Sunday, July 31, 2011

U.S. Debt, Who is at fault? Where do we go from here?

First, let’s talk about under the Bush administration how the rules for short selling was deregulated. Note: "Wikipedia", During hearings on the bankruptcy filing by Lehman Brothers and bailout of AIG before the House Committee on Oversight and Government Reform, former Lehman Brothers CEO Richard Fuld said a host of factors including a crisis of confidence and naked short-selling attacks followed by false rumors contributed to both the collapse of Bear Stearns and Lehman Brothers

Secondly, the lack of regulating the derivative market allowed billionaire’s to rape the stock market and investors. Note: "Wikipedia", 2000 December:Commodity Futures Modernization Act of 2000 (based on a report by Summers, Greenspan, Levitt, & Rainer) declares credit default swaps (and other derivatives) to be unregulated, banning the SEC, Fed, CTFC, state insurance companies, and others from meaningful oversight. CDS eventually destroy AIG & others.

• Third, it was under the Bush administration that the mortgage industry was deregulated. Don’t we all remember when then, President Bush stood on the White house lawn and said we are going to make home ownership affordable to millions of Americans? Deregulating the mortgage market is one of the biggest factors in causing the sub-prime mortgage market collapse. Note: "Wikipedia", subprime mortgages. 2002 June 17:Bush unveils his "Blueprint for the American Dream". He sets a goal of increasing minority home owners by at least 5.5 million by 2010 through billions of dollars in tax credits, subsidies and a Fannie Mae commitment of $440 billion to establish NeighborWorks America with faith based organizations. 2003-2007: U.S. subprime mortgages increased 292%, from $332 billion to $1.3 trillion, due primarily to the private sector entering the mortgage bond market, once an almost exclusive domain of government sponsored enterprises like Freddie Mac.

o The Federal Reserve fails to use its supervisory and regulatory authority over banks, mortgage underwriters and other lenders, who abandoned loan standards (employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability), emphasizing instead lender's ability to securitize and repackage subprime loans. 2007 Home sales continue to fall. The plunge in existing-home sales is the steepest since 1989. In Q1/2007, S&P/Case-Shiller house price index records first year-over-year decline in nationwide house prices since 1991. The subprime mortgage industry collapses, and a surge of foreclosure activity (twice as bad as 2006) and rising interest rates threaten to depress prices further as problems in the subprime markets spread to the near-prime and prime mortgage markets. April 3: According to CNN Money, business sources report lenders made $640 billion in subprime loans in 2006, nearly twice the level 3 years earlier; subprime loans amounted to about 20 percent of the nation's mortgage lending and about 17 percent of home purchases; financial firms and hedge funds likely own more than $1 trillion in securities backed by subprime mortgage; about 13 percent of subprime loans are now delinquent, more than five times the delinquency rate for home loans to borrowers with top credit; more than 2 percent of subprime loans had foreclosure proceedings start in the fourth quarter The monoline insurance companies (AMBAC, MBIA, ACA, &c) have written vast quantities of insurance against the failure of CDO tranches. Those tranches now begin to fail by the hundreds. The credit ratings agencies downgrade the monolines from AAA, but the monolines have a unique business model. If they don't have a AAA rating, then their main line of business (bond insurance) becomes impossible for them to perform. By 2009, the monolines have all crashed. 2008 October 1: The U.S. Senate passes HR1424, their version of the $700 billion bailout bill.

o October 1: The financial crisis spreads to Europe.

• October 3: President George W. Bush signs the Emergency Economic Stabilization Act, creating a $700 billion Troubled Assets Relief Program to purchase failing bank assets. It contains easing of the accounting rules that forced companies to collapse because of the existence of toxic mortgage-related investments. Also key to winning GOP support was a decision by the Securities and Exchange Commission to ease mark-to-market accounting rules that require financial institutions to show the deflated value of assets on their balance sheets."

o October 6–10: Worst week for the stock market in 75 years. The Dow Jones loses 22.1 percent, its worst week on record, down 40.3 percent since reaching a record high of 14,164.53 October 9, 2007. The Standard & Poor's 500 index loses 18.2 percent, its worst week since 1933, down 42.5 percent in since its own high October 9, 2007.

o October 6: Fed announces that it will provide $900 billion in short-term cash loans to banks.

o October 7: Fed makes emergency move to lend around $1.3 trillion directly to companies outside the financial sector.

o October 7: The Internal Revenue Service (IRS) relaxes rules on US corporations repatriating money held oversees in an attempt to inject liquidity into the US financial market. The new ruling allows the companies to receive loans from their foreign subsidiaries for longer periods and more times a year without triggering the 35% corporate income tax.

o October 8: Central banks in USA (Fed), England, China, Canada, Sweden, Switzerland and the European Central Bank cut rates in a coordinated effort to aid world economy.

o October 8: Fed also reduces its emergency lending rate to banks by half a percentage point, to 1.75 percent.

