America's Financial Mess

[adrock3215]

I have a very limited understanding of Constitutional law. But I know that Article 1 Section 1 states:

Section 1. All legislative powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives.

Given this, how (throughout the 20th century) has the federal government been transformed into a sort of regulatory entity with legislative power? There must have been some interpretation or loophole that enabled the state to expand its powers to what we currently have, where a member of the executive branch (Paulson) can actually propose a piece of legislation ($700 billion bill).

Edited September 26, 2008 by adrock3215

[softwareNerd]

One can trace back to a similar debate about whether the "First Bank of the USA" was constitutional.

[IchorFigure]

Another one bites the dust. R.I.P. WaMu.

[gags]

Another one bites the dust. R.I.P. WaMu.

On the one hand this demonstrates pretty clearly the extent of the weakness among some of our major financial institutions. However it also shows that the assets of a huge failing bank can be transfered to another institution (in this case JP Morgan Chase) quite rapidly with hardly any interruption and without the government spending gobs of taxpayer money. I'm still not convinced that we can't pull ourselves out of this trouble by doing one-off deals like WaMu when they pop up. What the Congress should really be voting on is an elimination of the capital gains tax, reductions in the corporate income tax and some sort of major tax break for those who buy homes. The latter would help to stop the decline in real estate prices.

[CraigL]

The House Republicans just made public a brief correspondence to Nancy Pelosi detailing in broad terms the general principles behind their version of a "rescue plan." Given that we're realistically not going to escape from this situation without at least some form of a power grab by the government, I see this as potentially much more promising than the Paulson/Bush/Frank/Pelosi plan, especially the second general principle:

Private Capital – Not Tax Dollars – Should be Injected Into Financial Markets

Instead of injecting taxpayer funds into the market to produce liquidity, private capital can be drawn into the market by removing burdensome regulatory and tax barriers that are currently blocking private capital formation. In short, too much private capital is sitting on the sidelines during this crisis, and it is well past time to unleash it.

Temporary tax relief provisions can help companies free up capital to maintain operations, create jobs, and lend to one another. In addition, the working group recommends a temporary suspension of dividend payments by financial institutions and other regulatory measures to address the problems surrounding private capital liquidity.

Yes, it's stated in pragmatist-altruist terms ("temporary tax relief", worrying about creating jobs, etc.); however, even a small demonstration of the free market's ability to self-correct could be a good first step toward swaying today's almost unanimous cultural attitude that massive government intervention is the only way to respond.

Edited September 26, 2008 by Francisco d'Anconia

[adrock3215]

It looks like Wachovia is the next to go. It could be closed up and sold by the end of this weekend.

[UptonStellington]

I'm only a few minutes into the video, but knowing me, when it's done I'll forget to post it, so I'm doing it now. This looks like it's a pretty good description of what happened (which Yaron Brook and others on this board have talked about... nice to have it in YouTube form). Scroll down a little till you see the video.

http://kudlowsmoneypolitics.blogspot.com/

[UptonStellington]

Okay, now that I've watched the whole thing, a disclaimer: The second half is essentially a campaign ad for McCain. Still, I think the first half offers a valuable summary of what happened.

[Thomas M. Miovas Jr.]

http://kudlowsmoneypolitics.blogspot.com/

Here is an actual link to the video via the blog. It's called Burning Down the House.

While not perfect, and certainly ought not to be upholding McCain as a freedom fighter given some of the policies he backed, it does go into some details in historic context (a bit too quickly, in my opinion). But, like so many other good things said, it doesn't advocate reversing the laws that make this crises happen in the first place, and says that banks were greedy. It does point out that a few people greatly benefited from this law by running the show, which basically means they became rich by pointing a gun at bankers.

Kind of reminds me of that Midas brake commercial: You can pay me now, or you can pay me latter (when it comes to taking preventative action against something going wrong). Of course, had the banks not been forced to make those loans, we wouldn't be in this mess, and are paying for it now instead of reversing the laws.

Edited to add: Unfortunately, though there is a lot of talent on display on this video and others on youtube.com and aniboom.com, there is also a lot of copyright violations, which I am against. The music in the background was such a violation.

