The Economy is Improving; What Happened and Why

Let's talk about our current economic condition. I've been looking around and learned a few things I'd like to share.

I believe this recession (2008 through 2009), that some are calling the "Great Recession"* was caused by the federal government.

I was going to say that Wall Street "fat cats" helped as well, but I believe they were doing what everyone wanted them to do, maximize profits, follow the rules that the government imposes on them, and honor their contracts. This benefits everyone.

The reasons for the recession are multifaceted, but the prime mover in this debacle seems to be the FEC's Financial Accounting Standards Board's (FASB) modification their "mark to market" rules in Financial Accounting Standards (FAS) number 157, which forces investment firms to estimate and report the value of their holdings, for taxes, investor information and other purposes, to current market values. This makes sense on the surface, but if there is a market slow down, such as the subprime market hitting the skids, where their holdings cannot be easily liquidated, the value goes down.

In the subprime situation, many loans were adjustable rate loans and started adjusting upwards as the prime lending rate went up in mid 2004 through 2008. (Coincidence? I wonder if Mr. Bernanke had any part in this?)

Here is what I believe happened

A real estate bubble soars upward with easily available credit due in part to a low prime rate and subprime loans, peaking in 2006.

- By 2004 there were trillions of dollars in mortgages and investments in the subprime loan markets, backed by Fannie Mae and Freddie Mac, two "quasi governmental" organizations that guarantee the loans.

- The Federal Reserve increases the prime lending rate (money the Fed loans to banks and others) from 2.00% in 2001 to a peak of 6.25% in June of 2006.

- Throughout the same period, investment firms obtain and repackage mortgage loans into security derivatives and sell them to investors around the world and making profits all over the place. As long as the money is flowing, such as mortgage holders making their payments; no problem.

- Through 2006, subprime mortgage holders' payments increase with many doubling and tripling. Many who could just barely make their payments now cannot afford them and mortgage holders default and and banks foreclosure.

- In 2007 the housing market becomes saturated with over priced real estate. Many are denying that it is a serious problem.

- Investors who bought properties as investments, such as those who "flip" them, find the market flooded and real estate values are tanking. They start walking away from the debt.

- New terms, "illiquid", "toxic Assets" and "derivatives" become every day words in the general American population.

- In September 2007, the Federal Reserve starts lowering the prime lending rates.

- FASB tightens the asset estimation and reporting requirements of FAS 157. They became effective for businesses with fiscal years beginning after November 15, 2007. Under the stricter requirements, firms that invested in these toxic assets, had to report the loss of billions of dollars is their assets.

- Over 100 companies fold due to the now illiquid assets they were stuck with.

- Markets around the world that invested in these (once) high yield derivatives lose capital causing a panic in our federal government. (if those countries fail, who will loan this government more money?) Representative Barney Frank (D-NY) runs around denying it was his fault.

- The federal government start picking winners and losers in the financial services and investment companies. While loaning funds to some financial institutions, the government decides not to assist Lehman Brothers Holdings, Inc., the competitor to Treasury Secretary Henry Paulson's former employer, Goldman-Sachs (GS). GS, who turned a profit from the subprime meltdown, would later receive $12.9 Billion in bailout funds from the Troubled Asset Relief Program (TARP).

- In September 2008, Secretary Paulson pushed for bailouts of $700 Billion (TARP) to shore up the now almost defunct financial markets in this country and abroad. He got it done and President Bush signed it.

- American International Group, Inc. (AIG) receives Bailouts totaling $122.8 billion by the end of 2008, with more to follow. Nobody can say where the money went.

- The Obama pre-administration complains about executive bonuses being paid by companies that received taxpayer hope dollars.

- General Motors (GM) is laying off employees; In 2008 GM was down 13,000 salaried employees since 2000 & 40,000 hourly jobs are gone since 2006 (NY Times). They were closing plants and reporting that they will not have enough operating capital to pay their employees and creditors. Along with Ford and Chrysler, they are asking for a bailout. GM received $9.4 Billion in December 2008 (CNN Money), and more bailout money was to come.

- As businesses fail, being unable to secure funds to continue to operate due to a "bad banking environment", millions around the world became unemployed. This causes more foreclosures, lost homes and lost investments, many of these investments were retirement accounts. Many who were planning to retire now must continue to work (if they can find a job).

- In March 2009 President Obama says he does not want to run the automobile industry, but fires GM CEO Rick Wagoner (Politico), tells GM what vehicles to produce, and insists that GM downsize, destroying thousands of jobs. GM totals 40,000 more layoffs for 2009 alone (LA Times).

- In March 2009 President Obama instructs GM on how to run its business or he will cut off the bailout funds (Business Week).

