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The first installment of the only true independent voice in Blogosphere

April 14, 2010

Welcome to the first and only blog in blogosphere that truly gives Americans a voice of what it means to truly be an independent in the world of politics. In this blog, I will share with you the issues of the day, and the perspective of someone that is not tied to the Republican or Democratic Party.

Today marks a new day, where Americans can begin to understand that there is a path beyond simply the GOP or the Dems. That both of the political parties only represent their own interests, not yours or mine.

My first blog will deal with the biggest issue in America today; Financial Reform.

I watched in horror back in September 2008 as the US economy began to sour. I watched in agony as the media breathlessly reported that credit markets had begun to tighten. I watched in disgust as former Treasury Secretary Henry “Hank” Paulson attempted to prevent a complete collapse by issuing a thee paragraph bill before Congress, authorizing nearly $1 Trillion to allow Treasury to keep banks afloat.

Let’s look at this from outside Washington and Wall Street. For years, Americans had been living in a dream world. We were told that the American Dream was owning your own home. And that it was as easy to own a home as to make a pie. There were so many ways to get a mortgage; fixed, jumbo, ARM, balloon, interest only. The sky was the limit.

Heck, even at one point, I spoke with a friend of mine that worked in Real Estate. He told me that as a new teacher, making only $30,000; I could own my own home worth upwards of $200,000! Never mind that I had a car payment and nearly $40,000 in student loans. I could afford a mortgage payment of neary $1,000 per month because I had great credit.

That was the word that got this whole mess started: credit. Going back as far as the 1980s, rules were in place that the purchase of real estate with a bank loan had specific guidelines. One was that you had to actually demonstate you could repay a loan according to the terms and conditions of the bank.

Another was that you had to put up some money as a down payment; upwards of 20 percent down. Finally, that your credit report and score had no pitfalls.

But some very shrewd people in national politics, namely Former Senator Phil Gramm decided that the regulations in place were way too constrictive of profit making. According to Sen. Gramm, federal regulations prohibited the banking and real estate industries from being “innovative” and giving them free reign to create new streams of revenue. Today, we look at this as giving a loaded gun to an idiot.

Many banking and housing regulations were rolled back, including ones that eliminated proof of income and down payment for real estate transactions.

Next came former President Bill Clinton. Now, being a Democrat, you would think that Pres. Clinton would be mindful of what deregulation would do to the US economy. After all, he was a Rhodes scholar and former Governor of Arkansas, where they value honesty and transparancy.

Not this time.

Pres. Clinton not only went against this notion, he actually championed eliminating more regulations on the banking industry. Now, in order to get a mortgage, all you needed was a credit score.

When you deregulate an industry that only concerns themselves only in profits, you set yourself up for disaster. Make no mistake about that. Banks, brokrage firms, and other financial institutions must be kept in check. Failure to do so allows these entities to create new ways to make profits, regardless of legality or risk to the national and global economy.

So, what happened when these regulations were rolled back? Of course banking executives created new types of mortgages for real estate purchases. First, the ARM, or adjustable rate mortgage. The premise of this loan was the idea that you could keep your home for a short time, make money off of the equity, and then sell the home. These mortgages were written for that purpose. It was based on the economic theory that a home would always rise in price and value. After all, there had never been a time in which this theory had never been disproven.

Next come Jumbo loans. These loans were guaranteed by Fannie Mae and Freddie Mac that the loanee would repay the loan and that the Federal Government would assume the risk. These loans also allowed people to purchase very unassuming homes in places like San Francisco, Los Angeles, New York, and Boston. Again, the theory was based on the notion of continual home value increase with respect to market prices.

Balloon loans were the next tool. This allowed a person to have a lower mortgage payment, then after a certain time period, mostly at the end of the mortgage, they would have to pay the balance of the loan, much like the constant inflation of a balloon. Now, of course virtually all people that agreed to this kind of mortgage either did not understand the terms of the loan, or knew that they would sell the house before the balloon payment came up. Again, based on equity pricing.

