The US auto business has always been cyclical, with booms and busts following each other on a something close to a seven-year cycle. What happened last October, however, was extraordinary. In the wake of the financial crisis that began the month before, consumer demand in the US suddenly collapsed and has remained very low ever since, with the auto industry especially hard hit. Not just GM but all 11 of the global automakers operating in the US have reported sales declines of anywhere from a third to a half in each of the past six months. Losing half their revenue has hurt all the automakers. But it pushed GM over the edge.

To be sure, GM’s managers have been aware for decades that their operating model is fragile. This is an enterprise that was built for steady long-term growth. Thus GM concentrated on staying large, even at the expense of profitability. They supplemented their capital by selling long-term bonds and now have trouble paying the interest. And they depended heavily on easy consumer credit to finance purchases of their vehicles.

Moreover, GM has never responded adequately to global competition. As they lost market share over the years to imports and “transplants” (foreign makes assembled in the US), they never figured out how to make money selling smaller, fuel-efficient vehicles. But as long as cash flows covered their obligations, they managed to postpone the day of reckoning. Adding to the company’s financial troubles, their labor union, Ron Gettelfinger’s United Auto Workers (UAW), has never been willing to allow GM to close antiquated factories and lay off the affected workers.

At the end of the September financial quarter, GM had about $11 billion left. At the time, they were losing about a billion dollars a month, and were planning to line up new capital or new financing in 2009. Their economists were projecting a strong improvement in demand for their products this year. Then the bottom fell out in October, and GM started losing nearly $5 billion a month. By the end of November, it was clear that GM would be out of cash by year-end. And that’s exactly what happened.

Was there another way out from the financial crisis? For instance, couldn’t GM file a Chapter 11 bankruptcy and continue operating? Now-fired CEO Rick Wagoner consistently said no, asserting that customers would not buy vehicles from a bankrupt company out of fear that spare parts and warranty service would be unavailable. There’s certainly something to this, but it obscures the real reason that GM could not file Chapter 11: No bank would lend them the money to do so.

When you don’t have enough cash to pay your suppliers, they’ll generally force you to file for Chapter 11 bankruptcy. (Long-term debt holders can also force a bankruptcy, but they’re usually better served by cutting a deal to restructure the debt.) To operate in Chapter 11 bankruptcy, you usually will arrange so-called “debtor-in-possession,” or DIP financing. Your bankers will lend you money to stay in business, secured by the hard assets of the business. There was absolutely no way for GM to arrange DIP financing. They were literally staring at a Chapter 7 bankruptcy – that is, the liquidation of the business – starting sometime in January.

It’s impossible to overstate the gravity of this danger. Hundreds of thousands of people would be thrown out of work, and thousands of suppliers and dealers would face their own bankruptcies. At a time of pervasive crisis in the financial world, there wasn’t a penny of private money that could possibly be lent to GM to keep operating. There was also no time (and no financing) to line up a lightning-fast acquisition of GM by another automaker. Toyota Motor? Volkswagen AG? Those companies are in trouble, too. Because no one had any money, there was simply no way to avoid some government intervention.

Government intervention, however, is not a magic cure for the car industry’s troubles. The auto market has suffered from reduced overall demand. As recently as mid-decade, North Americans purchased nearly 17 million new cars and trucks each year. Demand in 2009 will barely reach 10 million units. We have the ability to produce far more vehicles than the market needs, and some of that overcapacity has to be eliminated. (To a small extent, you can mothball idle factories, but you have to stop paying idle workers.) Ordinarily, the free market takes care of this process in swift and brutal fashion. But in the auto business, there’s the UAW to contend with.

The whole point of a labor union is to protect the jobs, the pay, and the benefits of existing workers. (By resisting productivity improvements, they also artificially overprice labor, which has the side effect of increasing unemployment elsewhere in the economy.) In GM’s case, the union’s adamant refusal to give up anything, together with dyspeptic and incompetent management, has made it impossible for the company to adapt to changing market conditions.

That brings us up to the current crisis. GM is the weakest of the large automakers (Chrysler’s case is somewhat different). Parts of GM, such as the overseas operations, are healthy and worth keeping, but a substantial chunk of North American operations really ought to fold. A global recession, however, is no time to allow a messy liquidation of large chunks of a $200-billion company.

However, it’s delusional to suppose that GM can return to full health and profitability. It simply must become much smaller, because America is not buying the vehicles it makes. The proper role of government in this situation is to bridge the company through the process of partial liquidation.

This would have required five steps. First, making a deal to force the holders of GM’s bonds (more than $20 billion) to accept lower payments of interest and principal. Second, buying out and closing down several thousand dealers. Third, closing unneeded factories. Fourth, turning the company’s retiree benefit obligations over to the federal government. Fifth, and most critically, firing tens thousands of employees. The whole process likely would have required between $50 and $100 billion taxpayer dollars over perhaps 18 months. However unfortunate, this would have been the least-bad outcome, and a vast improvement over a rapid, forced liquidation of the company.

At this point, however, two factors come into the picture, one old and one new. The old factor is the protection extended to the UAW by Democrats in Congress, and now in the Obama administration. You can expect that the union will not be required to accept large cuts in pay, benefits, retiree healthcare and work rules. But that will not stop UAW president Ron Gettelfinger, perhaps with Barney Frank or Barack Obama at his side, from telling us, against all evidence, that the union has made deeply painful concessions, for the good of the country.

The new factor is actually quite a surprise, and a very unpleasant one: the Obama administration has decided that it wants to run General Motors in bankruptcy. From their statements so far, they appear actually to believe that they can bring a new management approach that will return GM to a robust profitability. They certainly have expressed little hope that the company’s existing management can do the job.

The right approach, as noted, would have been to bridge the company and to pressure it to downsize aggressively, with a bankruptcy judge imposing harsh concessions on the union as well as the other stakeholders. But the administration has signaled that it wants to do something completely different. They fired Rick Wagoner (for whom I shed no tears) and installed GM veteran and former chief financial officer Fritz Henderson in his place. Henderson immediately stated that he is responsible in significant measure to federal “car czar” Steven Rattner. An independent CEO, of course, is responsible primarily to his common shareholders.

At the same time, no less than President Obama announced the formation of an independent, government-financed entity that would honor the warranties of newly-purchased GM vehicles. That takes care of Wagoner’s original objection to bankruptcy.

But why is the president promising to fix our cars and trucks? Why does he think his people should be significantly contributing to the management of the largest US automaker? Surely, his job is big enough already.

The portents of the government’s new role are troubling. For one thing, government isn’t subject to market discipline. At the very least, a government-run GM will not be efficient. It will probably lose money and will certainly misallocate perfectly good capital. At a time of forced restructuring and smaller markets, nothing could be worse. Congress is intent on protecting the union from taking large cuts in pay or benefits, and the Obama people have made it very clear that they want GM to start making smaller vehicles, ideally with alternative power sources. You can’t operate a business at maximum efficiency if you make your marketing decisions in light of political goals, as opposed to what the market actually wants.

Also worrisome is the potential impact on trade. If the government props up a large failed domestic manufacturer, and preserves its overpriced labor contract, that will make the US less competitive globally, because vehicles produced abroad will be able to deliver better value for less money. Pressure will then rise to protect the domestic industry. The only way to make that work over time is to erect barriers to trade, which will impoverish the emerging world and lead to increased international tension.

But worst of all is the sense, born of hubris, that the federal government can and should undertake the task of manufacturing automobiles, or anything else. The reason the US economy has long been the world’s strongest and most flexible, is that our private sector has always made the decisions. In its attempt to change that model at GM, the Obama administration has lurched into dangerous territory.

By Francis Cianfrocca
4/8/2009

http://www.frontpagemag.com/Articles/Read.aspx?GUID=D6A29A98-B672-4DE6-81CC-DFC0A13D522F

Comments are welcome at redstatepatriot@hughes.net. Please include the title of the article as your subject line. Selected responses, in whole or part, may be published (appended to the article).

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The U.S. Chamber of Commerce was one of the main lobbyists opposed to provisions that would have mandated that stimulus money go to U.S. companies. The Chamber is a U.S. organization in name only, like its finance capital comrades, the guys that gave the world such a bad case of the dreaded "American Disease," much of the planet is praying that cash-rich China will eventually bail everybody out.

The United States' lack of a manufacturing capacity makes it even less likely that anything resembling a lasting recovery can emerge from President Obama's approach to the economic crisis. The infrastructure projects that are supposed to be central to the recovery scheme are only valued at $150 billion - which is not much of a jolt, especially when much of what will have to be bought is only available in other countries, made by foreign workers. Barack Obama has put a huge emphasis on building a green economy. However, according to the New York Times, most of the sources of solar panels and wind turbines are located in Europe and Asia. There can be no green economy without a mass transit makeover of the United States, but the U.S. hasn't made subway and light rail cars in many years. They'd have to be imported.

Every product that must be imported for the infrastructure project means a watering down of the stimulus impact of the dollars spent. You can't put people to work in American factories that don't exist.

A true national recovery effort would mean re-industrialization, on a grand scale and a green model, through massive direct federal creation of state-owned industries independent of the finance capitalists who murdered American manufacturing and then blew up their own businesses on Wall Street. But this is already nearly impossible, since President Obama is committed to saving the banking class through unlimited infusions of public money, and then allowing these reborn zombies to resume their roles as lords of development. The bankster parasites have neither the capacity nor the intention to build anything other than mountains of debt for the rest of us. Therefore, Obama's partnership with them spells doom for national recovery.

Like Billy Preston said, "Nothin' from nothin' leaves nothin'. "The U.S. cannot create the conditions for economic health without rebuilding a manufacturing capacity. And the remnants of Wall Street have nothing to contribute to an economic recovery, but an infinite capacity to steal.

By Glen Ford

http://www.marketoracle.co.uk/Article9109.html

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If you're keeping score at home, here are some of the biggest boondoggles with the price tags attached:

"Continuing Resolution" legislation to fund existing federal programs at $410 billion -- an 8.7% increase in spending over the last year which is the biggest increase on domestic spending since the Carter Administration. Currently being debated this week and next.

Obama/Pelosi Housing Bailout at $275 billion.

Bank Bailout at estimated $1 trillion. Details of this new Bank Bailout are still fuzzy but there is no argument that the numbers are huge.

Nationalized Health Care proposal is to be announced this Thursday. The President is saying his "health care reform…will not wait another year." You should know what that means. Hundreds of billions more of your money and less individual health care choice for you.

So far, the Obama/Pelosi agenda has been ALL spending while taking our nation to historic debt levels. Last night, we saw the first big Obama/Pelosi tax increase. And it is genuinely massive -- try $1.2 trillion over the next decade on what else, ENERGY - the one sector of the economy where prices are lower (for the moment).

President Obama and Speaker Pelosi are now championing a "Cap and Trade" scheme that will ration energy while increasing taxes. A version of this proposal was introduced last year as the Warner/Lieberman Cap and Trade bill. Here are the key details from last year's legislation that are the basis for the Obama/Pelosi plan:

$1.2 TRILLION Tax Increase over 7 years on gasoline, home energy and really all energy in next decade. Source: Congressional Budget Office, April 10, 2008

This tax would cost the economy 3 to 4 million jobs according to an analysis by the American Council on Capital Formation

The average family would lose over $4,000 per year in purchasing power (and remember the Pelosi/Obama tax cut was only $800 per couple)

Gasoline prices would increase anywhere from 77 to 145 percent--that means prices of about $2 a gallon now would go up to $3.50 or even $5 a gallon.

In addition, the Washington Post has reported that President Obama's budget will also include income tax increases.

The numbers are staggering. But there is more. Under the Obama/Pelosi "Cap and Trade" scheme, for the first time the federal government will literally ration energy -- deciding how much energy should be available and at what cost to families and businesses. The impact on our families and economy will be disastrous.

Is this what you voted for?

Red State Patriot

Comments are welcome at redstatepatriot@hughes.net. Please include the title of the article as your subject line. Selected responses, in whole or part, may be published (appended to the article).

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Response by Fritz:

When added up, the new proposals which are pouring out of the White House at lightning speed, the totals are incomprehensible. Obama likes to say will be the only ones with tax increases will be those making over $250,000 per year. Even if those making over $250,000 per year, a shrinking group I assure you, gave up 100% of their income the new projects would not be funded.

Have you seen one proposal that would encourage new business formation? The idea that alternative energy is going to be the new business of the United States is not only short sighted, but sophomoric.

All of a sudden $700 billion here and $700 billion there is of no consequence. Those that say the Bush administration piled up enormous debt, should tighten their seat belts as this train is accelerating. The Iraq war has cost about $600-$800 billion over 6 years. The deficit for this year alone is projected at $1.75 trillion by the congressional budget office, and that is before the $410 billion the house and Senate has in their latest spending bill. There are trillion dollar deficits being spawned for years to come. Congress has criticized Americans for living beyond their means, with the use of home equity loans and credit cards. Their solution to the problem is to continue the process, however with government bonds and higher taxes.

This is insane.

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Now, there is no doubting that Obama’s heart is in the right place. With foreclosures at record highs, the American white picket fence dream is crumbling.

And the impulse of any caring President must be to do something, almost anything to keep the dream alive.

But the experience of politicians tinkering with the U.S. housing market is not a happy one. Fannie Mae and Freddie Mac, anyone?

Real estate is simply too complex to be manipulated by anything but the “invisible hand” of the market.

Disagree?

Just read the four page White House Executive Summary with its laundry lists of programs, federal and state bureaucracies, conditions and caveats.

It’s confusing stuff even for the average MBA. How will it be digested by the average low-income subprime borrower?

Here’s the loan modification process:

“For a sample household with payments adding up to 43 percent of his monthly income, the lender would first be responsible for bringing down interest rates so that the borrower’s monthly mortgage payment is no more than 38% of his or her income. Next the initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent…”

Again, that’s the Executive Summary.

Can you imagine the chaos of a loan modification meeting between a subprime borrower and a bank officer?

Multiply that a few million times — and that’s the $75 billion “homeowner stability initiative.”

That’s if Obama is lucky enough to find the 3 to 4 million “responsible homeowners” he thinks would qualify or want to qualify for the government moolah.

But he’s almost certainly overestimating the number of “responsible homeowners” out there.

Those 3 to 4 million “responsible homeowners” are actually “credit challenged” borrowers. They put down very little money to purchase homes at very inflated prices.

Not only do they hold no equity in their homes today. Even with a modified loan, there is only a remote prospect of building equity in the future.

For most, economic self-interest says to walk away from the house rather than carry a modified mortgage that will suck up 31% of monthly income.

Truth is, many of the “credit challenged” borrowers won’t even get to running the numbers. They simply will have no interest in sitting down with a bank officer and going through pay stubs and tax returns.

Income verification? Are you kidding? That’s why many took the subprime mortgage in the first place.

That millions of homeowners were and are “irresponsible” is a harsh truth that Obama can’t really talk about.

In his America, the Obama housing plan is one neighbor helping another who is simply down on his luck. If only his America were real.

Then maybe his program would actually work.

http://blogs.wsj.com/deals/2009/02/18/mean-street-why-obamas-homeowner-rescue-is-bound-to-fail/

Hat tip: Len Salonsky

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Response: Marty Dillian
The Obama stimulus plans (with more to come) are nothing more than a socialist redistribution of money from those who are struggling to those who are struggling. Essentially, you are being asked to pay for your mortgage, and to pay for your neighbor's mortgage, without little regard to their lifestyle or yours, with no concern for your children's needs, or your parent's needs, without regard to your future employment prospects, your future financial needs, that you have been trying to prepare for. These are not stimulus plans, but 'kiss of death' plans. Don't be so naive as to think the motives are well-intended or the outcome unintentional.

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Response: Dick Doubek
HOW TO EXPLAIN THE STIMULUS BILL

Shortly after class, an economics student approaches his economics professor and says,

"I don't understand this stimulus bill. Can you explain it to me?"

The professor replied, "I don't have any time to explain it at my office, but if you come over to my house on Saturday and help me with my weekend project, I'll be glad to explain it to you." The student agreed.

At the agreed-upon time, the student showed up at the professor's house. The professor stated that the weekend project involved his backyard pool. They both went out back to the pool, and the professor handed the student a bucket. Demonstrating with his own bucket, the professor said, "First, go over to the deep end, and fill your bucket with as much water as you can." The student did as he was instructed.

The professor then continued, "Follow me over to the shallow end, and then dump all the water from your bucket into it." The student was naturally confused, but did as he was told.

The professor then explained they were going to do this many more times, and began walking back to the deep end of the pool. The confused student asked, "Excuse me, but why are we doing this?" The professor matter-of-factly stated that he was trying to make the shallow end much deeper.

The student didn't think the economics professor was serious, but figured that he would find out the real story soon enough. However, after the 6th trip between the shallow end and the deep end, the student began to become worried that his economics professor had gone mad.

The student finally replied, "All we're doing is wasting valuable time and effort on unproductive pursuits. Even worse, when this process is all over, everything will be at the same level it was before, so all you'll really have accomplished is the destruction of what could have been truly productive action!"

The professor put down his bucket and replied with a smile, "Congratulations. You now understand the stimulus bill."

Comments are welcome at redstatepatriot@hughes.net. Please include the title of the article as your subject line. Selected responses, in whole or part, may be published (appended to the article).

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As the nearby chart shows, government payrolls have been on the upswing for decades, save for a brief downward blip during Ronald Reagan's first term. This is an indication that too many resources are being directed to the wrong place. For every additional worker employed by a government at some level, there is one fewer worker who can contribute to real economic growth.

Despite claims to the contrary, governments and their employees cannot force economies to grow by growing themselves. They are unable to create wealth. Instead, they seize wealth through taxes, depriving the private sector of the capital needed for growth, and regulate commerce often to the point of obstructing progress.

French economist Frederic Bastiat cleverly explained government's dead-weight impact on the economy when he noted that "the state is a great fiction by which everybody tries to live at the expense of everybody else."

Of course, a minimum number of employees is needed perform legitimate government functions. But no government worker builds a house, car or washing machine; designs innovative technologies that make businesses run more efficiently; starts a new company that puts people to work in productive jobs; turns raw materials into fuels that give us power, mobility and warmth; or creates entire industries that both benefit consumers and boost the economy.

Maybe the best way to explain how public-sector jobs drag down the economy is to consider whose welfare is increased when a private-sector job is filled and whose is diminished at the time a government position is filled.

