to reduce our spiraling national debt.
Now, under President Obama, we find that he feels there is absolutely no problem with deficit spending and plans on deficits far into the future. The day of reckoning is once again pushed a bit down the road. Within 10 years, the bill will come due. Between the interest costs of our spiraling debt, the increasing payments to Medicare, the plunging value of state pension plans and the looming Social Security obligations – our national “bill” will no longer be able to be ignored.
My young friend’s usual reason for our current problems is “the war”. How does the war figure into this? Well, how do our annual costs in Iraq – averaged over the past 6 years - pencil out? Our average costs have been in the neighborhood of $10 Billion per month, $120 Billion per year. With a stroke of the pen, the TARP bill, penned by the Democrat House and confirmed by the Senate, exceeded our entire war costs since March 2003. The Democrat House and Senate has now passed an additional $850 Billion “stimulus” bill and Geitner says another $2 Trillion plus will be needed to unwind the banking problems. Yet my young friend confidently declares (along with a host of the left) that Iraq was the problem. Sorry, no sale.
So what does this mean? The bailout won’t work. Think of it like a family who has maxed out a credit card. Then they get a new offer in the mail with a higher limit. They transfer their balance and then max out the new card. The old empty credit card is too much to ignore, so the old card is now maxed out once again. Our cards, as a nation, are nearly maxed out. President Obama and the Democrat’s plan will finish the process. The result? I believe we may well be headed for a national – and global – collapse. Time will tell, but it’s going to get bumpy – very, very bumpy.
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