Then come interest only.  A mortgage would be written that a person would only have to pay the interest accrued on a house, and that they could sell the home within several years, making money on the sale, but never actually paying on the house.  The idea was to make money on the sale of the property.

What do all of these mortgages have in common? By today’s standards, they’re considered “junk loans” or “crummy loans”. Loans that would never be written under normal circumstances. But the fact that these loans were written were heavily vetted in one concept: positive equity.

For many years, there has been a concept in the marketplace that  a home would always increase in value. Most market analysts kept repeating over and again that the market had always increased in price, and there was no reason to suspect otherwise. So there was no reason to think that people couldn’t buy and sell homes, making money along the way.

As a result, these mortgage products were created to keep up with the demand of new potential homeowners. And of course, in order to also keep up with this rise in demand, construction workers and project managers were kept very busy by building homes; lots of homes across the country. Big homes, new homes, homes full of ammenaties. Homes that most people could never afford under the tradtional model of the mortgage. But hey, people were making money off of their homes, so why worry?

Not to mention people were encouraged by their banks to take out the equity in their homes and use that money for whatever they wanted.

Home Equity Lines of Credit (HELOC) were created so that people could benefit from their profitable source of income. Expensive cars, vacations, luxury toys; everything was paid for with this money. After all, homes were contiuning to increase in value. The party is never going to end!

And what about the bankers that were supposed to make sure that these people could actually repay their loans? No problem. If they default, we’ll be able to recoup the cost of the loan be selling the property to another person. After all, housing prices are only going to keep going up, and everybody is being encouraged to buy a home. Banks did not concern themselves with this thought.

This entire episode was so ridiculous that morgage companies were not even bothering to check that customers actually could repay loans written. All that mattered was the credit score. Gee, I mean the credit score tells a salesperson that you pay your bills on time. Surely, you can be trusted if your credit score is above 750.

Yes, it was like a giant party where everybody was making money. Everybody was happy. Everybody felt good about life. But then, all of a sudden, the champagne began to run dry. The music began to slow down. The dancing began to stop…

The bubble began to burst. In 2006, homeowners began to default on their mortgages at an alarming rate. 2007 and 2008 had even more increased numbers of defaults. By September 2008, the defaults had become so bad, that all of these “junk loans” began to pile up on the banks and all of the sudden, the banks realized that they had no money to loan.  How could this happen? As long as home prices increased, people would buy the foreclosed homes, right?

Unfortunately, home prices began to stabilize and dip as a result of lower middle class wages that had been dropping for over a decade. Consequently, the beginning of the end was approaching fast.

The banks suddenly began to grasp the situation. Their money was tied up in homes and mortgages that had been foreclosed. Home prices began to stablize, then drop. In some places, such as Las Vegas, Orlando, and San Francisco, the prices plummeted at record levels. In other markets, the bottom was beginning to drop. But nobody really began to panic. After all, the banks were guaranteed by the Federal Government. Surely the banks could not fail…

Then, the dire warnings came from the government. Former President George W. Bush and his Adminstration began to realize that the good times were ending. The markets were dropping. Banks stopped lending. These trademarks of an impending economic collapse were now at hand. The press had a field day, running left and right saying that the US economy was on the brink of collapse. Comparisons to the Great Depression were constantly heard across the airwaves.

Banks began to fail. Merril Lynch, Goldman Sachs, JPMorganChase, Bank of America, AIG, Washington Mutual. All of these companies began to show signs of strain on their bottom lines due to the crummy mortgages coming to fruition. Banks began to fail. The economic collapse had begun. Americans were nere panic now.

What came next was the most controversial move in the history of American politics: the TARP bill; the Troubled (toxic) Asset Relief Program. This bill, which was originally only 3 paragraphs in length was submitted to Congress. Dire warnings of further economic hardship would result if this bill was not passed immediately.

Americans were being told that the banks had all of these toxic assets and needed to be bailed out. Merril Lynch, Washington Mutual, and AIG, among others, were the victims of this unfortuante situation, and their debts needed to be eliminated in order to prevent another Depression. Though it seems odd that the banks were not victims, but rather the perpetrators of this crime against our economy.