When a private employer offers a job and the offer is accepted, the welfare of both the employer and employee is improved. The employer has a new worker who will make the company more productive and the worker has a job to meet his needs.

But when a government job is filled, a third party is involved, and the welfare of that party — the taxpayers who pay the public employee's salary — is harmed and the economy ultimately damaged.

It's hard to make a reasonable argument that the country needs 22 million public sector employees. With a total population of 304 million, that's one government worker for every 14 Americans.

The country's manufacturing and construction base is able to provide all the goods, homes and buildings we need and make a strong contribution to the economy — in other words, do more than the government — with just one worker for every 15 people.

If government workers and bureaucracy were indeed the engine of the growth, as some in Washington argue, then the Soviet Union would still be intact, East Germany would have a model economy and China would not be moving away from communism.

The best the government can do is take care of its limited duties and leave it to free enterprise to create wealth and add value to the economy. Economic expansion has always been the province of the private sector. It can work no other way.

INVESTOR'S BUSINESS DAILY
January 21, 2009

http://www.ibdeditorials.com/IBDArticles.aspx?id=317434650497778

Comments are welcome at redstatepatriot@hughes.net. Please include the title of the article as your subject line. Selected responses, in whole or part, may be published (appended to the article).

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But even as Washington tries to rescue the economy, the nation will be reeling from the actions of 50 Herbert Hoovers — state governors who are slashing spending in a time of recession, often at the expense both of their most vulnerable constituents and of the nation’s economic future.

These state-level cutbacks range from small acts of cruelty to giant acts of panic — from cuts in South Carolina’s juvenile justice program, which will force young offenders out of group homes and into prison, to the decision by a committee that manages California state spending to halt all construction outlays for six months.

Now, state governors aren’t stupid (not all of them, anyway). They’re cutting back because they have to — because they’re caught in a fiscal trap. But let’s step back for a moment and contemplate just how crazy it is, from a national point of view, to be cutting public services and public investment right now.

Think about it: is America — not state governments, but the nation as a whole — less able to afford help to troubled teens, medical care for families, or repairs to decaying roads and bridges than it was one or two years ago? Of course not. Our capacity hasn’t been diminished; our workers haven’t lost their skills; our technological know-how is intact. Why can’t we keep doing good things?

It’s true that the economy is currently shrinking. But that’s the result of a slump in private spending. It makes no sense to add to the problem by cutting public spending, too. (emphasis added)

In fact, the true cost of government programs, especially public investment, is much lower now than in more prosperous times. When the economy is booming, public investment competes with the private sector for scarce resources — for skilled construction workers, for capital. But right now many of the workers employed on infrastructure projects would otherwise be unemployed, and the money borrowed to pay for these projects would otherwise sit idle.

And shredding the social safety net at a moment when many more Americans need help isn’t just cruel. It adds to the sense of insecurity that is one important factor driving the economy down.

So why are we doing this to ourselves?

The answer, of course, is that state and local government revenues are plunging along with the economy — and unlike the federal government, lower-level governments can’t borrow their way through the crisis. Partly that’s because these governments, unlike the feds, are subject to balanced-budget rules. But even if they weren’t, running temporary deficits would be difficult. Investors, driven by fear, are refusing to buy anything except federal debt, and those states that can borrow at all are being forced to pay punitive interest rates.

Are governors responsible for their own predicament? To some extent. Arnold Schwarzenegger, in particular, deserves some jeers. He became governor in the first place because voters were outraged over his predecessor’s budget problems, but he did nothing to secure the state’s fiscal future — and he now faces a projected budget deficit bigger than the one that did in Gray Davis.

But even the best-run states are in deep trouble. Anyway, we shouldn’t punish our fellow citizens and our economy to spite a few local politicians.

What can be done? Ted Strickland, the governor of Ohio, is pushing for federal aid to the states (emphasis added) on three fronts: help for the neediest, in the form of funding for food stamps and Medicaid; federal funding of state- and local-level infrastructure projects; and federal aid to education. That sounds right — and if the numbers Mr. Strickland proposes are huge, so is the crisis.

And once the crisis is behind us, we should rethink the way we pay for key public services.

As a nation, we don’t believe that our fellow citizens should go without essential health care. Why, then, does a large share of funding for Medicaid come from state governments, which are forced to cut the program precisely when it’s needed most?

An educated population is a national resource. Why, then, is basic education mainly paid for by local governments, which are forced to neglect the next generation every time the economy hits a rough patch?

And why should investments in infrastructure, which will serve the nation for decades, be at the mercy of short-run fluctuations in local budgets?

That’s for later. The priority right now is to fight off the attack of the 50 Herbert Hoovers, and make sure that the fiscal problems of the states don’t make the economic crisis even worse.

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Another result of AIG's nationalization is, if anything, even more worrisome."

It turns out that AIG has a subsidiary specializing in "takaful" - insurance products that are purportedly "Shariah-compliant." I say purportedly because - while they have been cynically deemed "pure" (halal) by Shariah advisers that AIG employed for the purpose of making such certifications - the Islamic code expressly prohibits business transactions that involve risk. Consequently, insurance products designed to hedge against risk are inherently "impure" or haram.

Whatever the status of AIG's "takaful" products under Islamic law, the U.S. government now has a vested interest in their financial success. Uncle Sam has become Uncle Shariah.

In so doing, Henry Paulson has acted in a manner that not only appears to smack of a conflict of interest and egregious disregard for the public's fiduciary interests. He also seems to have violated the Constitution.

The First Amendment of the Bill of Rights has long been interpreted as prohibiting the establishment of any national religion or conferring upon one religion a preference over others. By taking a massive stake in a company that explicitly promotes Islam's Shariah law, the U.S. government is acting at odds with both of these revered principles.

Fortunately, an important legal initiative has just been launched aimed at blocking Mr. Paulson and the Federal Reserve Board from engaging in this sort of unconstitutional behavior via Shariah-Compliant Finance (SCF) and other commercial transactions. A lawsuit filed Dec. 15 in U.S. district court in Michigan by an Iraq war veteran named Kevin Murray contends that:

"The Shariah-based Islamic religious practices and activities that the government-owned AIG engages in - activities that are funded and financially supported by American taxpayers, including Plaintiff, who is forced to contribute to them - are antithetical to our Nation's values, customs, and traditions with regard to religious liberty, religious tolerance, and the proscriptions of the First Amendment. These government-funded activities not only convey a message of disfavor of and hostility toward Christians, Jews, and those who do not follow or abide by Islamic law based on the Quran or the teachings of the Prophet Mohammed, but they also embody actual commercial practices which are pervasively sectarian and which disfavor Christians, Jews, and other 'infidels,' including Americans."

The litigation seeks relief in ways that would be far-reaching at a time when the U.S. government has bought not only most of AIG but owns some 20 other financial institutions - and seems intent on encouraging their embrace of Shariah-Compliant Finance. (Notably, in November, Mr. Paulson's fellow Goldman Sachs alumnus and point-man for the financial sector bailout, Assistant Treasury Secretary Neel Kashkari, convened an "Islamic Finance 101" seminar where officials in the "policy community" were propagandized by Harvard University professors and other champions of the SCF industry.)

The court is being asked to rule that, among other things, the defendants' "policy and practice of approving, endorsing, promoting, funding, and supporting Shariah-compliant finance" and "the United States government's ownership interest in and use of taxpayer money to financially support AIG and its Takaful Insurance business, which is pervasively sectarian, violate the Establishment Clause."In addition, Murray v. Paulson seeks a permanent injunction against such practices both with respect to AIG and Shariah-Compliant Finance more generally.

Most Americans remain unaware of the menace posed by Shariah, let alone the extent to which it is being insinuated stealthily into our country. Happily, the latter is the subject of an excellent new book by the acclaimed scholar of Islam, Robert Spencer, entitled, "Stealth Jihad: How Radical Islam is Subverting America Without Guns or Bombs."

Murray v. Paulson therefore provides not just an opportunity for an urgently needed constitutional ruling and injunctive relief with respect to the U.S. government's submission to Shariah. This lawsuit brought on Mr. Murray's behalf by one of the nation's preeminent public interest law firms, the Thomas More Law Center, and by the formidable litigator/Shariah expert David Yerushalmi, who also serves as the Center for Security Policy's general counsel, affords the American people a vital teaching moment:

Official promotion of Shariah law is unconstitutional and, given Shariah's inherently seditious nature (it explicitly requires the violent overthrow of all non-Islamic governments in favor of a global theocracy), acquiescence to its insinuation in this country constitutes a felony offense known as "misprision of treason."

We cannot tolerate and must not permit Uncle Sam's morphing into Uncle Shariah. Prompt action by the courts on Murray v. Paulson may spare us that monstrous transformation.

By Frank J. Gaffney, Jr.

http://www.jewishworldreview.com/cols/gaffney121608.php3

---------------------------------

Is Treasury complicit?

If "cash is king," then Middle East coffers are irresistibly enticing. During a recent tour of Saudi Arabia and the Gulf states, Deputy Treasury Secretary Robert Kimmitt applauded the "growing role" of Arab banks in the U.S. economy. Treasury is seeking buyers for its newly acquired bailout assets because more than $1 trillion in cash is urgently needed to rescue the largest U.S. banks.

However, cash from the Arabian Gulf comes with a vital string attached: Islamic banking, erroneously viewed as an ancient practice. In fact, Islamic banking is a newly invented institution: "Neither classical nor medieval Islamic civilization featured banks in the modern sense, let alone 'Islamic' banks," notes Timur Kuran, professor of economics and law at the University of Southern California. According to the Dinar Standard, "assets managed by Islamic banks are in excess of $700 billion - predominantly concentrated in the Middle East." Islamic banking took off in the 1970s, but was first concocted by Muslim Brotherhood founder Hassan al-Banna in the 1920s. The stated goal was to penetrate the Western finance system, corrupting it from within in hopes of creating a parallel system to re-establish a global Islamic empire governed by Islamic law (Shariah). Islamic rules of commerce (fiqh al-muamalat) forbid interest (riba) and investing in a prohibited (hara'am) enterprise. They also mandate tithes on wealth (zakat). However, the Koran fails to precisely define these concepts. Imams and ayatollahs differ, for example, on whether riba prohibits all interest or only usurious interest.

While the overhaul of American and Western banking regulations is urgent, Islamic banking cannot be the answer because Muslim clerics - not U.S. laws and regulators - make the rules. In 1969, the Saudis created the Organization of the Islamic Conference (OIC), which is now leading the charge for global expansion of Islamic banking and has established new regulatory, accounting and auditing organizations to govern such banks. Notably, the OIC's charter is to "liberate Jerusalem and Al-Aqsa [mosque] from Zionist occupation."

Not surprisingly, zakat from Islamic banks often funds terrorist groups like the Muslim Brotherhood's Hamas. That organization's agenda was exposed during the Dallas trial of The Holy Land Foundation, a Hamas front group and an American Muslim charity just convicted of terrorism crimes. Evidence of the charity's true purpose included an 18-page "explanatory memorandum" outlining its "strategic goal … that all their work in America is a kind of grand Jihad (holy war) in eliminating and destroying the Western civilization from within."

Sharia financing forbids loans to entities labeled hara'am, such as industries that use alcohol, and to all Israeli businesses The Arab League Council established the boycott against Israel on December 2, 1945, (more than two years before creation of the Jewish state). The boycott prohibits all Arab states, companies and individuals from any financial or trade relations with Israel. Companies worldwide are blacklisted for doing business with Israel, as are companies doing business with boycotted firms. The OIC high commissioner for the boycott of Israel coordinates the efforts of its 57 member states from the Central Boycott Office in Damascus.

In response, the United States made it illegal for individuals or companies to cooperate with the Arab boycott. The law mandates reporting of boycott requests and imposes civil and criminal penalties against boycott participants. Arab boycott requests have risen sharply in tandem with the U.S. financial crisis and the rapid growth of Islamic banking. The Commerce Department's Bureau of Industry and Security reported a 20 percent increase in Arab boycott requests overall from 2005 to 2006, and the Congressional Research Service reported 24 boycott requests to U.S. companies in fiscal 2007 from little Bahrain alone.

On April 5, 2006, Congress unanimously condemned Saudi Arabia for its continued enforcement of the boycott - which violated commitments the Saudis made to the World Trade Organization in 2005. Nonetheless, last August Saudi Arabia and other Gulf states threatened to boycott Nissan, which aired a commercial on Israeli television promoting a fuel-efficient car, and demanded the Japanese carmaker's apology. Not a word from Washington.

Instead, the Treasury Department, hungry for petrodollars, is holding seminars to promote Islamic banking and U.S. taxpayers are footing the bill. This practice must stop. Islamic banking corrupts our financial system, enables the illegal Arab economic boycott of Israel and entangles government with Islam in violation of the First Amendment's Establishment Clause.

Rachel Ehrenfeld and Samuel A. Abady
The Washington Times
December 11, 2008

Rachel Ehrenfeld is director of the American Center for Democracy.
Samuel A. Abady is a civil rights lawyer.

http://www.washingtontimes.com/news/2008/dec/11/islamic-banking/

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Response from David R.:

This is not something for litigation. This is something for legislation. Somebody in congress or the Senate needs to propose a new banking law that prohibits US banks or financial institutions from engaging in "discriminatory and religiously biased investment plans". You shouldn't be able to do "white-christian, only lending/investment fund", so too FDIC regulated banks and investment agencies shouldn't be allowed to have "sharia friendly" investment/lending portfolios, that prohibit investments in companies that do business with Female owned, Israel, or Alcohol etc., stemming from a particular relgious racist, dogma. Turn their whole "political correctness" dogma around on them.

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That means the Big Three Automakers who have been begging Congress for cash won’t have very many customers next year regardless of what they build, how cheap they sell it for or how much money the government throws at them to keep the assembly lines rolling, which is why thousands upon thousands of new cars are now piling up at ports both here and abroad.

It doesn’t matter if next year’s new cars get 5 mpg or 55 mpg. Nor does it matter if they retail for $10,000 or $110,000. There are Dodge dealers offering two for one trucks on their lots right now, and even at that, they’ve got way more than they can sell.

The fact remains, there’s little or nothing left of the average person’s bank account or borrowing power to buy them with – no more credit, no more cash and, in many cases, no more job.

What part of broke, unemployed and overextended do these CEOs not understand? Building more automobiles with future taxes isn’t going to bring a single new customer into their showrooms.

When I read about Congress considering loans to automakers with money that has yet to be created out of thin air with the Fed’s printing presses, all to be repaid later by whomever is still clinging to a job or some taxable asset, it occurs to me that GM, Ford and Chrysler are doing nothing but justifying their own existence by allowing the paychecks of some to be plundered so they can still get one.

That’s socialism folks – pure and simple – redistributing wealth – and it is not going to save this country from economic ruin. All it’s going to do is create a lot of shiny new cars for homeless people to live in.

By Paul Proctor
December 13, 2008

http://www.newswithviews.com/PaulProctor/proctor168.htm

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American Express manages to get approval (from the Federal Reserve) to become a bank holding company in the blink of an eye. This kind of thing usually takes weeks or even months. And within 24 hours, the reason they did so leaks — they want to reach into your wallet and pull out some bailout money, too! Amex is reportedly seeking $3.5 billion in taxpayer funds.

General Motors operates for years churning out gas-guzzling SUVs and Hummers. Ford also stakes its future on big trucks like the F-150 — instead of choosing the same prudent path as competitors like Honda and Toyota, who focus on fuel-conscious sedans and compacts. GM (via its financing arm GMAC) even goes a step further. Not content to stick to car loans, it decides to branch out and make billions and billions of dollars of crappy mortgage loans. Then, when the utterly predictable consequences of this foolish corporate strategy come home to roost, GM and the other automakers come back to the trough like pigs looking for slop. Only in this case, we're talking real money - $25 billion or more.

Treasury Secretary Henry Paulson and Fed Chief Ben Bernanke urge Congress to create the Troubled Asset Relief Program - with as little debate and oversight as possible and a price tag of $700 billion. They warn of financial cataclysm if the government doesn't start buying up mortgages and mortgage related assets from banks. Yet just a few short weeks later, they totally change course. They say "Never mind - we're not going to buy up assets after all. We're going to buy up stakes in small banks, big banks, insurers, and God knows who else, with the money. We know the last 20 or so 'solutions' to the credit crunch didn't work. But this one will. Really. We mean it."

Fannie Mae and Freddie Mac make a huge deal about a new program to modify more mortgages. We get the mid-afternoon press conference, the intraday ramp in the stock market, the usual stuff.

Citigroup, JPMorgan and other lenders get in on the action too, issuing glowing press releases about foreclosure moratoriums and other plans to keep borrowers in their homes.

But in reality, many lenders and mortgage servicers have ALREADY been trying all kinds of loss mitigation strategies and loan modifications (loan term extensions, temporary interest rate reductions, and so on).

Yet ... they haven't managed to stop the nation's foreclosure rate from rising.

Why? It's Simple ...

1. All those modification efforts can't overcome the negative impact of surging unemployment.
2. Many borrowers lied about their income and their assets in the first place, meaning they can't even make the reduced payments their lenders are offering.
3. Others were speculators and second-home owners, who don't qualify for relief.
4. Home prices are falling so far, so fast, that millions of borrowers are underwater, owing $20,000, $50,000, even $100,000 more than their homes are worth. They have little financial incentive to stay in their houses, even at a lower monthly payment, because they know they won't breakeven for years, if ever. And many of them know darn well they can rent for less ... sometimes much less ... at a house or apartment down the street or across town.
5. Still others have loans that were ultimately sliced, diced, and repackaged into complex securities, now owned by various Ferrari-driving hedge fund managers who leveraged up to buy junky paper just a few months after they got out of B-school.
6. Because of the "miracle" of this financial alchemy ... which made Wall Street rich beyond measure ... these borrowers are stuck. Their loan "servicers" WON'T modify their loans because they're afraid of getting their pants sued off by the investors who own securities derived from those underlying loans, securities that in some cases can lose value if the loan terms are changed.

The Hole Keeps Getting Deeper ... And Deeper ... and DEEPER ...

How about the bottomless pit known as AIG? The company made a bunch of stupid decisions to insure crummy mortgage-related securities against default. It clearly had no idea what the heck it was doing, and managed to lose a whopping $24.5 billion in the most recent quarter. But instead of going broke, they get thrown a helping hand courtesy of, well, you and me. The tab for that bailout keeps on rising - approximately $150 billion at last count!