- GM files for chapter 11 protection under the bankruptcy laws after receiving bailout funds several times, being nationalized the President of the United States. The federal government then claimed a sizable percentage of GM stock and gave the remaining stock to the UAW.

The net result of the change to FAS and the failure to properly mange Fannie and Freddie: subprime market crash, stock market crash, housing market crash, worldwide recession, the loss of millions of jobs, millions lose their homes, and the US Deficit is tripled with hope dollars. Our government nationalizes some banking and automobile manufacturers, acting like 1959 Cuba or 1971 Venezuela, and the list goes on.

This is how we find ourselves trying to climb out of a recession in 2010. The mortgages that were "owned" during this period had their values drop as much as 50 percent making them "upside down', meaning investors and home owners owed more than the property was worth. Many investors and owners started walking away from this bad debt. The debt was guaranteed by Fannie Mae and Freddie Mac, two quasi-governmental entities that now held trillions of dollars in debt from these loans.

The good news

Realizing what they have done (primarily from the discussions of Steve Forbes) but continuing to blame former President Bush, they changed the mark to market rules last April (FAS -157, 2009), easing the rules and stabilizing market prices and the economy is improving.

This is why I am of the opinion that the US Congress caused and allowed this recession through...

- handing off the power to regulate markets to the FEC, who produced poorly thought out market rules instituted with their failure in the Enron debacle in mind.

- decades of intimidating financial institutions to give loans to people who in all likelihood would be able to make the payments for very long.

- turning their backs on the indicators (from as far back as 1998) and prompts from the Bush administration to reign in Fannie Mae and Freddie Mac hopefully before it became too late. Committees refused to hear the advice, senators promised filibusters if any interference with their plans to lend money in an exceptionally risky manner, with charges of racism and other bogus claims to prevent any change to the status quo (which is ironic as now, while in the majority, the Democrats are labeling the Republicans as the "party of no").

Hey, maybe we should give the health care insurance industry to a board or commission created by these guys. What could go wrong?

Notes

*No doubt trying to equate it to the actual Great Depression to bypass President Carter's "great recession"

Hating Wall Street.

There is a lot of hate over at the Huffington Post, but Arianna complains about President Obama's lack of leadership where Timothy Geithner is concerned. It seems Geithner is to be the scapegoat for the president for forcing Sen. Dodd (D-Pluto) to add the AIG bonuses to their bailout. There are 50 pages of comments at Huffington Post as I type this. One contributor actually hates Wall Street, and he refers to them as "Wall Street masters" and "idiots on the Street".

It seems there are many, many more with the same attitude at the Daily Kos, within the Democratic Party and around the country. In fact some nice folks learned (I wonder how) where some AIG executives lived, got on some buses and picketed their homes with signs shouting "Damn you AIG" (with dripping blood), "AIG Bailout CROOKS", "Money for the needy, not for the greedy!" and "Capitalism is organized crime". Hating Wall Street is very cool, so to speak.

The Obama/DNC/congressional/MSM/legacy media blame campaign seems to be working. The people are blaming and hating Wall Street executives for the hard times brought on by the US Congress and the presidents who enabled them. Democrats want voters to look elsewhere to blame our current troubles on, so they actively promote hating the achievers in America. They use class envy to encourage average Americans to despise achievement and they actively demonize anyone (read: Republicans) who support business. They do this even though they need corporate donors (see "Democrats Bid Business Adieu", WSJ) and the American people need them to provide jobs. Good old Barney Frank, sounding much like those McCarthy hearings in the 1950s, tops it off as he demands the names of the AIG executives who received bonuses (video).

We've known for years that the American left hates and fears anyone who is successful in business, professing that they must be cheating and stealing from "the little guys". Unless, of course, that rich guy funds their issues (think "I'm having a very good crisis" - George Soros). Then they simply fail to mention them.

Of course, Senator Chuck Schumer's had to get in on the act of scolding AIG,

“If you don’t return it on your own, we will do it for you.”

This hate serves at least two purposes:

1. It gives them an enemy to defeat that is not you and me so they (congress & the president) can swoop in and save us from the evil doers. They just need our vote and our money.
2. It allows them to divert blame from themselves (explained above). No one would elect a mouthy buffoon to congress or the presidency. Would they? Really, would they?

So, did congress enable the "crisis"? Some people think so.

Testifying before the House Oversight and Government Reform Committee in Washington, Franklin Raines, former Fannie Mae Chief Executive Officer, blames housing and regulators for it.

“It is remarkable that during the period that Fannie Mae substantially increased its exposure to credit risk its regulator made no visible effort to enforce any limits,” from "Raines Faults Regulators for Fannie, Freddie Missteps", Dec. 9, 08, Bloomberg.com

Fannie Mae Execs Daniel Mudd, and former Freddie Mac CEOs Richard Syron and Leland Brendsel testifies as well...