o October 8: White House considers taking ownership stakes in private banks as a part of the bailout bill. Warren Buffett and George Soros criticized the original approach of the bailout bill.

o October 11: The Dow Jones Industrial Average caps its worst week ever with its highest volatility day ever recorded in its 112 year history. Over the last eight trading days, the DJIA has dropped 22% amid worries of worsening credit crisis and global recession. Paper losses now on US stocks now total $8.4 trillion from the market highs last year.[87]

o October 11: The G7, a group of central bankers and finance ministers from the Group of Seven leading economies, meet in Washington and agree to urgent and exceptional coordinated action to prevent the credit crisis from throwing the world into depression. The G7 did not agree on the concrete plan that was hoped for.

o October 14: The US taps into the $700 billion available from the Emergency Economic Stabilization Act and announces the injection of $250 billion of public money into the US banking system. The form of the rescue will include the US government taking an equity position in banks that choose to participate in the program in exchange for certain restrictions such as executive compensation. Nine banks agreed to participate in the program and will receive half of the total funds: 1) Bank of America, 2) JPMorgan Chase, 3) Wells Fargo, 4) Citigroup, 5) Merrill Lynch, 6) Goldman Sachs, 7) Morgan Stanley, 8) Bank of New York Mellon and 9) State Street. Other US financial institutions eligible for the plan have until November 14 to agree to the terms.

October 21: The US Federal Reserve announces that it will spend $540 billion to purchase short-term debt from money market mutual funds. The large amount of redemption requests during the credit crisis have caused the money market funds to scale back lending to banks contributing to the credit freeze on interbank lending markets. This government is hoping the injection will help unfreeze the credit markets making it easier for businesses and banks to obtain loans. The structure of the plan involves the Fed setting up four special purpose vehicles that will purchase the assets.  2011 The U.S. Financial Crisis Inquiry Commission reported its findings in January 2011.   It concluded that "the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels.

Not to be lost in all of this is the easing of “mark to market” (Mark-to-market or fair value accounting refers to accounting for the fair value of an asset or liability based on the current market price of the asset or liability, or for similar assets and liabilities, or based on another objectively assessed "fair" value.) on bank balance sheets, asked for by the “GOP” Republicans. This in itself is a legal way for banks to not tell us the truth of how much they are really worth, what happened to transparency?

These events not only collapsed financial markets in the U.S. but around the world. As a result the U.S. economy was sent into a tailspin that we are still in today.

I will admit, we have to get our spending under control, but the question needs to be asked, were do we start? We are spending billions in fighting two wars and now, one conflict overseas, should spending be cut there first? During this whole bank crisis, some banks took the bailout money reinvested and made billions on the back of taxpayers, should we demand that money back, plus that which they borrowed.

Yet, we hear talk about cutting entitlement programs, since when has social security, medicaid or medicare been entitlement programs? Most who receive these programs paid for them through payroll deductions. Social security is a promise made by the federal government, pay into it while you are working, if you become disabled or reach retirement age you will receive “payment”, sort of an american investment. Social security an “entitlement program”, here is what President Bush had to say about the program: “”, President George W. Bush made a shocking assertion back in 2005 when he was pushing to privatize Social Security. “A lot of people in America think there is a trust,” he said, “that we take your money in payroll taxes and then we hold it for you and then when you retire, we give it back to you. But that’s not the way it works. There is no trust fund — just IOUs ….”

Actually, working Americans have paid so much in Social Security payroll taxes during the past three decades that they have built up a $2.6 trillion surplus in the account. That money should make the system strong enough to cover the current level of benefits for the next 26 years. In the interim, a prudent government could restructure the program for the rest of the century, perhaps by means-testing benefits and rejiggering contributions.

But, unfortunately, Bush was right. In 1983, Congress and the Reagan administration adjusted Social Security taxes and benefits to put the program on an even keel that began to build up a huge surplus for investment. But Congress decided to “borrow” the surplus instead of investing. They’ve been using it to help pay for things that have nothing to do with Social Security, things the political establishment and tax-averse Americans wanted but didn’t want to pay for: invasions, education, highway repairs and so on. And, without giving any thought to paying the surplus money back, the federal government has been trading it for special Treasury bonds that politicians used to assure us were safe in a lockbox.

Just IOUs. In a lockbox.

Here are some programs I would call entitlement programs: Welfare programs such as: food stamps, shelter rent, homeless housing and WIC. As a people we have to ask ourselves if we want to help those who are less fortunate? Making the claim that we need to cut social programs to balance the budget vs. creating a millionaire’s tax is creating class warfare.

Where do we draw the line, the future of our great nation depends on how the majority of the people in this Country answers that question. One thing is for sure, social programs are not the sole blame for the financial crisis of the U.S., as a matter of fact one could argue the majority of the blame falls with the millionaire’s and billionaire’s on Wall St. and the politicians who robbed the social security fund.