Then there's Fannie Mae and Freddie Mac. They take on hundreds and hundreds of billions of dollars of mortgage and interest rate risk. They pile headlong into the derivatives market, dig deeper into the riskier subprime and Alt-A part of the mortgage business, and continually operate on relatively small capital cushions.

Furthermore, they keep carrying billions and billions of dollars of dubious tax-related "assets" on their balance sheets and claim that means they're in decent shape. But soon after, the two companies are essentially nationalized. And those tax assets? Fannie Mae just slashed their value by 78% to $4.6 billion.

Why can't the government just cut the crap and level with us?

Sometimes I just can't help but ask myself that question. I mean, I know it makes for bad politics. But like the old saying goes, honesty is the best policy. And we're just not getting it from Washington and Wall Street.

Instead, policymakers and industry officials have been offering up a steady diet of B.S. about this credit crisis and the housing bust for the greater part of two years now ...

• "It's just a subprime mortgage problem."
• "There's nothing to worry about, the problem is 'well-contained'."
• "Major banks and brokers will never fail. It'll just be a few small institutions."
• "Home prices never go down."
• "It's a great time to buy or sell a house."

That's what you've been told by officialdom. And all of it - every last bit of it - has proven to be dead wrong.

On the other hand, we've been doing our best to give it to you straight the entire time, no matter the consequences. This morning, I'm going to do it again ... I'm going to tell you the brutal truth you won't hear from Washington or Wall Street. You can't just wave a magic wand in Washington and wish all this stuff away. You can't reverse years and years of reckless overspending, over-borrowing, and over-lending - even with hundreds of billions of dollars of taxpayer money.

You can't keep borrowers in homes they should have never bought in the first place.

You can give banks and consumers billions and billions of dollars ... but you can't make them lend and spend it. If they know the economy stinks, they're going to lose their jobs, or that there's just too much risk out there, they aren't going to do what you want them to do. Instead, they'll do what is PRUDENT - repair their balance sheets, hunker down, and rebuild their capital base over time.

The harsh reality is that the economy is cyclical. Busts follow booms. They have for hundreds of years. And those busts are healthy over the longer term, even if they're painful in the short-term. They set the stage for healthy, productive growth.

Unfortunately, the Fed has consistently gotten in the way of that curative process in recent years.

It went totally overboard under Alan Greenspan after the dot-com bust, driving the cost of money into the gutter. Thanks to that reckless monetary policy, and the reckless disregard for prudence throughout the lending industry, we experienced the biggest housing and mortgage bubble in the history of the U.S. We also saw too much dumb lending and asset inflation in the leveraged buyout business, in the commercial real estate arena, and in the emerging markets.

Now, we have to suffer the consequences. They're baked in the cake.

The government can try to ease the pain of that process. That's what all these bailouts are about. But in case you haven't noticed, they really haven't worked. We've gotten brief bounces in stocks, brief periods of economic expansion, temporary improvements in the credit markets. But they don't stick. They fail.

What to Do Now? I know this is a sobering big-picture view. But it has the added benefit of being true - unlike a lot of the garbage you're hearing from your elected and unelected leaders.

Someday, we'll see the depths of the recession's eyes. Someday, we'll get to the point where enough companies have failed, enough homes have fallen into foreclosure, enough lenders have gone under, and enough debt has been crunched to get a real bottom in the markets and the economy. Then we'll be ready for our country to grow in a healthy, sustainable fashion for the long term.

But we're not there yet. And judging from what I'm seeing, my outrage list appears doomed to grow.

by Mike Larson
November 14, 2008

http://www.moneyandmarkets.com/my-outrage-list-keeps-getting-longer-and-longer-28009

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Former OCC Chief John D. Hawke, Jr.

Hawke, a veteran banking industry lawyer appointed to head the OCC by President Bill Clinton in 1998, wouldn't budge. He said he would reinforce federal policies that hindered states from reining in lenders. The AGs left the tense hour-long meeting realizing that Washington had become a foe in the nascent fight against reckless real estate finance. The OCC "took 50 sheriffs off the job during the time the mortgage lending industry was becoming the Wild West," Cooper says.

This was but one of many instances of state posses sounding early alarms about the irresponsible lending at the heart of the current financial crisis. Federal officials brushed aside their concerns. The OCC and its sister agency, the Office of Thrift Supervision (OTS), instead sided with lenders. The beneficiaries ranged from now-defunct subprime factories, such as First Franklin Financial, to a savings and loan owned by Lehman Brothers, the collapsed investment bank.

Some states, including North Carolina and Georgia, passed laws aimed at deterring rash loans only to have federal authorities undercut them. In Iowa and other states, mortgage mills arranged to be acquired by nationally regulated banks and in the process fended off more-assertive state supervision. In Ohio the story took a different twist: State lawmakers acting at the behest of lenders squelched an attempt by the Cleveland City Council to slow the subprime frenzy.

A number of factors contributed to the mortgage disaster and credit crunch. Interest rate cuts and unprecedented foreign capital infusions fueled thoughtless lending on Main Street and arrogant gambling on Wall Street. The trading of esoteric derivatives amplified risks it was supposed to mute.

One cause, though, has been largely overlooked: the stifling of prescient state enforcers and legislators who tried to contain the greed and foolishness. They were thwarted in many cases by Washington officials hostile to regulation and a financial industry adept at exploiting this ideology.

The Bush Administration and many banks clung to what is known as "preemption." It is a legal doctrine that can be invoked in court and at the rulemaking table to assert that, when federal and state authority over business conflict, the feds prevail—even if it means little or no regulation.

"FUNDAMENTAL DISAGREEMENT"

"There is no question that preemption was a significant contributor to the subprime meltdown," says Kathleen E. Keest, a former assistant attorney general in Iowa who now works for the Center for Responsible Lending, a nonprofit in Durham, N.C. "It pushed aside state laws and state law enforcement that would have sent the message that there were still standards in place, and it was a big part of the message to the industry that it could regulate itself without rules."

"That's bull----," says Hawke, the former comptroller. He returned to private law practice in late 2004 with the prominent Washington firm Arnold & Porter. Once again representing lenders as clients, he confirms the substance and tone of the April 2003 meeting with the state AGs, saying they "simply had a fundamental disagreement." But he denies that federal preemption played a role in the subprime debacle.

Hawke blames much of the mess on mortgage brokers and originators who, he says, were the responsibility of states. "I can understand why state AGs would try to offload some responsibility here," he adds. "It's important to remember when people are trying to assign blame here that the courts uniformly upheld our position."

His arguments have some merit. The federal judiciary has bolstered preemption in the name of uniform national rules, not just for banks but also for manufacturers of drugs and consumer products. And state oversight alone is no panacea, as the chaotic state-regulated insurance market illustrates. Inadequate supervision of mortgage companies in some states contributed to the subprime explosion. But the hands-off signals sent from Washington only invited complacency. When some state officials fired warning flares, the Administration doused them.

Consider a clash in 2004 between the OCC and regulators in Michigan. In January of that year attorneys working for Hawke filed a brief in federal court in Grand Rapids on behalf of Wachovia (WB), the national bank with $800 billion in assets based in Charlotte, N.C. Michigan wanted to continue to examine a Wachovia-controlled mortgage unit in the state, which the bank had converted to a wholly owned subsidiary. The parent bank sued, claiming Michigan could no longer look at the mortgage lender's books. Citing the threat of unspecified "hostile state interests," the OCC argued in its brief that "states are not at liberty to obstruct, impair, or condition the exercise of national bank powers, including those powers exercised through an operating subsidiary."

Michigan countered that Wachovia Mortgage was not itself a national bank. The Constitution preserves state authority to protect its residents when federal statutes don't explicitly bar such regulation, Michigan contended. Ken Ross, the state's top financial regulator, says his department fought Wachovia all the way to the U.S. Supreme Court in part because it feared a growing subprime mortgage problem: "We knew there needed to be [state] regulation in place or there could be gaps." The OCC, he adds, "did not have robust regulatory provisions over these operating subsidiaries."

The nation's highest court sided with the Bush Administration, ruling in April 2007 that the OCC had exclusive authority over Wachovia Mortgage. Justice Ruth Bader Ginsburg, writing for a five-member majority, pointed to the potential burdens on mortgage lending if there were "duplicative state examination, supervision, and regulation." In a dissenting opinion, Justice John Paul Stevens said that it is "especially troubling that the court so blithely preempts Michigan laws designed to protect consumers."

By the time of the Supreme Court decision last year, Wachovia and its mortgage operations in Michigan and elsewhere were feeling the ill effects of unwise lending. As real estate prices continued to fall this year, pushing many borrowers into default, Wachovia teetered on the edge of failure. In late September the federal government stepped in to arrange a fire sale. Wachovia now may be carved up between Citigroup (C) and Wells Fargo (WFC).

Confrontations such as Michigan's battle with Wachovia became far more common after George W. Bush took over the White House in 2001 and instituted a broad deregulatory agenda. The OCC, an arm of the Treasury Dept., has adhered closely to it. The agency oversees more than 1,700 federally chartered banks, controlling two-thirds of all U.S. commercial bank assets. Historically, its examiners have monitored bank capital levels and lending to corporations more attentively than they have the treatment of individual borrowers. "Consumer protection has always been an orphan [among federal bank regulators]," says Adam J. Levitin, a commercial law scholar at Georgetown University Law Center.

The OCC brought 495 enforcement actions against national banks from 2000 through 2006. Thirteen of those actions were consumer-related. Only one involved subprime mortgage lending. OCC spokesman Robert Garsson says the figures could be misinterpreted because the agency addresses many problems informally during bank examinations. He declined to provide any examples.

Beyond the influence of free-market theory, turf concerns have reinforced the Administration's determination to exercise responsibility for as many lenders as possible—and prevent state incursions, notes Arthur E. Wilmarth Jr., a professor at George Washington University Law School. Almost all of the funding for the OCC and OTS comes from fees paid by nationally chartered institutions.

GEORGIA FIGHT

Hawke says the OCC seeks only to exercise powers that it has long held under federal law. It is far more efficient for national banks to deal with one set of federal rules than a hodgepodge of state directives, he argues, echoing the Supreme Court's majority view. By the late 1990s, he adds, more state legislatures and AGs were trying to bully national banks by, for example, restricting ATM fees charged to nondepositors. State officials "found it politically advantageous to assert these kinds of initiatives," he says. The OCC's heightened preemption campaign "was occasioned by the fact the states were becoming more aggressive."

The current head of the OCC, John C. Dugan, concurs. "To claim that it is our fault from preemption is just a total smokescreen to shield the fact that the state mortgage brokers and mortgage companies were just not regulated," Dugan says.

Efforts in Georgia to rein in unwise lending provoked a particularly fierce federal reaction. In 2002 the state passed a law that imposed "assignee liability" on the mortgage-finance process. Understanding the significance of this requires a little background.

One of the forces that accelerated the proliferation of dangerous home loans was the Wall Street business of buying up millions of mortgages, bundling them into bonds, and selling the securities to pension funds and other investors. Securitization, which grew to a $7 trillion industry, meant the lenders could pass along the risk of default to a huge universe of investors. Many of those investors, in turn, relied uncritically on reassurances from fee-collecting investment banks and ratings agencies that mortgage-backed securities were high-quality. When many of the reassurances proved hollow, the securitization market collapsed this year.

Assignee liability would radically reshape that market by making everyone involved potentially responsible when things go bad. Investment banks that created mortgage-backed securities and investors who bought them would be liable for financial damage if mortgages turned out to be fraudulent. The financial industry opposed assignee liability, maintaining that it would cripple the market for asset-backed securities. Major ratings agencies later agreed that allowing unlimited damages would be disruptive. The agencies threatened to stop evaluating many bonds tied to mortgages covered by the Georgia law.

But some banking experts speculate that if Georgia's example had spurred more states to adopt broad assignee liability, greater caution would have prevailed in the mortgage-securities market, possibly preventing the blowups of Lehman, Bear Stearns, and other once-mighty institutions. "If the Georgia law had held, it is possible that other states would have followed and there might have been change earlier," says Ellen Seidman, who headed the OTS from 1997 through 2001.

"OUTGUNNED" ADVOCATES

Roy Barnes, Georgia's governor in 2002, understood the potential significance of assignee liability when he signed the state's new Fair Lending Act that year. He recalls a breakfast meeting with banking lobbyists during which he admonished the industry to clean up reckless lending. He jokingly threatened to hire "the longest-haired, sandal-wearing bank commissioner you ever saw." But the bankers fought back, seeking to undermine the new law.

The OCC's Hawke assisted the industry by issuing a ruling in July 2003 saying the Georgia law did not apply to national banks or their subsidiaries. A fact sheet prepared at the time—and still available on the OCC's Web site—says: "There is no evidence of predatory lending by national banks or their operating subsidiaries, in Georgia or elsewhere."

The OCC ruling had been requested by Cleveland-based National City Bank (NCC) on behalf of several of its units, including First Franklin Financial, a subprime lender that operated in Georgia and other states. First Franklin, which was acquired by Merrill Lynch in 2006, has been hit with dozens of suits alleging unfair lending practices. Merrill shut down First Franklin's troubled lending business in March. Itself hobbled by mortgage-securities losses, Merrill agreed last month to be acquired by Bank of America (BAC). The bank and Merrill declined to comment.

In August 2004, Hawke went a step further in a letter to the Georgia Banking Dept. He said even state-chartered mortgage brokers and lenders were exempt from the Georgia law—if the loans they handled were funded at closing by a national bank or its subsidiary.

By then support for the Georgia law was already eroding. Barnes, a Democrat, lost his reelection campaign in November 2002, and his Republican successor moved to dilute the lending act. Still, supporters mobilized to defend the legislation. One was William J. Brennan Jr., an Atlanta legal aid attorney who specializes in housing and had testified before the U.S. Congress in 2000 about what he saw as the looming mortgage mess. He told the House Financial Services Committee: "The entry of many prominent national banks into the subprime mortgage-lending business has resulted not in reform, but in the expansion of the abusive practices." Federal regulators, he testified, "have done little to stop" the trend. In early 2003, Brennan and a legal aid colleague, Karen E. Brown, consulted with Georgia legislators trying to block amendments softening the lending law. At a hearing in February, Brennan requested a police escort because he feared that angry mortgage brokers would block his way. "The words that come to mind are 'outgunned' and 'overwhelmed,' " says Brown.

Georgia legal aid attorneys Brennan and Brown

The Georgia legislature sharply curtailed the assignee liability provision in March 2003 and eliminated other elements of the law as well. Subprime lenders such as Ameriquest Mortgage that had halted lending in Georgia in protest of the law resumed marketing high-interest, high-fee mortgages. But by late 2007, Ameriquest had gone out of business after agreeing to a $325 million settlement to resolve suits alleging that it had made fraudulent loans.

ESCAPING STATE ENFORCEMENT

Georgia now has the sixth-highest rate of foreclosure in the country. Consumer advocates and state attorneys general contend the weakening of the state's law was a severe blow to efforts to curb careless lending. "Had the Georgia Fair Lending Act not been watered down, we would be in a very different place right now," says Brown.

In some states, dubious local mortgage firms sold themselves to national banks, gaining protection against state enforcement. The Iowa Division of Banking in 2006 sought to examine a subprime broker called Okoboji Mortgage in the town of Arnolds Park. A borrower had accused the firm (named for an area lake) of duplicitous lending practices. Cheryl Riley, a 52-year-old janitor, told state officials she had not received the 30-year fixed-rate mortgage she thought she had arranged with Okoboji in 2005. Instead of one monthly statement, Riley got two: one for a 9.25% adjustable-rate loan and another for a 15-year fixed loan at 12%. Both rates were far higher than what Riley and her husband thought they had negotiated. "We were horrified," she says.

A preliminary state investigation found that Okoboji's manager had headed a mortgage firm in Nebraska that lost its license for falsifying loan documents. But Okoboji refused Iowa's demand for an examination, forcing the agency to file suit in August 2006. Okoboji responded by announcing that it had been acquired by Wells Fargo, a nationally chartered bank regulated by the OCC. Okoboji handed in its state license, saying it no longer had to comply with Iowa rules. "We'd had red flags but were now blocked from investigating," says Shauna Shields, an Iowa assistant AG.

Okoboji's former manager, Lyda Neuhaus, calls Nebraska's earlier actions "a witch hunt" based on "12 miserable complaints." Her father, Juan Alonso, who owned Okoboji, says he sold his company because he wanted to retire, not to escape state regulation. Both deny any wrongdoing. A Wells Fargo spokesman declined to comment on Iowa's concern about Okoboji and defended the acquisition as benefiting customers and shareholders.

"PLAYING FIELD WITH NO RULES"

The experience with Okoboji was the sort of thing that Iowa AG Miller had warned about when he joined his counterpart from North Carolina on their visit to OCC chief Hawke in 2003. "Now, we could not do anything with federally chartered banks or subsidiaries," Miller says. In 2006 and 2007 the Iowa legislature shot down proposals by Miller for more- restrictive lending laws. Lax regulatory standards at the federal level helped undermine his efforts, he explains. State-chartered banks insisted that tougher rules in Iowa would put them at a competitive disadvantage with federally chartered banks overseen by the OCC. "We had to acknowledge the [political] environment we were in," Miller says.

The banking industry repeated the argument for regulatory "parity" in many states that tried and failed to tighten supervision of subprime lenders, says Keest of the Center for Responsible Lending: "State institutions then wanted a level playing field, which was a playing field with no rules."

Hawke says that it would have been inappropriate for the states to impose more-stringent standards on federally chartered institutions: "Had they tried to apply those rules to national banks, they clearly would have been preempted."

In Cleveland in 2002, Frank G. Jackson, then a member of the City Council, could see that many lower-income residents were being persuaded by lenders to pile on high-interest debt. "It was pure greed, based on exploitation," he says. "[Some subprime lending] is just the same as organized crime." He started negotiating with mortgage lenders for more-favorable terms. To his surprise, the lenders bypassed him and persuaded the state legislature to enact a less stringent version of an anti-predatory lending act he was drafting. "I figured the good faith had ended, so I passed my law [at the city level]," Jackson says. That law required lenders to register with the city and provided counseling to prospective borrowers.