Edited September 27, 2008 by Thomas M. Miovas Jr.

[Thomas M. Miovas Jr.]

Well, Washington has reached some sort of deal, but no details are available, so I guess we find out tomorrow after the final vote on it. Since there are no details at this time, I'm thinking it might be pretty bad. I've also heard that supposedly 20% of the bail-out money was going to something called ACORN, which is a Democrat political tool. But that is not being mentioned at this time as of about midnight, central standard time.

http://www.foxnews.com/story/0,2933,429321,00.html

[brian0918]

This excellent article from 8 years ago talked about the CRA and ACORN, and predicted that it would lead to the disaster that we have today. The guy even sounds like an Objectivist with his suggestion that politicians check their premises.

The modifications to the CRA during Clinton's time made it possible for community groups to extort billions out of banks, forcing them to give loans to high risk people.

Edited September 28, 2008 by brian0918

[Thomas M. Miovas Jr.]

Here is a draft proposal of what they hammered out. Since it doesn't reverse the laws that got us here and talks about nationalizing parts of the credit market, it's not going to fix the problem. I think there is an off-hand reference to ACORN, but I'm not sure, since it is not mentioned specifically. It also says that tax payers get a cut of the shares, but doesn't say what that means -- i.e. do I get a check in the mail if the government makes a profit?

My understanding is that the government will buy up not only bad debt, but chunks of the companies being helped -- which is why I refer to nationalization -- but it doesn't say anything about the details of what is going to be written into law.

[softwareNerd]

This excellent article from 8 years ago...

The modifications to the CRA during Clinton's time made it possible for community groups to extort billions out of banks, forcing them to give loans to high risk people.

Great article;thanks for posting it. The Bruce Marks guy sounds like a villain straight out of Atlas Shrugged, saying how he considers high losses to be a great virtue.

It appears that the few GOP holdouts have caved -- as usual -- after some bluster. As usual, they'll settle for something that is different in minor ways.

[Thomas M. Miovas Jr.]

It appears that the few GOP holdouts have caved -- as usual -- after some bluster. As usual, they'll settle for something that is different in minor ways.

Yes, it looks that way, and I don't know that we count on the Republicans / Conservatives to be for free enterprise any longer. While a couple of them mentioned the bad laws, they didn't hold out to have those laws changed. And it all depends on how much of the credit companies the government is going to wind up owning as to whether on not this will become a kind of de facto socialism, with the government running most of the credit market.

I certainly do not think this is a good compromise, as getting rid of the bad laws was not even on the table; we are going to get more of the same,and I don't think that will be good for the economy in the long run. But also, the government will have the power to re-negotiate mortgages that people cannot pay back, which will defer the payments that much longer. Basically, more people might be able to get and to keep their houses, at the cost of the credit markets losing their freedoms. This is evil, and will not bode well in the long run.

I haven't listened to it yet, but Yaron Brook gave a talk on this topic that is available via the Internet at this link.

"Yaron Brook, executive director of the Ayn Rand Center for Individual Rights, explained the reasons for the resurgence of big government in America and called for a moral revolution to reduce government to its proper size and function."

[fletch]

But also, the government will have the power to re-negotiate mortgages that people cannot pay back, which will defer the payments that much longer.

If difficulty in making a mortgage payment will bring the government in to renegotiate your deal, wont that encourage more people to have difficulty making their mortgage payment?

[gags]

If difficulty in making a mortgage payment will bring the government in to renegotiate your deal, wont that encourage more people to have difficulty making their mortgage payment?

We don't seem to be getting many details, but this sounds like one of the more troubling aspects of the plan. The minute you make it easier for people to default or renegotiate their deals or get out of their debts, you will add fuel to the fire that is already raging. If it was a decline in the value of subprime mortgages that touched off this crisis in the first place, making it more convenient for people to renege on their committments sure isn't going to increase the value of these securitized mortgages.

Of course, the Republicans have again come up short. While they showed some initial promise, they are clearly incapable of sticking to their guns.

[fletch]

Of course, the Republicans have again come up short. While they showed some initial promise, they are clearly incapable of sticking to their guns.