The executives said Congress pressured the companies to finance lower-income borrowers while regulators did little to curb the increasing risk that ultimately led to a government takeover that wiped out most shareholders and potentially saddles taxpayers with a $200 billion tab. James Lockhart, the companies’ regulator, said in September that exerting greater control over Fannie and Freddie was impeded by “their lobbying power.” Bloomberg.com

Why would that happen? I believe the explanation is clear.

Congresspersons who received campaign contributions from these financial institutions, including then Senator Barack Obama ($110,332.00 from AIG) and Senate Banking committee Chair Christopher Dodd ($281,038.00 from AIG), blocked any attempts to tighten them up. When the mortgage payments stopped coming in, the house of cards toppled. Among federal candidates in the 2008 Cycle a total of $644,218 was donated from AIG. Around 70% went to Democrat candidates. Senator Schumer has received $111,875.00 from AIG as well. (OpenSecrets.org) Over the past 20 years AIG has "has contributed more than $9 million to federal candidates and parties through PAC and individual contributions." (OpenSecrets.org) Our representatives in congress also receive millions from the unions. Unions that were bailed out by them as well. President Bush doesn't get a pass either as he had received $200,000.00 from AIG.

So, what have they done to cause this recession? Democrats in congress have been pushing loans to people who barely could afford them and demonize anyone who would prevent those loans. (Republicans in congress do not want to be demonized as mean and hateful for opposing this lunacy, so they only make little squeaks about it from time to time.)

The congress and federal regulators made the rules that allowed the "securities derivatives” markets that allowed the "toxic assets" to be created.

For as far back as I can remember our American style politics, the Democratic Party has been the party of 'There is a problem for working Americans and we're going to fix it. Because we care Those Republicans don't care. They are mean'. This has always been followed by them either doing nothing, which allows them to use the same issues and crisis's to campaign on, or they do something, anything, and make it worse. In the area of housing, they used their third grade vision of what is "fair" and created the Community Reinvestment Act (CRA) under Jimmy Carter in 1977. This, along with the rumored pressuring the FTC to back off sub-prime loans, and some choice regulations (most likely authored by lobbyists), is the underlying issue that caused our economic dilemma.

But really, should we blame Wall Street for acting in character? Or should we blame those who rely on feelings and self-serving rhetoric to further their own goals? The fact is that with very few exceptions, exceptions that end up in jail, Wall Street plays by the rules given to it by the US Congress and enforced through federal regulators.

Didn't Secretaries Paulson and Geithner, Presidents Bush and Obama, and the entire US Congress not recognize businessmen and business contracts when they decided to give them 700 Billion Hope Dollars? They knew who they were dealing with. They have been dealing with them for decades. And the Wall Street folks did what comes naturally: They made money, and lots of it. Then, they passed out bonuses. Translation:

The federal government did not bail out the banking system. Congress bailed out the people who run these companies.

When AIG received billions of Hope Dollars, they were able to honor their contracts. It's what business people do. No Problemo.

Of course the US congress does not understand this train of thought. Contracts? Honor? (I can see Barney Frank's eyes rolling in wonderment now)

Since congress gave the Hope Dollars to Wall Streeters and Big Auto, but did not give any Hope Dollars to help the people that were losing their homes (as originally stated by congress, the Fed and President Bush) it seems as if the congress represents only those who are able to ante up the big bucks instead of you and me. (If your representative is not representing you, you should replace him/her and keep replacing them until you find one that does represent you." Moreover, even though I vote Republican, this challenge goes to GOPers as well.)

Our government's only proper response should be to allow those companies to find their own way. Ordering CEO's to be fired, demanding they build cars that only a few can afford, or want, and picking who wins and who loses, is not within the limited powers of this Constitutional Republic. These are the consequences of taking money from the federal government (They cannot tell you how to run your business if you don't take their money).

The free market system, capitalism, cannot work when there are third parties (Dodd, Franks, Reid, Pelosi, Obama, Bush) picking winners (AIG, GM, etc.) and losers (Lehman Bros.). Chapter 11 protection would allow these companies to reorganize using the system that (mostly) works. Try to keep in mind that the named underlying collateral, real estate, is still there and still valuable. That $300,000.00 home may now be marketable at $200,000.00, but it is not zero. Those "toxic assets" to be dealt with in the normal manner and the collateral, homes and properties, would bear their current, more reasonable, market value. The only people who would lose are the executives that allowed the extreme risk and those who were duped into investing in them. The average Americans who are covered by the FDIC may lose some, but not all and certainly not two or three trillion dollars worth.

Sure, the economy would be tough for a while, but the recession would not be as long as it's going to take to payoff the President's and congress's irresponsible spending. Spending of dollars they do not have and will not have: Hope dollars.