His accomplishment was short-lived. That same year, the American Financial Services Assn. (AFSA), a national trade group, sued to block Ohio municipalities from passing lending laws that conflicted with state statutes. The Ohio Supreme Court later sided with the industry. AFSA's goal was to ward off conflicts between federal, state, and local rules, says spokesman Bill Himpler. "Different municipalities moving different anti-predatory lending legislation . . . would have brought the credit markets to a screeching halt."

Fulfilling Jackson's fears, the Cleveland area has become one of the places worst hit by the mortgage catastrophe. More than 80,000 homes have gone into foreclosure since 2000, the highest per capita rate in the country.

In January, Jackson, elected the city's mayor in 2005, tried a new tactic. He filed suit in state court against Lehman, Wells Fargo, and 19 other lenders, alleging that they sold "toxic subprime mortgages . . . under circumstances that made the resulting spike in foreclosures a foreseeable and inevitable result." The city's attorneys based the suit on an Ohio law banning "public nuisances," which is usually used against defendants such as manufacturers whose factories emit pollution. The idea was to steer clear of conventional banking law and head off any claim of federal preemption. The suit is pending; the banks all deny wrongdoing.

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic network

Countrywide Set Aside $8.4 Billion for Lawsuits

The preemption issue resurfaced on Oct. 6 when The New York Times reported that a group of states had pressured Bank of America's (BAC) Countrywide Financial mortgage unit to resolve pending suits by setting aside $8.4 billion for borrowers. "This agreement demonstrates the effectiveness of states in addressing predatory lending...proving states should not be preempted by federal legislation," said California AG Jerry Brown.

To read the Times article, go to http://bx.businessweek.com/state-attorneys-general

by Robert Berner and Brian Grow
Berner is a correspondent for BusinessWeek in Chicago .
Grow is a correspondent in BusinessWeek's Atlanta bureau .

Business Week
In Depth
October 9, 2008

http://www.businessweek.com/magazine/content/08_42/b4104036827981.htm

Hat tip:
Jim Dillian
Boone, NC

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Lynn Browne, who co-authored the 1992 study, was the Boston Fed’s deputy director of research at the time and now serves as its executive vice president in charge of communication. She said co-author Alicia Munnell approached her to do the study because “community activists were complaining that mortgage loans were not being made in minority communities.

“It did not seem satisfying to have to keep responding, ‘We need more data,’ ” Browne said.

Liebowitz, a longtime critic of the study, says it was rife with data errors.

In fact, there were enough critics of the study - and the issue had become so politicized - that, in 1995, Browne and another one of her co-authors published a 26-page article rebutting critics’ arguments.

“My guess is that they were interested in finding a particular result,” Liebowitz said. “Richard Syron was head of the Boston Fed at the time. He went on to be the head of Freddie Mac. They were looking for mortgage discrimination and they found it.”

The Boston Fed study got a lot of attention. It put banks on the defensive against charges of racism and gave community activists and minority groups ammunition in what became a very ideologically driven push to expand homeownership in America.

Once again, the Boston Fed led the way and the Fed’s next step is what, according to Liebowitz, “really opened up Pandora’s box.”

The Fed published a guide in 1993 for banks on equal opportunity lending, with a foreword written by Syron. The guide recommended changes to mortgage underwriting standards and practices that, according to Liebowitz, is where we find the seeds of today’s mortgage meltdown.

The guide says “management should be directed to review existing underwriting standards and practices to ensure that they are valid predictors of risk. Special care should be taken to ensure that standards are appropriate to the economic culture of urban, lower-income, and nontraditional consumers.”

Among the recommendations in the Boston Fed’s 1993 “Closing the Gap: A Guide to Equal Opportunity Lending”:
Special consideration could be given to applicants with relatively high obligation ratios who have demonstrated an ability to cover high housing expenses in the past. Many lower-income households are accustomed to allocating a large percentage of their income toward rent.

Accumulating enough savings to cover the various costs associated with a mortgage loan is often a significant barrier to homeownership by lower-income applicants. Lenders may wish to allow gifts, grants, or loans from relatives, nonprofit organizations or municipal agencies to cover part of these costs.

Lack of credit history should not be seen as a negative factor. Certain cultures encourage people to pay as you go and avoid debt.

Lenders should focus on the applicant’s ability to maintain or increase his or her income level, and not solely on the length of stay in a particular job.

In addition to primary employment income, Fannie Mae and Freddie Mac will accept the following as valid income sources: overtime and part-time work, second jobs (including seasonal work), retirement and Social Security income, alimony, child support, Veterans Administration (VA) benefits, welfare payments and unemployment benefits.

Liebowitz argues that these recommendations - which began as well-intentioned efforts to prevent racial and cultural discrimination in mortgage lending - overreached.

He also says the widely disseminated guidelines were misused or exploited by lenders, some well-meaning and some predatory, and laid the groundwork for abusive practices - such as no-money-down, option adjustable-rate-mortgage and liar loans - that have spiraled into the mortgage meltdown the country is faced with today.

Hat tip: Dave Amos

“What was the impact of this attack on traditional underwriting standards? As you might guess, when government regulators bark, banks jump. Banks began to loosen lending standards. And loosen and loosen and loosen, to the cheers of the politicians, regulators and GSEs (government-sponsored enterprises),” Liebowitz writes in “Anatomy of a Trainwreck: Causes of the Mortgage Meltdown,” a chapter for an upcoming book, which he provided to the Herald.

As for Browne and the Boston Fed, they don’t see how their well-intentioned effort to fight discriminatory lending could have gotten the country into this mortgage mess.

“I think it’s a real stretch,” said Browne last week. “I don’t see much of a connection other than the initial efforts of banks to respond (to the guide) showed that there was a market there. That may have piqued some interest (from predatory lenders).”

Browne said the housing bubble can be blamed more on a big expansion of the broker community, rising house prices and increased demand.

Regulatory changes and lax enforcement also helped accelerate the crisis by allowing Wall Street firms and others to buy more and more of the securities backed by these risky mortgages, experts argue.

“I disagree very strongly with the idea that this (guide) set us on a slippery slope,” Browne said.

Syron left the Boston Fed in 1994 and wound up as CEO and chairman of the Federal Home Loan Corp., or Freddie Mac, in 2003. As head of Freddie Mac, Syron has said he faced increasing pressure to buy up more and more risky mortgages, some of which the Boston Fed’s guide had, in effect, served to legitimize.

When too many of the mortgages went bad, the federal government stepped in last month to take over Freddie Mac and another government-supported enterprise, the Federal National Mortgage Association, or Fannie Mae. Syron and Fannie Mae chief Daniel Mudd were ousted.

Liebowitz says Syron deserves a fair share of the blame for what has happened.

“Richard Syron was most recently head of Freddie Mac where, his total compensation in 2007 was $18.3 million. Nice reward for presiding over unprofessional research behavior, bankrupting Freddie Mac and crippling our financial system, all in the name of politically correct lending,” Liebowitz quipped.

Syron could not be reached for comment.

In defending the Boston Fed’s position, spokesman Joel Werkema said: “The (1993) manual was trying to be helpful. There was a moral imperative and a market that our study found hadn’t been served so well in the past. The message to banks was, think flexibly. Back then, you’ve got to remember, it was pretty hard to get a mortgage.”

By Frank Quaratiello
October 6, 2008

http://www.bostonherald.com | Business & Markets
Article URL: http://www.bostonherald.com/business/general/view.bg?articleid=1123690

Hat tip: Bob Cusack

Comments are welcome at redstatepatriot@hughes.net. Please include the title of the article as your subject line. Selected responses, in whole or part, may be published (appended to the article).
--------------------------------

Response by: Red State Patriot

" Back then, you’ve got to remember, it was pretty hard to get a mortgage.” Apparently for a reason!

If this is what liberalism and an attempt at socialized housing will do to the markets, imagine what someday will become of socialized medicine and socialized education. Forget that thought - it's already happened.

I hesitate to ask, what's next? Having already read, 'We The Living' by Ayn Rand, I know.

Just yesterday, Bank of America — one of this country’s “strongest” banks — revealed that its earnings plunged 68% in the third quarter. Why? Because the toxic loans in its portfolio made under pressure of political correctness, made to irresponsible demographics, are now imploding. Bank of America is having to pay more than $8 billion to modify (rather than let default) 400,000 troubled mortgages it bought in its acquisition of Countrywide. And because its own credit card customers, a large number of whom are illegal alliens, defaulted on a staggering $1.24 billion in credit card debt in July, August and September alone! If you were wondering, it has only just begun. Can you say Dow Jones Industrials - 6500 or lower?

« Close It

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.
In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

By STEVEN A. HOLMES

http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&partner=permalink&exprod=permalink

All italicized sections constitute emphasis added by Red State Patriot.

Comments are welcome at redstatepatriot@hughes.net. Please include the title of the article as your subject line. Selected responses, in whole or part, may be published (appended to the article).

« Close It

Economic collapse is preferable to this deal. And I think we ought to call their bluff.

Just because the secretary of this and the chairman of that tell us that a global financial meltdown is just days away, that doesn’t make it so. These same people have been wrong about everything else they’ve predicted since this difficulty began. I personally don’t feel any obligation to believe their sky-is-falling routine.

And even if they’re right, I’d rather take the economic hit and work our way out of it than commit the sins against our Republic that are all through this immoral scheme.

And this is exactly that – immoral.

It is immoral to make working Americans pay for the failings and greed of individuals and companies on Wall Street. It is immoral to make responsible people clean up the mess of irresponsible people. It is immoral to put this vast amount of money and power into the hands of one man or one committee. It is immoral to impose textbook socialism on American finance and business without the consent and cooperation of the people. It is immoral to give to government sweeping powers that cannot in any way be justified by a resort to the Constitution. It is immoral to heap such debt on the government or the taxpayer. It is immoral to expect the American taxpayer to shoulder the cost of “saving” the world economy. It is immoral for such a massive governmental move to be made without extensive and deliberate public input and debate.

Put another way, the Wall Street people crapped the bed – let them sleep in it. Working people didn’t cause the problem and working people shouldn’t be expected to clean up the problem. People who pay their mortgage shouldn’t have to pick up the tab for people who don’t pay their mortgage.

And we shouldn’t abandon principle for expediency. Americans shouldn’t have to abandon their beliefs, the free market or their form of government because some business types got greedy and some government types got stupid.

If the American economy is so mis-structured that the collapse of some alphabet-soup companies puts it over the edge, then maybe it needs to go over the edge. If we’re that weak, maybe we should knock it down and start over.

We’ve gone through recessions before. We’ve gone through collapses before. We’ve been through economic hell in this country several times, but each one of those times – except, possibly, under FDR – we stuck by our Constitution and we stuck by our heritage. There’s no reason we ought to do any different this time.

And there’s no reason we ought to believe that government debt – the root cause of so many of our economic problems – is the solution to this problem. Two wrongs don’t make a right, and this cure is worse than the disease. To saddle our economy with this debt will have a long and terrible impact on American workers, taxpayers and businesses.

Far better to take our medicine now and get it over with. Better to weather the storm than to delay it and ultimately intensify it.

So I’m not going along anymore. The negatives outweigh the positives. I don’t trust these people when they predict dire outcomes, and I don’t believe that those dire outcomes – should they happen – are worse than what the fat cats are trying to shove down our throats.

Don’t sell out your principles for a mess of pottage. Don’t throw out the Constitution and capitalism because we’re in a tight spot. Stand like Americans, don’t capitulate like slaves. Men have fought and died for political and economic freedom, and Washington wants us to hand some of that back because of something we don’t understand on the evening news.

This bailout is a bad thing. It is a first cousin to slavery. And I’ve turned against it. I’m going to call my congressperson and my two senators and I’m going to ask them to vote against it.

by Bob Lonsberry

http://www.lonsberry.com/writings.cfm?story=2471

Comments are welcome at redstatepatriot@hughes.net. Please include the title of the article as your subject line. Selected responses, in whole or part, may be published (appended to the article).

« Close It

Over at Political Affairs Magazine, a publication of the Communist Party USA, writer John Case is gloating. His article about the crisis is headlined, “A Dose of Socialism to Forestall Disaster.” He thinks that Paulson and Federal Reserve Board chairman Ben Bernanke have been reading the works of closet Marxists.

But none of this is secret. At a time when many pieces of legislation before Congress take up thousands of pages and do their best to hide pork barrel spending, Paulson’s three-page plan for Wall Street socialism is straightforward and simple. If passed by Congress, Paulson would assume the dictatorial power and authority to designate financial institutions “as financial agents of the Government” and order them to perform “all such reasonable duties related to this Act as financial agents of the Government as may be required of them…”

The bill gives Paulson automatic access to $700 billion and raises the limit on the public debt to $11.3 trillion. He gets the power to issue regulations, hire people, establish various financial “vehicles,” and take other “necessary actions.”

Conservative Senator Jim Bunning is brutally honest, saying that “…the free market for all intents and purposes is dead in America.” He said Paulson’s plan “will take away the free market and institute socialism in America. The American taxpayer has been misled throughout this economic crisis. The government on all fronts has failed the American people miserably.”

“After reviewing the Administration’s proposed bailout plan, I believe it is completely unacceptable,” said conservative Senator Jim DeMint. “This plan does nothing to address the misguided government policies that created this mess and it could make matters much worse by socializing an entire sector of the U.S. economy. This plan fails to oversee or regulate the government failures that led to this crisis. Instead it greatly increases the role for Secretary Paulson whose market predictions have been consistently wrong in the last year…”

Every newspaper in America should print a copy of his plan. Every news anchor and commentator should read it out loud to the American people. The American people have a right to know that President Bush and Congress are officially creating a socialist America.

Over at the “conservative” Fox News Channel, however, some commentators think this is just great. “I love it,” Fred Barnes of the “conservative” Weekly Standard said of the temporary market rise in response to the anticipated Paulson plan. “Look,” Barnes said, “when I keep hearing this is going to cost a trillion dollars, and so on, it may not cost anything.” The U.S. may “come out ahead” in the long run, he confidently predicted. He praised Paulson and Bernanke for acting “boldly.”

Another “conservative,” Charles Krauthammer, was almost giddy. “It took FDR a decade to put in place all the institutions of the New Deal,” he commented. “Paulson and Bernanke did it in ten hours. I mean, in one night, they created a whole new world.”

However, on the September 21 edition of Fox News Sunday, host Chris Wallace pointed out that Paulson has already been caught making reassuring but false statements about the crisis. In March, also on Fox News Sunday, Wallace had asked him, “Are more Wall Street firms in danger, at risk, of going under? Paulson replied, “I’ve got great confidence in our financial market, our financial institutions. Our markets are resilient. They’re flexible. Our institutions, our banks and investment banks, are strong.”

And this is the guy being entrusted with virtual dictatorial power over Wall Street? Rather than praise him for his intellect and ability, why aren’t Barnes and Krauthammer demanding that Bush fire him?

The liberal media are, of course, also trying to keep the American people in the dark about what is happening. The Washington Post deceptively calls it a “rescue plan.”

The “debate” taking place in Washington and the media is being carefully controlled. The Republican Bush Administration supports the plan and Congressional Democrats want to take it further. The Democrats want even more federal involvement in the firms that are being acquired. In other words, it is a question of how much socialism they want. The Democrats want more socialism; the Bush Republicans want slightly less. But it is still socialism.

There is a bipartisan note: both sides agree that there should be a new government board assigned to monitor America’s transition into a socialist economy.

Both major party presidential candidates, John McCain and Barack Obama, have not objected to the proposed federal takeover, although McCain has raised questions about giving Paulson too much power.
Constitution Party presidential candidate Chuck Baldwin, who has been endorsed by Rep. Ron Paul, is ripping the Democrats and the Republicans. “That deer in the headlights look on the faces of Obama/Biden/McCain/Palin when discussing this crisis should tell Americans everything they need to know about these candidates,” he said. “Not one of them is letting on they know what’s really happening, much less how to fix it!”

He said, “So far, the only solution being talked about is more of the same failed monetary policies that got us into this mess in the first place―more fake money, more debt, more usury. It is time to demand a return to sound money.”

On the House side, 31 members of the House of Representatives have voiced public objections in writing to going further down the socialist road. They are members of the Republican Study Committee (RSC), the Caucus of House Conservatives. They have sent a letter to Paulson and Bernanke.

Rep. Mike Pence, the former chairman of the RSC, said, “The Administration’s request amounts to the largest corporate bailout in American history. Congress should act, but should act in a way that protects the integrity of our free market and protects the American taxpayer from more debt and higher taxes. To have the freedom to succeed, we must preserve the freedom to fail. Any solution to our present crisis must preserve our essential economic freedom.”

“Government bailouts and takeovers are nothing new,” points out financial advisor Ric Edelman.

He cites the following: “In 1971, Richard Nixon rescued Lockheed by providing $250 million in loan guarantees. When the Penn Central Railroad failed in 1971, Nixon created Amtrak. Jimmy Carter gave $1.5 billion in loan guarantees to Chrysler in 1979. Under Ronald Reagan, the FDIC in 1984 spent $4.5 billion to rescue Continental Illinois, which still holds the record as the largest U.S. bank failure. Then, during the S&L crisis of the 1980s, George H. W. Bush approved the bailout of 747 savings and loans at a cost to taxpayers of $124.6 billion. In 1998, under Bill Clinton, the Federal Reserve Bank of New York bailed out Long Term Capital Management at a cost of $3.6 billion. During the Mexican Peso Crisis, Clinton arranged for loans and guarantees to Mexico totaling almost $50 billion. Then, following the September 11, 2001, terrorist attacks, George W. Bush approved $15 billion in subsidies and loan guarantees to aid the faltering airline industry. This year, the Federal Reserve approved a $30 billion credit line to help JP Morgan Chase acquire Bear Stearns and engineered takeovers of Freddie Mac, Fannie Mae and AIG. The names, dates and amounts are different, but that’s about it.”

In fact, however, the massive scope and price tag make the Paulson plan far different.

Meanwhile, some “progressive” economists and writers are urging the Democrats in Congress to take the plan much further by implementing the first phase of a global tax.

James Parrott of the Fiscal Policy Institute says that Washington needs to establish a “new regulatory regime that covers all financial institutions (including hedge funds), controls risk and introduces a tax on financial transactions to help repay U.S. taxpayers for coming to the industry’s rescue.” A tax on financial transactions, which would affect stocks and mutual funds, could be part of a global “Tobin Tax,” named after the late Yale University economist James Tobin, to bring in billions and even trillions of dollars a year to national governments and international institutions such as the United Nations. Such a plan has usually been marketed as a way to diminish “global financial instability.”