We will have to see how the final vote goes, but I suspect you will see a substantial number of Republicans vote against it. The truth is, Democrats control both house of Congress and could have passed this along to a willing president without any Republican support. The congressional Republicans were screwed from the start when you had a Republican administration champion a plan like this in the first place.

[gags]

You're right that the Dems had the votes to ram this through but they didn't do it because they wanted to have the political cover of being able to say "see the Repubs supported it too" when it all blows up. They also needed Republican support because most polls show that the majority of the American people are opposed to this bailout. That being the case, this was a perfect time for the Republicans to make a stand on principle and declare that they will not support this bailout. They simply don't have the balls to do it and so the country continues to drift in the wrong direction.

[Zip]

Even the NYT saw this coming.

Too bad they've forgotten that they once knew where to lay the blame...

http://query.nytimes.com/gst/fullpage.html...mp;pagewanted=1

[gags]

Here's a link to a summary of the provisions in the bill: http://voices.washingtonpost.com/livecover...al_bailout.html

I don't see anything that looks like it corrects the legislation and the government policies that originally encouraged this kind of lending. There is also a provision that "Requires federal entities to work with servicers to encourage loan modifications, considering net present value to the taxpayer". How do the politicians propose to prop up the value of bad loans by forcing servicers to change the terms of these contracts and make them even less favorable? It's absurd.

[Tenure]

I had a quick question: are all the principles basically the same behind the British melt-down also? It's hard to find the same coverage of this issue. I mean, the British economy depends on the American economy to a large degree, but I'm wondering if anyone here has any links detailing what has been happening in the British economy over the past 20 years?

[Thomas M. Miovas Jr.]

The Emergency Economic Stabilization Act of 2008, which is what it is being called, is basically a huge and totally controlling bureaucracy that will basically nationalize the credit markets, especially as that pertains to housing; and they are free to do whatever they deem necessary to "protect the tax payer's interest" in attempting to correct the problem. Not only that, but 20% of any profits goes to one semi-government agency, while another 35% of any profits goes to another semi-government agency; which, as I understand it, are some sort of political action groups that are not named explicitly in the bill.

What I envision is that if you own a house and want to sell it, then the act can give them the authority to regulate the housing market in order to protect their potential profits -- i.e. you will only be able to sell your house or to buy another one at the discretion of the bureaucrats. After all, the tax payer must be protected and the building, buying, and selling of houses will have to be regulated in order to prevent the market values of houses from coming down or going up, since "stability" is the key to this boondoggle.

Also, if you own a house and use this bill to renegotiate a better loan, expect the bureaucrats to tell you what you must do to your own house in order to comply with their dictates -- i.e. you will be required to put up solar panels or wind generators, at their discretion. It doesn't say that explicitly, but that is what it means in potential if you let the bureaucrats renegotiate on your behalf.

This is a bad deal all around.

[Clawg]

well, the house didn't like it

[gags]

The market is currently down by 650 points. Ouch!

[Thomas M. Miovas Jr.]

The Senate is to vote tonight (Wednesday 10/01/08) on their version of the "rescue bill" that will turn every financial institution into an agent of the Federal Government. If you click on this link and look down a few lines, you can get the PDF of the wording of the proposed bill: RAW DATA: Senate's Tax Legislation (pdf). I haven't had time to read the whole thing, but basically, the Senate is trying to sweeten the deal to the tax payers by putting in modifications of the capital gains tax. However, it creates such a bureaucracy that the harm done to business will be much worse, in my opinion.

I'm pretty much convinced that if the Senate passes it tonight, then the House will pass it tomorrow.

The bill makes no provisions of reversing the laws that got us here in the first place, but rather creates a much bigger bureaucracy when what we need is free markets.

This Bill is known as the ‘‘Emergency Economic Stabilization Act of 2008’’ so if you can write your Senator, this is the bill name you need to indicate. I think it is attempting to correct one government boondoggle (the Community Reinvestment Act) with another, and it doesn't fix the mess in the first place.

Edited October 1, 2008 by Thomas M. Miovas Jr.