Let’s be clear about one thing. The economic disaster we find ourselves in is not entirely the making of Wall Street. For the Democrats in the audience, it is not entirely the fault of Republicans. For the Republicans in the audience, this is not entirely the fault of Democrats. This is, to put it plainly, the net result of the perfect storm of stupidity.
If you have ever read The Perfect Storm, there is a great explanation of the three weather phenomenon that came together to create the system that is the focus of the book. The movie glosses over the explanation, so read the book instead.
What we are witnessing this week is the same interaction of three deadly factors. Any one of the three would be destructive. In total, however, they have just cost you and I a trillion dollars. And don’t for a moment think the total will end there. Mark my words, this bailout has only begun to cost us.
The Three Factors
Under a Republican congress and Democratic President, Washington expanded a Carter era relic called the Community Reinvestment Act.
The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations.
In other words, banks will make loans for houses to people who are ill-equipped to pay them back. The “encouragement” came in the form of penalties for not doing so.
Add to that another bill passed by a GOP controlled Congress with a Democratic President. That bill, the Gramm-Leach-Bliley Act sought to:
Enhance competition in the financial services industry by providing a prudential framework for the affiliation of banks, securities firms, insurance companies, and other financial service providers, and for other purposes.
In other words, prior to the law, Insurance companies could sell insurance, banks could do loans, securities firms sold stock, and never the three should meet. After the law, it was a free for all. Banks created securities out of the shitty loans they issued under the CRA, Insurance companies under wrote those while creating their own shitty securities, etc, etc.
Now into the mix you have to throw the American people. They look at the news and see home values going through the roof. The react the same way they did during the Beanie Baby craze. They rush out to get a piece of that action. They can buy a $5 stuffed animal and sell it for $300 on eBay, so they buy the hell out of Beanie Babies.
Unfortunately, economic laws will only support that for so long. The company will make more (thereby reducing demand for the things), people will lose interest, or some other force will enter the market and suddenly your left with crates full of stuffed animals rotting in closets. Beanie Babies were an artificial market.
In the same way, people saw home ownership as a great way to make money. Home flipping became the rage, people took out second mortgages to buy second homes, and suddenly everyone had to buy a house.
The Perfect Storm
The trouble is when you have people who can’t afford to buy houses meeting up with people who have to sell houses to keep from running afoul of laws designed to promote home ownership among the poor, you wind up with a) a guy who will lie about his income or b) a guy who will lie about the value of the house or the terms of the loan.
So suddenly a lot of people are invested in houses they can barely afford anyway, and the real terms of those notes go into effect. People can’t pay, so the value of that note becomes worthless.
Since you have built shitty securities on the value of that house, the value of those securities go into the toilet. When that happens, the debt that the mortgage company is carrying becomes unsustainable and the house of cards comes tumbling down.
This is exactly what we’re witnessing. We’re seeing exactly what happens when an artificial market comes tumbling down. There never was a market for housing for people who can’t afford it. The government created one, took their eyes of the guys who were managing it, and is now asking us to throw another deck on the house of cards so people who can’t afford to borrow can keep doing so.
DC is Fundamentally Broken
I have said that Washington DC is so fundamentally broken it is going to drag the rest of the country down with it. I am more convinced of that than ever today.
With this bailout, we’re solving nothing. We’re simply allowing people who shouldn’t have credit to keep on borrowing. We’re enabling addictive behavior. The Congressmen who voted for the bailout should be tried as traitors.
Despite all of that, I was forced to watch to politicians on TV last night both of whom blamed “the greed and corruption of Wall Street” for the mess while giving a pass to the incompetence and stupidity of Washington. Make no mistake. This dismal situation was the result of horrible policy that started with, and was supposed to be overseen by, Congress. They passed the laws that allowed this to happen and ARE TAKING ABSOLUTELY NO RESPONSIBILITY for the mess they created.
What’s worse, is both candidates for President, and both candidates for Vice President, appear to have learned absolutely nothing from watching this happen and are pursuing the same ridculous policies that have crippled our nation.
I believe you can absolutely count on two things.
First, when the next Administration is about 6 months or a year into its term, they will have to deal with an economic disaster of Biblical proportions. This is a band-aid fix for a missing leg. It’s stupid and will do nothing but punt the problem into an off-year when the sheep aren’t watching.
Second, if you think we dodged a bullet with this bill today, you haven’t seen anything yet.