Dean Baker of the Center for Economic and Policy Research says that “The government should impose a modest financial transactions tax, comparable to the one in the United Kingdom. This can both restrain excessive trading and raise more than $100 billion a year in revenue.”

One cannot exclude the possibility of such a proposal being slipped into the final legislation. It is being reported that Senator Christopher Dodd, Democratic chairman of the Banking Committee, has been circulating a 44-page version of the bill. But Dodd’s Banking Committee website only has a three-page summary. What is in the rest of the proposal?

The next few days are critical. The American people can stop this rush into socialism, if only the liberal and conservative media start telling the truth about the socialist “new world” into which we are about to enter.

AIM Column
By Cliff Kincaid
September 23, 2008

http://www.aim.org/aim-column/socialism-is-coming-to-america/

Comments are welcome at redstatepatriot@hughes.net. Please include the title of the article as your subject line. Selected responses, in whole or part, may be published (appended to the article).

---------------------
Response by Suzanne:

I've just finished reading this and I am ready to go puke!

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Response by Len Salonsky:

From my vantage point, the American people have been enabling the turn towards socialism for decades by their complacency and by their almost universal demand for entitlement increases whose implementation lie outside the principles and codification of the US Constitution. Unscrupulous politicians (perhaps the majority) are glad to accommodate any end-run around the Constitution if such an act will bring them a majority of votes.

The American people will never knowingly adopt Socialism, but under the name of Liberalism, they will adopt every fragment of the Socialist program until one day America will be a Socialist nation without knowing how it happened. ~ Norman Thomas - Socialist Party Presidential candidate (1976)

No republic has long outlived the discovery by a majority of its people that they could vote themselves largesse from the public treasury. ~ Alexander Tyler

In general, the art of government consists in taking as much money as possible from one party of citizens to give to the other. ~ Voltaire (1764)

You cannot bring about prosperity by discouraging thrift. You cannot strengthen the weak by weakening the strong. You cannot help the wage earner by pulling down the wage payer. You cannot further the brotherhood of many by encouraging class hatred. You cannot help the poor by destroying the rich. You cannot keep out of trouble by spending more than you earn. You cannot build character and courage by taking away mans initiative and independence. You cannot help men permanently by doing for them what they could and should do for themselves. ~ Abraham Lincoln

There are severe limits to the good that the government can do for the economy, but there are almost no limits to the harm it can do. ~ Milton Friedman, Nobel laureate

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LAMB: We started a number of weeks ago trying to get you to come talk to us, and you were on vacation. And you live six months of the year in Colorado. So, it was – I guess it was perfect for you to be here the week of the takeover.

WALLISON: Oh, yes. This has been quite a week.

LAMB: Where are you personally coming from? Where do you reside, and what have you done in your past?

WALLISON: Well, I’ve been in the government a fair amount. I’ve never run for office, but I’ve helped people who are running for office. And then, in Republican administrations, I’ve had some roles. I’m a lawyer – graduate of a law school, and then I practiced law for many years. But during that time …

LAMB: Harvard Law.

WALLISON: Harvard Law School. And during that time, I came in and out of government. I was a counsel to Nelson Rockefeller. I’m a New Yorker, actually, by birth. And so, I got to know Nelson Rockefeller. I became his counsel when he was vice president. And then in the Reagan administration, I was the general counsel of the Treasury Department. And finally, when Don Regan went over to become chief of staff in the Reagan White House, I went over about a year later – left my practice once more – and became a White House counsel for Ronald Reagan. So, I’ve had a fair amount of government experience and a lot of financial experience in the government. That’s one of the things that gave me a real interest in Fannie Mae and Freddie Mac.

LAMB: When did you start getting interested?

WALLISON: Well, when I was at the Treasury Department. They were – Fannie Mae was a fairly significant company in the early 1980s, when I was at Treasury. And even then, it occurred to me that this was an accident waiting to happen. They were in a – they had a business model that seemed to me to be unworkable, and one that would eventually cause a lot of problems. I wasn’t able to do anything at Treasury at the time. We were too busy with many of the problems, including the S&L collapse. But what I did remember when I left Treasury was that this is a subject that I’d like to return to at some time in the future. And fortunately, when I had an opportunity to go to AEI, I was able then to start looking more seriously at Fannie and start investigating a little bit more exactly how they were doing and whether my thoughts about what was going to happen to them were likely to come true.

LAMB: The statement by Ralph Nader had the word G – or the letters – GSE in it. I want to run a clip, just a very brief clip, of Henry Paulson, the secretary of the Treasury, last Sunday, at 11 o’clock in the morning, when he announced the takeover of Fannie Mae and Freddie Mac.

(BEGIN VIDEO CLIP)

HENRY PAULSON, U.S. TREASURY SECRETARY: These preferred stock purchases agreements were made necessary by the ambiguities in the GSE congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long. And as a result, GSE debt and MBS are held by central banks and investors throughout the United States and around the world, who believe them to be virtually risk-free. Because the U.S. government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS.

(END VIDEO CLIP)

LAMB: OK. Break it down. What is MBS?

WALLISON: Mortgage-backed securities.

LAMB: What does that mean?

WALLISON: Well, what happens, one of the ways that Fannie and Freddie operate is to create pools of mortgages. And then they sell securities that are backed by those pools of mortgages. That’s how you get a mortgage-backed security.

LAMB: OK. Let me stop you for a second. I buy a house. I go to a bank, or the realtor gets me a mortgage. And I agree to pay, let’s just say $400,000 for a mortgage. What happens to that mortgage?

WALLISON: Well, if the mortgage gets to Fannie Mae or Freddie Mac, it’s put into a pool with a lot of other mortgages. That’s not the only thing they do. They have another way of doing this, but let me deal with the mortgage-backed security issue first. It’s put into a pool with a lot of other mortgages. Some of them are larger, some of them smaller, but thousands of them, all in the same pool. Then, securities are sold, backed by that pool. And the securities say we will pay you what we receive from the mortgages in the pool – your share of what we receive from the mortgages in the pool. And if we don’t – if the mortgages in the pool don’t perform as we anticipate they will perform, we will pay you anyway. In other words, we guarantee a certain return out of this pool. That’s what a Fannie or Freddie mortgage-backed security entails. Now, the reason you are able to get your $400,000 mortgage from some bank that is the lender, is that they know they can sell your mortgage to Fannie, which will buy the mortgage and put it into the pool, and then reimburse itself by selling mortgage-backed securities to investors.

LAMB: So, as an individual, could I turn right around and then buy securities with Fannie’s name on them?

WALLISON: Absolutely.

LAMB: Preferred or common? And what’s the difference?

WALLISON: No. It’s not that kind of security. It’s called a mortgage-backed security. And what it would say is, this security represents a one-millionth share of a certain pool of mortgages that we have created. And if we don’t pay you the specified amount to come out of this pool, then you have us backing the pool.

LAMB: So, if I had bought a security – and where would I buy that? Through a …

WALLISON: Through a broker.

LAMB: … broker?

WALLISON: Sure.

LAMB: And I owned it right now, and the government just took over Fannie Mae and Freddie Mac, do I still have the security backed?

WALLISON: Oh, sure. S ecurity is absolutely solid. And that’s one of the reasons why the government had to take over Fannie Mae and Freddie Mac, because so many individuals and mostly financial institutions around the world hold exactly those kinds of securities.

LAMB: How much of those securities do the Chinese own?

WALLISON: Oh, I don’t know the number, but it would be very large, probably running into maybe the hundreds of billions of dollars.

LAMB: Japanese, same thing?

WALLISON: Very large. Yes. Most central banks own these kinds of securities. And not only the mortgage-backed securities, but they buy direct borrowings by Fannie Mae and Freddie Mac, that they use – that is, the two GSEs, government-sponsored enterprises – use to buy and hold mortgages themselves. They don’t securitize all their mortgages. They hold a certain number of those mortgages, amounting now to about $1.5 trillion, in their own portfolios. That is, in fact, the most profitable way that they operate. The mortgage-backed securities is not a very profitable business. It’s a much less risky business. And as a result, it’s not as profitable. But when they really want to make profits, they buy and hold the mortgages themselves, because what is being paid on the mortgages is a lot more than they have to pay for the money they borrow in order to buy those mortgages.

LAMB: OK. What is a GSE, a government-sponsored enterprise?

WALLISON: Government-sponsored enterprise.

LAMB: And when was the first one started?

WALLISON: Fannie Mae was created in 1968 from an existing organization called Fannie Mae, which was started during the New Deal, and was an actual government agency. The trouble is that, by 1968, when we were in the middle of the Vietnam War, we were running deficits. And …

LAMB: In our general government.

WALLISON: In the general government. And the Johnson administration realized that the way Fannie Mae was growing, it was causing these deficits, because it was putting out a lot more cash than it was taking in any year, as it grew and bought more and more mortgages. So, they decided one of the ways to reduce this deficit was to get Fannie Mae off the government’s books, which they did by selling shares to the public in Fannie Mae, and turning it into a quasi-public company – with private shareholders, but at the same time, a kind of implicit government guarantee, because they were allowed to keep a number of ties to the U.S. government. So, since that time, the capital markets have believed that the government would back Fannie Mae, and ultimately, Freddie Mac, which was created a few years later, in case they got into any difficulty. And that’s why they’ve never had any trouble raising funds, because there was always the thought in the markets that the government would back them if they got into any trouble. They denied this for many years. They said, no, no, no. There’s no doubt that we are independent of the government. The government has no responsibility for us. Their supporters in Congress said exactly the same thing. But now we realize that the markets were right all along. And as soon as they got into trouble, the government stepped in and saved them.

LAMB: I want to jump in this process, because I found this on the Web, again from Ralph Nader. And it’s – he wrote a letter to Christopher Cox, who runs the Securities and Exchange Commission, about a lot of things, and including why do the people who run Fannie Mae – and there’s also Freddie Mac in this – but Fannie Mae make so much money? And the time period was the years 1998 to 2003. I’m just going to go down the list. Franklin Raines, at the time, the CEO, compensation from 1998 to 2003 was $90 million. Portion derived from components tied to attaining EPS goals – earnings per share goals, I assume – $52 million. Timothy Howard, compensation the same time period, $30 million. He was, I believe, the chief financial officer.

WALLISON: Yes, CFO.

LAMB: Jaime Gorelick, who we saw a lot of during the 9/11 Commission, she was the Vice Chairman of Fannie Mae, took away $26 million in those years, ’98 to 2003. And that her portion derived from components tied to attaining her earnings per share goals was $14 million. And then, Daniel Mudd, who was just let go as the CEO, during that time period – we’ll come back to him in a moment, because there was a lot more money since 2003 – took out $26 million. Now, how is it – I’m just asking you as a citizen. How is it that this government would have an organization that was solely government, and then created – Lyndon Johnson created a private company – quasi-private company …

WALLISON: Right.

LAMB: … with 18 board members …

WALLISON: Right.

LAMB: … and five board members from him …

WALLISON: Right.

LAMB: … and then subsequent presidents …

WALLISON: Right.

LAMB: … would let this kind of money be taken out of this organization? How did that happen?

WALLISON: Well, they are private companies, after all. If they have private shareholders, their obligation is to make sure that their shareholders earn profits. And to the extent that they were successful doing that, they would claim, like any other CEO, or any other major officer of a private company, that they’re entitled to the compensation that they were receiving. The problem with that argument is that they were helped substantially by the backing of the taxpayers of the United States. And so, one would think that anyone who realized he or she was getting that kind of backing would be less demanding in the compensation that they wanted. Unfortunately, they didn’t behave that way. They behaved as though they were entitled to all this compensation, when their jobs were made very easy by the fact that the government was seen by the markets as backing them up.

LAMB: Was the original decision on Lyndon Johnson’s part cynical?

WALLISON: You know in Washington, it’s very hard to say what is cynical. This is called smoke and mirrors, I think. It was – the idea was to get Fannie and Freddie – well, get Fannie, at that point, off the books of the government. If they had done it completely, if they had said, you won’t have a congressional charter, what you will have is a charter from, say, the State of Delaware, and you won’t have any line of credit to the Treasury Department, as they initially had, and we won’t say it’s possible for banks to invest in an unlimited manner in your securities, take away many of the benefits that Fannie and Freddie were given at the time they were privatized – then, it would have been a perfectly reasonable thing to do. That would have been a real privatization. Unfortunately, they only did a quasi-privatization, where they allowed the markets to believe that over time, if it was necessary, the government would step in and back them.

LAMB: Well, as you know an awful lot of political people in this town were put on the boards over the years. But I found this – and I’m going to go over a list in one of your books – but I found these couple of paragraphs in a ”New York Times” today. We’re recording this on Tuesday before the Sunday night airing.

”Mr. Bush has never been a fan of the government’s involvement in the mortgage markets. He has long viewed Fannie Mae and Freddie Mac as ’ticking time bombs,’ said his former chief economist adviser, Al Hubbard. As far back as 2002, he began arguing for greater regulatory control over the companies, but was thwarted by Republicans who controlled Congress. Democrats eventually granted the authority, which provided the legal underpinning for the takeover announced on Sunday.”

”Mr. Bush was so disapproving of Fannie Mae and Freddie Mac, Mr. Hubbard said, that beginning early in his administration, he refused to appoint members to their boards. ’That is very significant,’ Mr. Hubbard said. ’No president has ever done that.’ But he said, ’We’re not going to put people on the boards of these institutions that are these huge, systemic financial risks to the economy.’”

Now we call it OFHEO.

WALLISON: Yes.

LAMB: Which is a long way of saying …

WALLISON: Their regulator.

LAMB: … a regulator of this. I mean, it’s interesting that these are supposed to be private organizations, but regulated by outsiders.

WALLISON: Yes.

LAMB: So, we just asked that simple question. ”Can you tell us what’s the regulation? What’s the fact today about presidents you know naming people to the board?” And they said ”You have to write us a letter.” And we said, ”We’d like an answer quickly.” And they said, ”How quickly?” I said, ”We’d like it today or tomorrow.” And we never have gotten an answer from them.

WALLISON: Is that right?

LAMB: Yes. But I just bring that up, because when you wade into this, you look at this fact right here, that he has not appointed …

WALLISON: That’s right.

LAMB: … board members, can you explain that?

WALLISON: Sure.

LAMB: And is the president on the side of right as far as you’re concerned?

WALLISON: Yes. Absolutely. I was for this. I was for a number of things the president was proposing, and still am. But the point he was trying to make, I think – I think Al Hubbard’s got one part of it right. But I think what the White House was trying to do was to separate the government from Fannie Mae and Freddie Mac to the extent possible. The way this thing was set up by Lyndon Johnson and his administration, was to have a real quasi-government agency, in which the president appointed five members of the board, and the shareholders elected the remaining 13. And so, that reflected a certain involvement of the government in their business. And that – I think the White House thought – encouraged the markets to believe that, if they went belly up at some point, the government would step in. So, I think what the president was trying to do here was to send a different signal. And that is no. We’re not responsible for Fannie Mae and Freddie Mac. They were trying to get the markets to believe during this period that there really wasn’t a connection between the United States government and Fannie Mae and Freddie Mac, and the markets simply would not believe it. And the markets turned out to be right, because now we find, when they have gotten into financial trouble, that in fact the government did step in and back them. And this has happened before. I mean, the markets are not crazy, and they are not – they are not particularly prescient. They just look at what’s happened in the past. And in the 1980s, the farm credit system had financial difficulties. And, of course, that was also a government-sponsored enterprise. And, of course, the government stepped in and bailed them out. So, the markets look at that, and they look at what Fannie and Freddie are in relation to the government, and they say, well, this is going to be the same thing. The U.S. government is never going to allow one of these organizations to fail. And the markets, of course, turned out to be right. We are not allowing them to fail.

LAMB: Again, help us understand how the left and the right come together, on both ends of this, for it and against it. Bill Greider, a liberal writer for The Nation Magazine – found this on TheNation.com – just six weeks ago wrote this.

”So much for market discipline. For everyone else, Washington recommends a cold shower. Talk about warped priorities! The government puts up $29 billion as a sweetener for J.P. Morgan, but only can come up with $4 billion for Cleveland, Detroit and other urban ruins.… A generation of conservative propaganda, arguing that markets make wiser decisions than government, has been destroyed by these events. The interventions amount to socialism, American style, in which the government decides which private enterprises are too big to fail.”

WALLISON: Yes. Well, Fannie Mae and Freddie Mac are sui generis in this respect. And that is, it was always clear to me, and to a lot of other conservatives, that the government was going to bail them out if they got into difficulty. And that’s why they would get into difficulty, because there wasn’t any market discipline. We believe – and I think most economists believe – that the best way to control risk in private companies is to make sure the market is at risk. And so, they will not get the funds that they need, if they are taking risks, and the market is wary and interested in the steps that they are taking in their business before it will lend them any money. But when they’re backed by the government, that doesn’t happen. And that’s how – at least in my mind – we get this kind of corporate welfare that we’ve had with Fannie Mae and Freddie Mac in particular.

LAMB: But what about the bailing out of a Bear Stearns, or …

WALLISON: Well you know all of these things have their reasons, which are somewhat different. The Bear Stearns issue – and I happen to agree with that, because at the time the Bear Stearns bailout occurred, the market, the international financial markets, were in a panic. And there was for the first time, certainly in my lifetime, and probably for the first time since the Great Depression, there was real concern worldwide in the stability of all of the major financial institutions in the world, in the global capital markets – the major banks in Europe, the major banks in the United States, the investment banks in the United States and many other such institutions. And I think the fear was, at the Treasury Department and at the Federal Reserve, that if Bear Stearns – which was not one of the larger investment banks in the United States – but if Bear Stearns failed, the panic that was current in the market at the time would cause investors to run to all these other financial institutions and start withdrawing their funds – in other words, runs throughout the world. And they hoped to prevent that by showing that the government will step in and stop that from happening. This actually was the right thing to do under the circumstances. And with all respect to Bill Greider, if the government had not done that, the people of the United States and the people in the developed world, generally, would be far worse off now, because there wouldn’t be – many of these financial institutions would have failed, and there wouldn’t be the financing available that is necessary to keep our economies running.

LAMB: Do the people running these institutions ever pay a price? It seems like they walk out with these tremendous severances …

WALLISON: Yes.

LAMB: … multi-millions of dollars they take out, and just go on with life while everybody else gets punished.

WALLISON: Yes, well, this is – this, unfortunately, is part of the process of recruiting executives very frequently. They get contracts. I’m not justifying this in any way. But in order to recruit a high-powered executive, you have to sign a contract with that person. And frequently, the contract says, unless you do something wrong, if you’re dismissed by the company, we will pay you a certain amount as a severance. Again, I don’t want to justify it, but if you go through each of these conditions, each of these cases, case-by-case, I think you’ll find that that’s what happens much of the time. And it’s happening again with Fannie Mae and Freddie Mac, because their two top executives, according to today’s newspapers, may walk away with almost $15 million each as severance – for managing these companies down the tubes.

LAMB: What I see – the ”Washington Post” this morning has a piece. The severance packages could be worth as much as 14.9 for – is it Syron? Is that his last name?

WALLISON: Syron.

LAMB: Syron, Richard Syron, the former Freddie Mac chairman and chief executive. As much as $9.8 million for Daniel Mudd. But why, in the first place – again, I go back to the point, the government of the United States created these institutions. I know you say they were standalone companies, but they had five members of their board provided by the United States …

WALLISON: Yes.

LAMB: … by the President of the United States. Why wouldn’t there be some restriction on taking that kind of money out, when they’re supposed to be serving, in many cases, the little person?

WALLISON: Yes. Well, I think from the standpoint of the boards of directors – let’s assume the president still had five members on the board. What is the obligation of the board members? Those board members, I think, were advised by their counsel, that their obligation was to the shareholders, and not to the government. That’s one of the reasons I think why the White House decided initially to withdraw those board members, and not to appoint them anymore, because they weren’t doing anything on behalf of the United States. They were just there as kind of symbols of the government’s backing of Fannie Mae and Freddie Mac, but were not changing the policies of the company in any way.

LAMB: Let me show you a piece of paper. This is not very fancy graphics, but there are 70 members of the House Financial Services Committee. Every time you see a line through a name, that means that, in the 2008 cycle – and you can actually turn the pages here, same thing on the other side – the names really don’t matter. But out of the 70 members, 50 of them got (ph) money for their campaigns …

WALLISON: That’s right.

LAMB: … from Fannie Mae. And, of course, money from Freddie Mac. But we can add to that, not only do they get tremendous amounts of money all the time in the coffers, they have their PACs give to PACs.

WALLISON: Yes.

LAMB: And the PACs end up serving the members.

WALLISON: Right.

LAMB: And then you have the foundation, which was shut down last year, which I want to ask you about. And then you have the advertising. They spent $75 million a year on advertising. Why would these institutions have to advertise? Why would Fannie Mae or Freddie Mac have to spend $75 million on advertising?

WALLISON: A very good question. And in fact, until they ran into their financial difficulties, there were many in the financial world, including mortgage lenders, who believed that Fannie and Freddie were trying to get into the business of originating mortgages, and so, were trying to make themselves familiar to the American public in general as good guys. So, they were doing a lot of kind of public service advertising, and trying to tell the American people that a Fannie Mae or a Freddie Mac mortgage would be something they should want. They never did get into the mortgage origination business. They stayed in the business of buying mortgages from other lenders. But that was only because they ran into financial difficulties in the early 2000s. That’s why they were advertising. And all of these payments to Congress, that’s only part of the story. This was truly a culture of corruption. This is the kind of thing that, say, John McCain, who is running against the culture of corruption in Washington, can point to as a perfect example of what is wrong with this town. These organizations were made out of federal backing, taxpayers’ backing. They were made into powerful organizations. And their executives and their shareholders took tremendous profits out of these companies – again, because of the backing of the shareholders. They then took some of these profits, and they turned it over through campaign contributions to the people on the committees in Congress, who were supposed to be supervising them …

LAMB: By the way, in 2005, total lobbying expenditures, Freddie Mac – this is not for Fannie Mae, and I want to ask the difference between the two – was $12,560,000.

WALLISON: Yes. Oh, that surprises me it’s so low.

LAMB: That was actually – their highest year was 2004. It was close to $16, $17 million.

WALLISON: Yes. Well, it depends on the issues that were before Congress at that time. They hired just about every lobbying firm in Washington, D.C.

LAMB: At one point, there were 42 outside lobbyists.

WALLISON: Yes. And one of the reasons they did that is, not that they needed 42 outside lobbyists. They just wanted to keep anyone else from having lobbyists. And they practice a very tough business in politics, very tough on individuals who are critics. And a critic could get in a great deal of trouble. There were people whose careers had been ruined by criticizing Fannie Mae and Freddie Mac. And I personally happen to be very fortunate that I’m working at a place like the American Enterprise Institute, because they were not intimidated by Fannie Mae and Freddie Mac when I began to criticize those two companies, but they made a run at me in other aspects of my life, including a board of directors that I was on. And …

LAMB: Where was that?

WALLISON: I was a director of the Mortgage Guarantee Insurance Corporation, which is a mortgage insurer, and dealt regularly with Fannie Mae.

LAMB: And in what way? How would you deal with Fannie Mae?

WALLISON: Well, they guarantee, they insure mortgages that Fannie Mae makes. Fannie Mae makes a mortgage that has more than an 80 percent loan-to-value ratio. They are required by statute to have mortgage insurance for the remaining 20 percent. So, that’s – the mortgage insurance business relies very much on Fannie Mae and Freddie Mac for much of their business. And it came to pass that the president of this mortgage insurance company went to speak to Fannie Mae about the fact that they weren’t being selected as a mortgage insurer. And he came back to the board meeting that I was at, and he said, ”Well, we were told that they only like to deal with companies that are friends of theirs. And with Peter Wallison on your board, we just don’t regard you as a friend anymore.” So, I resigned, right then and there. But it is to me an example of the kind of thuggery that these companies were capable of. And they did that all through Washington, so that the media in Washington and individuals in Washington, and people in Congress who wanted to stand up to them, were under threats all the time.

LAMB: The next one, Public Radio did a report in September – actually, it was in July. And they just had this one line in here. It was a piece by Peter Overby. ”A rival lobbyist once described Fannie Mae as a political organization that happened to be in the mortgage business.”

WALLISON: Yes.

LAMB: I mean, you had people coming out of the Reagan administration, like Ken Duberstein – you worked in the Reagan administration – he went on their board. Ann McLaughlin Korologos was on their board.

WALLISON: Right.

LAMB: She was secretary of labor back in those years. There’s a lot of other Republicans. John Buckley came out of one of the campaigns from the Republican side and went to work over there.

WALLISON: Right.

LAMB: What …

WALLISON: This …

LAMB: I mean, what’s – how does this happen? Where are the morals of people who have been in the government? They know they’re taking this kind of money. And they know that they are allegedly in the business of helping – again, how many times have we heard it – the little people who can’t get mortgages.

WALLISON: Yes. It’s very sad. It’s sad that people are willing to do this. But the trouble is that this was known. This was known to everybody in Washington. This was known to the media. Where was the ”Washington Post”? Where was the ”Washington Times”? Where was the ”New York Times” These things were known. But Fannie and Freddie are huge advertisers in all of those media. Maybe that’s the reason why all of this stuff was not exposed. On the other hand, there’s the National Public Radio, which presumably doesn’t have major advertising from Fannie and Freddie, or didn’t at the time. And they didn’t expose it either. So, it is a very troubling thing to see that something as serious as this, which everyone in Washington knew about, everyone who was on the inside in Washington knew about, refused to do anything about. That’s why you really do need a political revolution, if you will, someone coming in at the top who says, ”I’m going to change the way this town does business.”

LAMB: Well, let me – and I don’t mean to be accusatory toward any individual, but just take the secretary of the Treasury, Hank Paulson. He used to run Goldman Sachs. A whole bunch of Goldman Sachs CEOs have been involved in all this process.

WALLISON: Yes.

LAMB: Wikipedia site says he’s worth $700 million. He served on the Financial Forum, or whatever they call it. TIME Magazine called it the most powerful organization in town, 20 big financial institutions. One of those on there besides Goldman Sachs is Merrill Lynch. The guy who was brought in now to run Fannie Mae is Herb Allison, who used to be the finance chief of the McCain campaign in 2000. He came out of Merrill Lynch. He’s now running Fannie Mae for the government. What are the – and I’m not impugning his motives. But it seems like the financial community is all interconnected. And the person that just wants the mortgage out there is the one that is least thought of in this process.

WALLISON: Yes. Although I certainly wouldn’t blame Herb Allison – yet.

LAMB: I’m not blaming anybody. I’m just saying, it’s all a matter of people who are in these banks, all these banks around the United States are all interchanged with these companies.

WALLISON: But you do – you do need to have knowledge of the financial markets in order to function in the financial markets. You have to know the people, and you have to know the way the markets work, and so forth. We actually are very fortunate that Paulson is there right now, because the two earlier secretaries of the Treasury in the Bush administration were not people from the financial markets, and probably would have required a lot of coaching to understand what they were seeing happening. So …

LAMB: Could I, though, suggest this, and just see what your reaction is? D on’t you really have to have people on these boards that will stand up …

WALLISON: Sure.

LAMB: … to the leadership, and more importantly, just ask questions?

WALLISON: Yes, absolutely. And the fact that they brought in people from Washington for these boards was a terrible mistake, but one that they could be expected to make, because they were purely political creatures. The reason they survived as they did was because they had the support of the government. So, you would want people on your board who don’t know anything about the financial markets, or anything about making mortgages, or anything about how to construct a financial system or a financial business. You don’t need those skills on your board. What you need in Washington are people who are in the Washington cognoscenti, the people who go to the cocktail parties and know the congressmen and know the senators, and can make sure that you’re getting heard when there is a challenge.

LAMB: OK. We’ve established that they spent a tremendous amount of money on advertising. They spent a tremendous amount of money on lobbying. They interchanged former presidential appointees in both Republican and Democratic administrations to the board of directors and to the staff.

WALLISON: Yes.

LAMB: They had this kind of quasi-backing – now, the full backing – of the United States government.

WALLISON: Yes.

LAMB: And then, there’s the foundations.

WALLISON: Yes. This is a very interesting – a very interesting thing, because, of course, we tend to think of foundations as (INAUDIBLE) and charitable, and in some cases, educational. But they use their foundations for the purpose of garnering what? Political support.

LAMB: OK. Let me put on the screen here some information from the Fannie Mae Foundation. Funded by $650 million in stock since 1995, and $12.5 million in cash in late 2006. Employed 105 people. Headed by Stacey Stewart, whose 2005 salary is $575,000 plus $72,000 in benefits and deferred compensation. Shut down in February of 2007. Ms. Stewart went to work inside Fannie Mae. And then, in a statement that was made by Director Jim Lockhart, who is the now-regulator of Fannie Mae …

WALLISON: Right.

LAMB: … it was just – it was kind of an off-hand comment. I was watching his news conference last Sunday, and he had eight or nine points that he made. And the eighth one was, all political activities, including all lobbying, will be halted immediately. But then there’s this one line, and it wasn’t explained. ”We will review the charitable activities.” The Fannie Mae Foundation spent $60 million there last year, giving $60 million around the country in every state and every district. I think $20 million of that was given in Washington, D.C., alone. Why did they need a foundation? And what purpose did it serve?

WALLISON: Well, it served their political purposes, like everything else at Fannie. The boards of directors served their political purposes and their foundation served their political purposes, because they gave money to community groups. And whenever there was a challenge to Fannie Mae or Freddie Mac of any kind, those community groups would write to the congressmen or call the congressmen or the senator and say, ”Don’t do anything to Fannie Mae. They’re good people. They support us. We are in your district. We do these good things for the people in your district.” So, even though the money was actually being used – probably, I assume – for good purposes within these districts, the reason Fannie Mae and Freddie Mac gave out this money was to gain the political support that it bought them in districts all over the country.

LAMB: Do you have any idea why they shut it down?

WALLISON: Yes, because I think they recognized that this was the purpose, that what they were doing – every time a challenge came up to Fannie and Freddie inside the government, a call went out to all these community groups – e-mails and telephone calls – and said, ”You better get on the phone to your congressman and let him know that, if he does anything that’s adverse to our interests, you will be very upset. And you represent X number of people in his district.” There were records of that. And presumably, when Dan Mudd came in at Fannie Mae after the accounting scandals they had, he said to himself, we don’t need this problem anymore. We’d better shut this stuff down.

LAMB: By the way, Dan Mudd is the son of Roger Mudd …

WALLISON: Yes.

LAMB: … former CBS …

WALLISON: But this is a – frankly, this is just another part of the scandalous process that was going on here. This is using essentially government money, taxpayer money, to lobby Congress indirectly through these groups. And more has happened. In the new housing legislation, one of the elements in this housing legislation, which contained the new regulations for Fannie Mae and Freddie Mac, never would have been passed, but for the fact that the Democrats wanted the housing bill aspect of this, because the problems in the housing market – Senator Shelby said, there isn’t going to be a housing bill out of this committee unless you put tough regulations of Fannie Mae and Freddie Mac in it. So, he got those tough regulations in the bill. But in addition, Congressman Barney Frank in the House wanted a special fund that comes out of the profits of Fannie Mae and Freddie Mac, and is then used for all of these community groups around the country. So, we see the same process continuing to work. Even though reform legislation was passed, it contains a nice slush fund that can be used by community groups around the country. So we see the same process continuing to work, even though reform legislation was passed, it contains a nice slush fund that can be used by the officials of Fannie Mae and Freddie Mac to reward community groups.

LAMB: You can go on Google and go looking for this Freddie Mae foundation and some of the information is still there. I did it and I just looked up one state, one year, to get an idea of the kind of money they gave away …

WALLISON: Yes.

LAMB: … and I wondered if you could fill in the blanks here, and I’m just going to read a couple of them. This is from 2006. The state of California, first one on the list is $5000 and they are all in various denominations, even $750 for somebody that travels some then, support the AFI Silver Theatre and Cultural Center’s 17 annual Larsen Latin American Film Festival that fostered cross-cultural understanding and civic dialogue. There—let me just read a couple of them. Korean churches for community development, supportive research on how Korean faith-based institutions could strengthen the cohesiveness of the communities in which they are based, building relationships between different ethnic and racial groups and supporting the community infrastructure, $10,000. Media (ph) economics for women, 16th Maxwell Award, that’s named after David Maxwell, your CEO …

WALLISON: Right.

LAMB: (INAUDIBLE) Excellence for Tierra del Sol, a 119-unit affordable rental housing project for low income people in Canoga Park, California. And then this is an interesting one: Regents of the University of California at Berkeley. A rather rich place. $35,000 approved in 2006, supportive research on the nexus between housing and schools and effective ways of integrating housing and educational policies in order to create prosperous livable communities. I can go on, and …

WALLISON: Sure.

LAMB: … this is an idea, and there are thousands of them …

WALLISON: Sure.

LAMB: … over the years.

WALLISON: Sure.

LAMB: … and that bought them very substantial political support.

WALLISON: See, ordinary corporations, of course, give away lots of money to community organizations and charitable organizations and cultural organizations, and they do this in part to support their products. So if General Motors gives a gift to a cultural organization, what they hope is that people will then think better of buying a General Motors car. Fannie Mae and Freddie Mac are different. Those gifts were given for the purpose of building political support for them, not their products because they weren’t at that point selling any products directly to the—to individuals. They were buying mortgages from banks. These gifts were given to organizations that would then, hopefully, come back and support them politically in Congress, so they were using, in effect, the taxpayer money that was backing them to gain—to buy political support in districts around the country that then reflected back on the Congressmen and Senators here in the United States. That was the process that was going on here.

LAMB: Now, you were a lawyer in Gibson Dunn …

WALLISON: Yes.

LAMB: … Crutcher—and Crutcher. That’s a—isn’t that a political …

WALLISON: No.

LAMB: I mean, aren’t there a lot of political lawyers in there? Isn’t Ted Olson there?

WALLISON: Ted is there. Yes. Ted is one and Brad (ph) Starr (ph) was a partner of Ted Olson, yes, but the — this is a — Gibson, Dunn & Crutcher is about 850 lawyers at this point, but all business lawyers and litigators, there’s very little political work done, and even in the Washington office of Gibson Dunn.

LAMB: So you didn’t lobby?

WALLISON: I never lobbied, but I think we had one or two. We may now have one or two lawyers in a 150-lawyer office here in Washington who actually lobby.

LAMB: I mean, the reason I’m bringing this up, I mean, Fannie Mae and Freddie Mac are not the only American institutions that do everything we’re talking about in this town. The connection here and the reason I’m asking you to explain it is because they were government institutions and had government sponsored people on their boards, and were backed up, even though they weren’t directly backed up, by the government money and we’ve seen how …

WALLISON: Yes.

LAMB: … the government’s taking them over. Explain this, and I know you’re on the other side politically, but just help us out on this. This was in the ”New York Times” today.

WALLISON: Yes.

LAMB: This is Tuesday, before the Sunday that this runs. Mr. Dodd, that’s Chris Dodd, is Chairman of the banking committee.

WALLISON: Yes.

LAMB: The Democratic Chairman, called the White House, accusation incredible and libel, Mr. Dodd all but accused Mr. Paulson, Secretary of the Treasury, of misleading Congress less than two months ago when the Treasury Secretary prevailed upon lawmakers to give him the authority to spend untold billions of dollars to rescue the two companies, assuring them at that time that he had no intention of using that authority. Boy, when I read that I said (INAUDIBLE)

WALLISON: Yes. That was the same thing that …

LAMB: Well, let me read some more.

WALLISON: Yes. Go on. I …

LAMB: I asked Dodd on the record you know why would you get an authority if you weren’t going to use it, quote, ”We accepted him at his word that all he needed was the authority and that he wasn’t going to exercise it, then he used this authority very aggressively. An angry-sounding Mr. Dodd said in the telephone conference call with reporters, he indicated that he would approach any future commitments by outgoing administration more skeptically, quote, ’Fool me once, your fault, fool me twice, my fault.’ Asked whether he felt duped, Mr. Dodd said, ’I was born at night but not last night. I heard experts over the last few days predicting this outcome, but I responded that I take the administration at their word to find out late Friday afternoon that it was going in this direction. It was hard to believe’.”

WALLISON: There’s a person who is attempting to fool everybody. I think he understood what was happening here. Though he wasn’t being lied to or misled by the Secretary of the Treasury. What Paulson was saying, and I thought actually what Paulson said was the truth at the time, and that is I think we thought, Paulson thought, that with the backing of the U.S. government made explicit through what Congress had authorized in July, there wouldn’t be any need to back—to come in specifically and take over Fannie and Freddie. But what they found was that the markets didn’t quite believe that Fannie and Freddie were going to pay all of their obligations, and what they found as the days went on was that the spread of interest rates that Fannie and Freddie were paying over treasury rates was gradually growing, and as it grew, it meant that mortgages in the United States would become more expensive because if Fannie has to pay more for its money, then the banks that they lend to will have to pay more for their money, and people will have to pay more for money when they buy homes. So what I think Paulson saw happening was that he had to reassure the markets that the government was actually behind these institutions, and the only way to do it was to actually take them over, and I think he also knew from the investigations that they did of Fannie and Freddie’s financial condition that they were close to if not insolvent. So I don’t think Paulson misled anyone in the Senate. I think what he said was you give me this authority, I probably won’t have to use it because the markets will believe that I could come in at any time and take over these companies, and therefore they will know that their loans will be repaid. Well, they didn’t quite believe it, and we have read during the recent weeks that the Bank of China was beginning to sell off part of its portfolio of Fannie and Freddie’s. Fewer people were showing up at the auctions for Fannie and Freddie securities. They were bidding—they weren’t bidding as aggressively, so Fannie and Freddie were beginning to have to pay more and more for the money they were borrowing, and the pattern was becoming very clear, so treasury really had to act. Now, I happen to believe they did the wrong thing. He should not have appointed a conservator for Fannie and Freddie. He should have appointed a receiver for Fannie and Freddie. A receiver would be able to modify their business model substantially, and even in his statement Paulson said that they have flawed business models. You, I think, read part of that. They have flawed business models. That is true. That’s why I thought from the beginning that they were going to be causing trouble for everyone because they are partly profit-making companies and partly companies with a government mission with government backing. Those two things can’t go together in the same institution. So, Paulson should have moved in and taken them over with a receiver so he could have changed that business model. He didn’t do that.

LAMB: Let me show you and the audience places you’ve seen …

WALLISON: Yes.

LAMB: … we have video of both Fannie Mae and Freddie Mac. Their institutions are both here in Washington. One of them’s out in the plain …

WALLISON: Right.

LAMB: … one of them’s in—out on—what is it, Wisconsin Avenue.

WALLISON: Yes.

LAMB: So Freddie Mac’s on the screen right now, and that’s the one out in the …

WALLISON: Yes.

LAMB: … plain in Virginia in the suburbs. Do you have any idea how many people work there?

WALLISON: No, I don’t.

LAMB: They also had …

WALLISON: The reason this may …

LAMB: … they had a foundation and you know it’s a bipartisan kind of thing.

WALLISON: Yes.

LAMB: Dennis Deacon, senior former Senator, was a former board member, David Gribben , who was a Richard—a Dick Cheney aid, was a former board member and George Herbert Walker Bush aid, Harold Ickes was a former board member, Clinton advisor, Ron Emmanuel, former board member, Clinton senior advisor, and then he—Ron Emmanuel received contributions when he got into the House …

WALLISON: Yes.

LAMB: … from the lobbyists, and Susan Molinari, former Congresswoman, Republican, was an outside lobbyist for Freddie Mac. Here’s Fannie Mae, and as we look at Fannie Mae, which is …

WALLISON: Yes.

LAMB: … quite a building you can see when you drive up Wisconsin Avenue. What is the difference between Freddie Mac and Fannie Mae? We’ve been talking a lot about Fannie Mae.

WALLISON: Well, I would say there isn’t any substantial difference at all between them. Fannie is the larger, the more politically active of the two, but as between them, they have exactly the same charters and they’ve done exactly the same thing, and to some extent, they are in competition with one another.

LAMB: Why do we need two?

WALLISON: Well, I think it was good to have two because they were in some competition. If we only had one, that would be a monopoly. We have had two. Some argue that they were in monopoly pricing anyway, but that’s not been established yet. In any event, two is always better than one because it does produce a certain degree of competition between these two government-backed organizations.

LAMB: Another article this morning from ”The Wall Street Journal.” Home loan banks draw focus or made rescue plan.

WALLISON: Yes.

LAMB: Now, it starts out by James Haggerty writing the Fannie Mae and Freddie Mac takeover raises questions about another set of institutions started by Congress to help finance housing. There are 12 regional federal home loan banks. You know a generalist, and I am a generalist, drowns in all this language …

WALLISON: Yes.

LAMB: … and all these institutions, and you get on, there are 12 of those federal home-owned banks across the country. They often have local board members, bankers, in many cases.

WALLISON: Yes.

LAMB: GSEs?

WALLISON: Yes, of course. The government sponsored …

LAMB: Government service—government sponsored enterprises.

WALLISON: Right.

LAMB: And also you add Jenny Mae into that, which …

WALLISON: Well, now that is a government agency. That’s not a government sponsored …

LAMB: That replaced what Fred—what Fannie …

WALLISON: Yes.

LAMB: … was in the beginning.

WALLISON: Right.

LAMB: Under HUD.

WALLISON: Right.

LAMB: What about these federal—no, I mean, you know …

WALLISON: (INAUDIBLE)

LAMB: (INAUDIBLE) no idea.

WALLISON: Look, Ronald Reagan said the closest we’ll ever come to immortality in this life is a government agency, and the federal home loan banks are a perfect example of that because they were established in the depression era to assist the development of a mortgage market and to help people get mortgages, but since then we have developed a very sophisticated mortgage system here in this country, and we don’t need the federal home loan banks. But they provide subsidized financing to banks, and the banks don’t want to give up this subsidized money that they received from this government-sponsored enterprise.

LAMB: Do you have any idea how much money these individual board members make on these banks and on those …

WALLISON: No.

LAMB: … on the …

WALLISON: No.

LAMB: … Fannie Mae, do they get paid?

WALLISON: Sure. In Fannie and Freddie they get paid, and it’s true also in the federal home loan banks. I just don’t know how much that is.

LAMB: When the stock has fallen at Freddie Mac and Fannie Mae from 65 roughly, $70 down to below a dollar …

WALLISON: Yes.

LAMB: … in less than a year …

WALLISON: Yes.

LAMB: … did the board members protect themselves?

WALLISON: I have no idea, but if they—I don’t know whether they got stock compensation. I don’t know whether they got stock options or anything of that kind …

LAMB: What would you to protect yourself …

WALLISON: (INAUDIBLE) major cash.

LAMB: … to make sure that if all that is going on right now happened that you got your money?

WALLISON: Well, I—if they had stock, if they were given stock or they had bought stock when they became directors, they probably should not have sold that stock while the stock was going down. I don’t know, as a matter of fact, whether they have. I haven’t ever looked into that, but one way to protect yourself is if you see a disaster looming in the future and you’ve got a substantial amount of that stock, you would sell it off. But I have no idea whether they did that.

LAMB: You’ve been around this town for a long time.

WALLISON: Yes.

LAMB: How much time do you spend in the town now?

WALLISON: About half the year.

LAMB: What do you do for AEI?

WALLISON: I write. I organize conferences. I speak from time to time. When I say half the year, I’m here half the year. I work 100 percent of the year, but in Colorado where I live the rest of the time, and I’m doing all of this work for the American Enterprise Institute.

LAMB: Now, people on the other side of politics would say AEI is funded by American industry, has its own …

WALLISON: Not quite. N ot quite. It’s got a third of its funding comes from corporations, a third comes from individuals, and a third comes from foundations. So it is not in any sense connected with corporations, and in fact, if anything, if there’s any group that you would identify as connected with AEI, it would be entrepreneurs. This is a free market organization.

LAMB: How would you explain people looking in from the outside to Washington, D.C. right now, seeing these stories, and we have just skimmed the surface.

WALLISON: Right.

LAMB: One word you could apply to our summer is just greed.

WALLISON: Yes.

LAMB: Where is it coming from in this society? Why is this happening in this town now?

WALLISON: Well, I’m not sure it’s only now, but it’s certainly become more prominent now. I’ve never understood this myself, frankly. I mean, there are—there seem to be two classes of people. There are people who keep score based on money, and there are people who keep score based on success in some other areas like academic success and so forth. I deal a lot with academics. I hope to rise to the level of an academic some day in my time. And those are not people who are motivated by money. Those are people who are interested in learning, in producing things that are useful. But other people keep track according to money, and I’m afraid that’s why we have so much, I would call it greed, going on here in Washington when people are trying to use their positions to enrich themselves.

LAMB: Why hasn’t the Congress done more than it has?

WALLISON: Because the Congress is part of the problem rather than part of the solution.

LAMB: Let me read the last paragraph of today’s editorial in ”The Wall Street Journal,” this being Tuesday.

”Mr. Frankn it turned out”… Barney Frank is their Chairman of the Financial Services Committee in the House, ”has had many accomplices from both parties in his protection of Fan and Fred, but he was and is among the most vociferous and powerful. In any other area of American life this track record would get a man run out of town. In Washington he’s hailed as a sage and his history of willful error will be forgotten faster than taxpayers can write a check for $200 billion dollars.”

WALLISON: That’s powerful language.

LAMB: Not to single out Barney Frank, and listen, he’s had many hours on this network so he’s had his time to talk. He—there were journalists saying both Republicans and Democrats.

WALLISON: Yes. And it’s true. It’s true. This could not have happened if both parties weren’t implicated, and I think that raises a lot of questions about our campaign finance system in this country. I think there are ways we could address this problem through the campaign finance system. In fact, I’ve written a book about the subject that’ll be out in April. Maybe we’ll have a chance to talk about it then. But the Congress is part of the problem here. They are implicated in creating Fannie and Freddie, keeping it alive, protecting those two companies against attack from any side within the political process and in the private sector, and they get benefits from Fannie and Freddie. You’ve mentioned many of them. They get campaign finance reform. How they get campaign finances, they hire the staff of these people, they hire the lobbyists who are the friends of congressmen and senators, they give out money to community groups who then in turn support those congressmen and senators who are their friends. It is a very unpleasant thing to watch, and ultimately, it is a way for Congress, without actually appropriating any money, to direct money to their friends, and that’s why I mentioned this thing that Barney Frank was so anxious to get into his bill, this idea of a slush fund that would be available to pay to community groups to support housing, maybe. We hope its housing and not other things, but ultimately it is a way for the Democrats, at least in this case the Democrats, to direct the funds to the groups that support them, and it’s not even appropriated funds. It’s not anywhere.

LAMB: Peter Wallison, thank you very much for your time.

WALLISON: Thank you.

END

Hat tip:
Jim Dillian,
Boone, NC

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Mr. Obama didn't bother to define "reasonable," and neither did Dick Durbin, the second-ranking Senate Democrat, when he recently declared that "The oil companies need to know that there is a limit on how much profit they can take in this economy." Really? This extraordinary redefinition of free-market success could use some parsing.

Take Exxon Mobil, which on Thursday reported the highest quarterly profit ever and is the main target of any "windfall" tax surcharge. Yet if its profits are at record highs, its tax bills are already at record highs too. Between 2003 and 2007, Exxon paid $64.7 billion in U.S. taxes, exceeding its after-tax U.S. earnings by more than $19 billion. That sounds like a government windfall to us, but perhaps we're missing some Obama-Durbin business subtlety.

Maybe they have in mind profit margins as a percentage of sales. Yet by that standard Exxon's profits don't seem so large. Exxon's profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).

If that's what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery -- both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau's industry rankings. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come.

In a tax bill on oil earlier this summer, no fewer than 51 Senators voted to impose a 25% windfall tax on a U.S.-based oil company whose profits grew by more than 10% in a single year and wasn't investing enough in "renewable" energy. This suggests that a windfall is defined by profits growing too fast. No one knows where that 10% came from, besides political convenience. But if 10% is the new standard, the tech industry is going to have to rethink its growth arc. So will LG, the electronics company, which saw its profits grow by 505% in 2007. Abbott Laboratories hit 110%.

If Senator Obama is as exercised about "outrageous" profits as he says he is, he might also have to turn on a few liberal darlings. Oh, say, Berkshire Hathaway. Warren Buffett's outfit pulled in $11 billion last year, up 29% from 2006. Its profit margin -- if that's the relevant figure -- was 11.47%, which beats out the American oil majors.

Or consider Google, which earned a mere $4.2 billion but at a whopping 25.3% margin. Google earns far more from each of its sales dollars than does Exxon, but why doesn't Mr. Obama consider its advertising-search windfall worthy of special taxation?

The fun part about this game is anyone can play. Jim Johnson, formerly of Fannie Mae and formerly a political fixer for Mr. Obama, reaped a windfall before Fannie's multibillion-dollar accounting scandal. Bill Clinton took down as much as $15 million working as a rainmaker for billionaire financier Ron Burkle's Yucaipa Companies. This may be the very definition of "windfall."

General Electric profits by investing in the alternative energy technology that Mr. Obama says Congress should subsidize even more heavily than it already does. GE's profit margin in 2007 was 10.3%, about the same as profiteering Exxon's. Private-equity shops like Khosla Ventures and Kleiner Perkins, which recently hired Al Gore, also invest in alternative energy start-ups, though they keep their margins to themselves. We can safely assume their profits are lofty, much like those of George Soros's investment funds.

The point isn't that these folks (other than Mr. Clinton) have something to apologize for, or that these firms are somehow more "deserving" of windfall tax extortion than Big Oil.

The point is that what constitutes an abnormal profit is entirely arbitrary. It is in the eye of the political beholder, who is usually looking to soak some unpopular business. In other words, a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation.

It's what politicians do in Venezuela, not in a free country.

DOW JONES REPRINTS
August 4, 2008; Page A12

Hat tip: Suzanne R.

Comments are welcome at redstatepatriot@hughes.net. Please include the title of the article as your subject line. Selected responses, in whole or part, may be published (appended to the article).

“It doesn’t seem to occur to Obama that the oil companies would pass the ”windfall profits tax“ on to consumers. What a great plan: You get relief from $4-a-gallon gas, and the only downside is $5- or $6-a-gallon gas!” —James Taranto

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“Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent.

“I want to remind you that I am only talking about the unfunded portions of Social Security and Medicare. It is what the current payment scheme of Social Security payroll taxes, Medicare payroll taxes, membership fees for Medicare B, copays, deductibles and all other revenue currently channeled to our entitlement system will not cover under current rules.

“Let’s say you and I and Bruce Ericson and every U.S. citizen who is alive today decided to fully address this unfunded liability through lump-sum payments from our own pocketbooks, so that all of us and all future generations could be secure in the knowledge that we and they would receive promised benefits in perpetuity. How much would we have to pay if we split the tab? Again, the math is painful. With a total population of 304 million, from infants to the elderly, the per-person payment to the federal treasury would come to $330,000. This comes to $1.3 million per family of four—over 25 times the average household’s income.”

“No combination of tax hikes and spending cuts, though, will change the total burden borne by current and future generations. For the existing unfunded liabilities to be covered in the end, someone must pay $99.2 trillion more or receive $99.2 trillion less than they have been currently promised. This is a cold, hard fact. The decision we must make is whether to shoulder a substantial portion of that burden today or compel future generations to bear its full weight.

“...Throughout history, many nations, when confronted by sizable debts they were unable or unwilling to repay, have seized upon an apparently painless solution to this dilemma: monetization. Just have the monetary authority run cash off the printing presses until the debt is repaid, the story goes, then promise to be responsible from that point on and hope your sins will be forgiven by God and Milton Friedman and everyone else.

“We know from centuries of evidence in countless economies, from ancient Rome to today’s Zimbabwe, that running the printing press to pay off today’s bills leads to much worse problems later on. The inflation that results from the flood of money into the economy turns out to be far worse than the fiscal pain those countries hoped to avoid.

“Earlier I mentioned the Fed’s dual mandate to manage growth and inflation. In the long run, growth cannot be sustained if markets are undermined by inflation. Stable prices go hand in hand with achieving sustainable economic growth. I have said many, many times that inflation is a sinister beast that, if uncaged, devours savings, erodes consumers’ purchasing power, decimates returns on capital, undermines the reliability of financial accounting, distracts the attention of corporate management, undercuts employment growth and real wages, and debases the currency.

“Purging rampant inflation and a debased currency requires administering a harsh medicine. We have been there, and we know the cure that was wrought by the FOMC under Paul Volcker. Even the perception that the Fed is pursuing a cheap-money strategy to accommodate fiscal burdens, should it take root, is a paramount risk to the long-term welfare of the U.S. economy. The Federal Reserve will never let this happen. It is not an option. Ever. Period.”

*** Mr. Fisher means well. He goes on to tell his audience that they, as voters, must deal with this situation. Since the obligations cannot be met, they must be reduced. Fair enough. But what candidate is going to tell the voters that they must give up their free healthcare? And what voter is going to vote for such a thing?

Mr. Fisher is right about the problem; he is wrong about the solution. The problem will not be fixed by the feds...nor by the voters. Popular democracy – ridden with its lobbyists, insiders and hustlers – will not allow it. Instead, the government will go broke.

July 18, 2008.

Hat tip: Len Salonsky

Comments are welcome at redstatepatriot@hughes.net. Please include the title of the article as your subject line. Selected responses, in whole or part, may be published (appended to the article).

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We Don't Have What It Takes

The radical changes that are necessary in our government's spending habits and in the management of its fiscal affairs that are required to save our nation from a financial meltdown may however, never be proposed, let alone implemented. The courage and commitment to financial solvency simply does not exist at the Federal level - by Democrats or Republicans. We are not going to solve the economic problems facing America without a moral commitment that is virtually non-existent in politics today. The fatal combinations of corruption and incompetence, of selfishness and greed, and of immorality and laziness make reform all but impossible.

Perilous Days Ahead by 2009

The National Debt of $9 trillion as a percentage of GNP will go from 35% to over 80% under a new wave of federal spending that even raising taxes cannot prevent. Taxes collected now simply go to pay the interest on this debt. Foreign nations now holding $2 trillion in mortgages on American assets will see their 25% stake in our economy increase to over 50% - before they panic and "pull the plug." The Federal government will do nothing to "downsize" itself. In fact, the declining economy will only encourage it to expand its bureaucracy. The Federal government is barely policing or monitoring its current spending. The GAO is an "auditor's joke." Waste and corruption will abound beyond historic levels. We can't stop the "baby boomers" retirement or their increased need for medical services. The $500 billion being paid in benefits to over 48 million recipients will significantly swell in size very shortly and will collapse the economic "safety nets" that are already stretched to their limit. The GAO's own January report entitled "Long-Term Fiscal Outlook is Unsustainable" was an understatement. The truth is we're heading for a serious financial collapse, and not the "minor corrective recession" that is the popular (but manageable) prediction we're hearing from our presidential candidates.

Biting The Bullet

The US Economy is teetering upon a weak foundation that has been fifty years in the making and a fiscal budgetary process that is designed to mislead the average American into thinking that spending more money that's what being collected is acceptable when it comes to running a government over the long-term. Just because we've financed our way out of a 1930's type depression, doesn't mean we can keep it up forever. There will be a day of reckoning...and it will be sooner than anyone imagines.

A. Citizen
March 10, 2008
See: http://www.firesociety.com/article/23019/?src=111

Comments are welcome at redstatepatriot@hughes.net. Please include the title of the article as your subject line. Selected responses, in whole or part, may be published (appended to the article).

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1) They're masters of public relations.

I had no idea how my open-handedness could be made to look, after the fact. At the time I bought the subprime portfolio I thought: This is sort of like my way of giving something back. I didn't expect a profile in Philanthropy Today or anything like that. I mean, I bought at a discount. But I thought people would admire the Wall Street big shot who found a way to help the little guy. Sort of like a money doctor helping a sick person. Then the little guy wheels around and gives me this financial enema. And I'm the one who gets crap in the papers! Everyone feels sorry for the poor, and no one feels sorry for me. Even though it's my money! No good deed goes unpunished.

2) Poor people don't respect other people's money in the way money deserves to be respected.

Call me a romantic: I want everyone to have a shot at the American dream. Even people who haven't earned it. I did everything I could so that these schlubs could at least own their own place. The media is now making my generosity out to be some kind of scandal. Teaser rates weren't a scandal. Teaser rates were a sign of misplaced trust: I trusted these people to get their teams of lawyers to vet anything before they signed it. Turns out, if you're poor, you don't need to pay lawyers. You don't like the deal you just wave your hands in the air and moan about how poor you are. Then you default.

3) I've grown out of touch with ``poor culture.''

Hard to say when this happened; it might have been when I stopped flying commercial. Or maybe it was when I gave up the bleacher seats and got the suite. But the first rule in this business is to know the people you're in business with, and I broke it. People complain about the rich getting richer and the poor being left behind. Is it any wonder? Look at them! Did it ever occur to even one of them that they might pay me back by WORKING HARDER? I don't think so. But as I say, it was my fault, for not studying the poor more closely before I lent them the money. When the only time you've ever seen a lion is in his cage in the zoo, you start thinking of him as a pet cat. You forget that he wants to eat you.

4) Our society is really, really hostile to success. At the same time it's shockingly indulgent of poor people.

A Republican president now wants to bail them out! I have a different solution. Debtors' prison is obviously a little too retro, and besides that it would just use more taxpayers' money. But the poor could work off their debts. All over Greenwich I see lawns to be mowed, houses to be painted, sports cars to be tuned up. Some of these poor people must have skills. The ones that don't could be trained to do some of the less skilled labor -- say, working as clowns at rich kids' birthday parties. They could even have an act: put them in clown suits and see how many can be stuffed into a Maybach. It'd be like the circus, only better. Transporting entire neighborhoods of poor people to upper Manhattan and lower Connecticut might seem impractical. It's not: Mexico does this sort of thing routinely. And in the long run it might be for the good of poor people. If the consequences were more serious, maybe they wouldn't stay poor.

5) I think it's time we all become more realistic about letting the poor anywhere near Wall Street.

Lending money to poor countries was a bad idea: Does it make any more sense to lend money to poor people? They don't even have mineral rights! There's a reason the rich aren't getting richer as fast as they should: they keep getting tangled up with the poor. It's unrealistic to say that Wall Street should cut itself off entirely from poor -- or, if you will, ``mainstream'' -- culture. As I say, I'll still do business with the masses. But I'll only engage in their finances if they can clump themselves together into a semblance of a rich person. I'll still accept pension fund money, for example. (Nothing under $50 million, please.) And I'm willing to finance the purchase of entire companies staffed basically with poor people. I did deals with Milken, before they broke him. I own some Blackstone. (Hang
tough, Steve!) But never again will I go one-on-one again with poor people. They're sharks.

(Michael Lewis is the author, most recently of ``The Blind Side,'' and is a columnist for Bloomberg News. The views he expresses are his own.)

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Assuming an 8% annual economic rate of growth, it will take China about 30 years, assuming 4% annual productivity growth, before it would exhaust this huge pool of unemployed. Can the United States compete with those labor costs for the next 30 years? Not in our wildest dreams! Where do you think the “jobs” will be - where will consumer goods and weaponry be manufactured over the next 30 years? Where will your waffle maker and toaster be manufactured? China and India, of course! If you doubt even for a minute, visit any retail merchandiser in the United States and check each appliance and article of clothing for their origin of manufacture.

Politicians tell you not to be concerned! The United States will still have many jobs. What they don't tell you, either out of ignorance or malice, is that those jobs will be temporary positions. The future holds far fewer jobs for Americans, regardless of individual educational achievement. Predictably, the only real jobs that can lead to measurable wealth will become the province of the elite, and they will be intensely coveted, particularly those with tenure such as "professor" or "congressman." Significant barriers to entry are being erected by the incumbents in those "jobs" as you read this article.

Those among us who are considered less qualified by the elite will predictably clamor for even more income and wealth redistribution. The government’s roster of Americans dependent on income redistribution will continue to grow exponentially. Government dependency has already become typical rather than the exception. More and larger definable groups have begun competing openly and ruthlessly for available taxpayer-subsidized handouts.

Congressmen, consumed absolutely with self-indulgence, self-aggrandizement and power over their fellow citizens, continue to demonstrate they do not have the vision, intellect, ethics, statesmanship, or the will to redirect a nation careening out of economic and social control. From their point of view, everything is as it should be. They rule, we serve. The reality is simple and painfully brutal: your education, your employability and your standard of living in coming years is solely your responsibility, unless you are willing to clean swimming pools or flip burgers while the government augments your meager existence. It would be incredibly wise, but uncharacteristic, for our nation's youth to wake up while the coffee is still warm enough to smell it.

In our modern “global economy,” Americans must quickly come to understand that have to compete with every other nation’s labor as a cost of doing business, from Mexico to China. If an American citizen hopes to earn 10 times as much as an Indian and 50 times as much as a Chinese, he is going to have to produce 10 times or 50 times as much as his competitors in India and China, of equal or better quality, or his job is going to move offshore. Only Rip Van Winkle is unaware that millions of jobs have already fled America to foreign shores as a result of excessive federal and state taxation, burdensome regulation by government administrative agencies (e.g., OSHA, EPA), runaway litigation, personnel benefits which include the cost of healthcare, and employee unions.

Is there one industry in the United States today that can leverage the needed productivity in the coming years? Not likely. Even the U.S. airline industry is on the verge of widespread bankruptcy. The automotive industry, led by Ford Motor Company is in close pursuit. Ford executives are arguably engaged in a form of intentional and self-inflicted corporate suicide, not unlike Jonestown.

What would be necessary to revitalize the American economy quickly enough that it will matter?

Congressmen, those who have the temerity to call themselves our elected representatives, but have forgotten that they are Americans first and foremost, would have to join the team. All employers, with the support of the nation’s citizenry, would have to create a “Team America” initiative not unlike the Kennedy space initiatives and NASA of the 1960’s. All Americans would have to commit to invest massive sums into new equipment (capital investment), vocational and technical training, and invigorate retro-style education solely grounded in mathematics, sciences and focused solely on student excellence. In the interim, free-loaders and race-baiters would have to forego hundreds of billions of dollars of taxation destined for pork projects and income redistribution for political purposes. Not likely ....

What is more likely is that Congress will employ their only other (three-phase) alternative available, (1) cutting your benefits, (2) dramatically increasing your taxes, and (3) undertaking intense social engineering. Their intent would be even more redistribution of power, influence, jobs, education, income, housing, transportation, private property and health care by accelerating socialism and redistributing what wealth still remains. All this will be necessary in order to support those citizens who long ago stopped working with the permission of Congress and state legislatures, and illegal aliens who are willing to work but contribute nothing.

Congress’ choice of the redistribution alternative, in lieu of the “Team America” approach, will cynically be calculated to ensure that politicians, at every level of government, protect and expand their own financial security in the lifestyle of a Hollywood movie star, rock or sports superstar. This they will accomplish by first legislating themselves a special elite status that no other American enjoys, including specialized medical care and exclusive retirement provisions. If that were not enough, Congress has already enacted their own unique ability to solicit, accumulate and keep massive amounts of personal wealth from campaign contributions upon their retirement. The provisions of Congressional retirement, were they to become widely known, would gag most Americans.

There is always a point of peak efficiency given existing technology. Just as there is elasticity in maximizing total revenue, so too is there elasticity in both taxation and income redistribution, which is why, when marginal tax rates are lowered, tax revenues increase. The same concept applies inversely to redistribution entitlements. At some point, excessive prices, taxes, and entitlements all become destructive to maximizing national ‘total GNP’ and economic growth.

Until decision makers are reigned in, and Congressmen once again become citizen legislators who are limited in tenure and not permitted to profit from elected office, decisions from Congress (and courts) will continue to focus on protecting their own self-interests, as a ruling elite class, at the sacrifice of all other Americans. If the economic engine in America is running low on fuel, clearly Congress isn't focused on filling the fuel tank, i.e., making any more fuel (real jobs) or creating better fuel (job training and new technologies). They demonstrate on a daily basis that the only fuel tank that matters is their own.

Red State Patriot would suggest that all Americans get out of debt as soon as possible and be very grateful if you still have a “job.” Be even more grateful if you still have a job two years from now. Hopefully the graphic accompanying this article, as you study it, will become self-explanatory.

Red State Patriot

Comments are welcome at redstatepatriot@hughes.net. Please include the title of the article as your subject line. Selected responses, in whole or part, may be published (appended to the article).

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The temporary worker, called the “marginal worker,” is often first in the door due to corporate and government reluctance to justify and create new permanent jobs. They’re also first out the door when business conditions deteriorate or some written or un-written standard of performance is not being met.

Government job creation numbers and unemployment statistics would both be far different if the definition of a “job” were more narrowly defined to better differentiate between temporary and permanent employees. Rest assured, with an increase in the minimum wage, permanent employees by the tens of thousands will decrease and temporary workers will increase. (What is it, exactly, that Congress is trying to accomplish?)

The exponential rise in non-union temporary workers in the last decade is a clear sign that employers have adapted accounting principles to human resource departments. Corporations and public entities have shifted their labor costs from being a fixed cost to a variable cost. Rather than bring someone ‘on board’ and pay them a salary, plus traditional or negotiated benefits, companies keep as many non-union workers as possible in temp/flex positions whose workload and work schedules can be adjusted with the vagaries in demand.

With American companies lacking international competitive pricing power (the ability to lower prices significantly and still remain profitable), and input (labor) prices rising rapidly due to government and union regulatory interference with the free market, what can a company do to protect ever decreasing profit margins - short of moving overseas? Very little.

Unfortunately, there is no basis to believe any relief from Federal, State and local regulation, taxation and litigation will be forthcoming anytime soon, given liberal opposition to tax cuts and the collectivist tenor in both Congress and the main stream media. The lumpen who read the print media do not understand how ever increasing taxes and redistribution will render them little more than a servant to the State.

There appears to be only one answer for business and municipalities. The easiest way to boost corporate profitability (or to find more money to spend without increasing taxes, in the case of a municipality) is to lower the most burdensome fixed cost, i.e., labor, and particularly the costs of labor benefits.

It is especially important to recognize that the definition of ‘economic necessity’ has changed dramatically in recent decades to include new personal consumption necessities, real and perceived, such as state-mandated taxes and fees, all forms of insurance, transportation needs, communications ability, health care and education. The historical concept of ‘disposable income’ ignores these new financial requirements in our rapidly evolving society and fails to account for these increasing “fixed costs” to the average citizen and family.

As more and more essential family expenses are added to the real or perceived list of necessities, disposable income diminishes, and with it – consumption expenditures. Americans, faced with this economic nightmare, compensate first with two working parents, then multiple jobs, and now families are confronted with the reality that jobs are becoming more difficult to obtain. In the meantime, Congress, living extravagantly on the backs of taxpayers, is either clueless or without conscience. You would think they would call a cab.

Given the rush of money both into the stock and precious metals markets, and rising equity and real estate prices over the last several years, how could the standard of living decrease? The household sector has actually become the biggest buyer of stocks, buying 400-500 billion dollars of equities, despite the fact that real incomes were, and still are, falling. The answer is not complicated. Much of the money actually used to purchase equities and real estate did not come from increased corporate earnings and growing employee payrolls. It came instead from all forms of consumer debt. Even increasing taxes taken in at all levels of government under the guise of economic prosperity are not being funded by business profitability, but by consumption expenditures fueled by consumer debt.

Lower interest rates, engineered by the Federal Reserve, encouraged most consumers to re-mortgage their homes, many multiple times, taking cash out, which became “found income” as opposed to earned income. Predictably, mortgage debt rose as did all other forms of consumer debt.

Where did all the money go? It became an undisciplined and obscene "spending spree."

In most cases, the average household is still running a cash flow deficit, i.e., spending more on consumer goods (e.g., beer) and capital items (e.g., cars) by funding purchases at the margin with new debt, rather than making consumption purchases and paying taxes with household earnings from cash flow (wages) or savings. The "average" American household debt, including vehicles, personal loans and credit cards, and excluding mortgages, is more than $25 thousand dollars. The cash shortfall in funding these consumption levels has been close to 150 billion dollars each year for at least through 2006. At some point the debt must be repaid. When that day comes, the consumption of some (many) goods and services is going to have to be deferred.

If real wages of Americans have really gone down over the last ten years, why has the cost of labor to corporations gone up so dramatically? The answer can be found in the footprints of several culprits, most of which are traceable back to an endless list of ill-advised decisions of Congress, plus state and local governments, all of whom are treading ever deeper into socialist quicksand with regulation, taxation and redistribution of everything of monetary value in society, i.e., housing, transportation, medicine, education, employment, income, and food. Karl Marx would be proud.

Health insurance premiums have risen at double-digit rates, predictably spurred on by government subsidy of healthcare, with no end in sight. The same can be said for education. Other personnel costs (workers compensation, overtime, turnover, training, litigation, union negotiated benefits, and retirement) have also been rising at double-digit rates. This is potentially bad news for every American. Even though employees progressively receive less disposable income as employer personnel costs are shifted to the employee, employers are still under tremendous pressure to cut Human Resource benefits and costs even further or simply get rid of permanent employees.

If you accept as an economic fact that increasing the Minimum Wage reduces entry-level employment opportunities, why does any American think that increasing human resource benefits doesn’t similarly reduce mid-level employment? The more the "benefits" costs go up in America, the availability of mid-level jobs becomes fewer, and the less competitive America becomes with India and China and other emerging nations. Just as millions of people immigrated to America because conditions were not conducive to economic survival in their native lands, it is imperative now to understand that jobs are leaving America for a reason.

And here we have another little wrinkle in the fabric of today’s culture. Corporate managers and governments, both city and state, no longer have the luxury of loyalty – neither to their shareholders nor to their workers/employees. The leadership pays itself extravagantly (as does Congress) but treats employees (Americans) as inventory. The idea seems to be to cut costs on everything but themselves, to hire the cheapest employees, often illegal immigrants, just in time, in order to meet short-term objectives.

Nobody holds anything in business inventory anymore. There are no excess products on the shelves, no excess money in the bank, and particularly no excess employees on the payroll. Inventory is an expense item and employees in America have become inventory.

Sources of further cost reduction are already becoming harder to recognize! Eventually, business and government managers will run out of costs to cut, including employee benefits. Then what?

Don’t gloss over the question, “Then what?” The North American Union?

Red State Patriot

Comments are welcome at redstatepatriot@hughes.net. Please include the title of the article as your subject line. Selected responses, in whole or part, may be published (appended to the article).

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A key reason for the concern is the real estate "bubble." Residential real estate assets accounted for more than two-thirds of recent GDP growth, not wages. Now that the real estate boom is coming to an end, or at least appears to be cooling substantially, the potential exists for serious consequences to the U.S. economy.

Consumers understandably tend to look for cheaper alternatives to new cars when the economy begins to show weakness, and right now consumers are faced with historically high fuel prices, a real estate market that has leveled off and declining in some geographic areas, and the gradually declining value of the U.S. dollar. As a result, the price is going up on imported goods which are no longer produced in the United States.

The Federal Reserve masterfully engineered low interest rates which stimulated not only business activity, but real estate development, home re-financing and home equity loans. In the past several years, the consumer has been taking money out of his house just to keep going. Fistfuls of money. Truckloads of it. Over the last two years alone, $1.352 trillion of equity has been extracted - an amount equal to about 10% of annual GDP.

The consumption expenditures that resulted powered much of the economy in recent years. The spending binge, which couldn’t last, is coming to an end. While consumer debt levels have become staggering, Congress still is in no mood to stop spending. Real wage increases have been modest and don’t begin to offset rising employee “benefit” costs, inflation, and higher taxes that were instituted by state governments immediately after the Bush Administration's federal tax cuts.

Aggravating the situation is the growing world demand for petroleum products, political unrest in the Middle East and the Islamic Wars. Congressional liberals have refused for decades to develop any new energy sources or permit construction of nuclear power plants or refineries. If the United States were to experience a national emergency and attempted to make up for lost time and opportunities, it would still take ten years to bring any refinery or nuclear facility into production, assuming environmentalists, state and federal courts, and Congress would acquiesce. As a result, consumers will continue to be pinched harder by higher (and still climbing) fuel prices and taxes, and the slumping real estate market is making it more difficult to extract any asset equity to purchase a vehicle (or other durable goods).

Decide for yourself if you think the United States is on the verge of a recession. In any event, it would be wise to begin to eliminate any accumulated household debt as quickly as possible. You do not want to run out of money before your bills are paid (if you are young), and you definitely do not want to run out of money before you die (if you are enjoying the final years of a good life).

Remember, the severity of any economic downturn cannot be predicted.

Red State Patriot

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