As expected, the Congress did not go along with this simple idea, and it was rejected. Then, it was rewritten with more regulations, and was passed the second time, and authorized into law. It took less than one month for TARP to be created.

Not even in time of war did this speed of legislation occur previously. Americans had just been duped into $700 billion of borrowed money to pay off the debts of the banks.  Why?

As a result, a catastrophic recession hit our country. A recession that claimed over 8 million jobs. A recession that, from a Dow Jones Industrial viewpoiont, we still have not yet recovered. President Barack Obama has been forced to continue TARP, and authorize an additional $700 billion in order to prevent any further job losses. Private companies have been taken over by the governemnt. At the top of that list: AIG, Citi, General Motors, and Chrysler. These companies, though different they may be, allowed their businesses to be diluted in the notion that they are too big to fail. And in many ways, they were. We just didn’t know it.

As an independent, I look back on this calamity and judge for myself the situations that surrounded these events. Were they correct? Were they necessary? Why and how?

To do this, we have to look at the past and previous Administrations for guidance.

First, was TARP necessary? The answer, unfortunately was yes. Purists argue that government intervention was inappropriate. Here is where we must look at history for our answer. In 1929, when the stock market began to plummet and credit markets froze, the Federal Government, led by Former President Herbert Hoover, in consultation with Former Treasury Secretary Andrew Mellon, decided that government intervention was inappropriate and that “the market would sort itself out”.

What Mr. Hoover and Mr. Mellon didn’t understand that banks could not loan because all of their assets either were in demand by their customers, or were tied up in loans that people took out to play the stock market.

Where does this sound familiar?

The market slide continued unchecked by the Federal Government until there was very little money in circulation. Consequently, a potential recession became a very deep Depression; one that lasted for over 15 years, and required a World War to completely overcome.

Pres. Bush and Sec. Paulson took this lesson from history and realized that the markets were in a very similar situation, and unless Government intervention occured, another depression would result.

Now, could TARP have been done better? Sure it could have. There could have been better safeguards in place to protect the taxpayers and ensure that every dollar appropriated would be returned. So far, about half of that money has been returned, with interest.

Four companies still owe money to the Federal Government. Those companies are listed above as being owned by the Government. 

Finally, TARP was created with the idea that bank lending would return to normal levels if the institutions had their toxic assets swept aside by this money. It’s been 18 months, and these institutions, whether the money has been repaid or not, still are not lending to consumers and small businesses.

Why? Well, that’s a great mystery. Perhaps the banks finally have gotten it through their thick skulls not to make loans that have unnecessary risk associated. Hard to get a loan, but also hard to make money.

And the home prices that were the centerpiece of this entire episode?

They’re still, by and large, nowhere near where they were in 2006. In some markets, they may never return. All the while, there are many homes that sit unoccupied in Florida and Nevada, California and New York, and all over the country. Homes that, if one is in the market, able to save 20 percent or qualify for an FHA loan, you can purchase a home at a relatively affordable price, with the help of a loan backed by the Federal Government.

Don’t we ever learn?

President Obama has done many things to try and speed up the recovery of the economy. The American Recovery and Reinvestment Act, The Public/Private Investment Program, and other incentives to try and get the banks to loan again, and people to purchase homes again.

However, we have not been able to shake loose the mindset of recklessness that we had going into this unfortunate episode.

What have we learned?

1. Banks need regulation. I’m sorry to both the GOP and the Dems, but being in bed with Wall Street led to this entire mess. This could have been entirely prevented. However, greed all of the way around allowed the safeguards to the American economy to be comprimised. Deregulation by both Republicans and Democrats allowed the banks to be “innovative”. Innovation is another word for cheating. When will they get it?

2. Not everybody in America is meant to own their own house. I realize that this goes against everything we were told by our families, friends, and elected officials. However, a mortgage is just like any other kind of loan. It is written on a commodity that can lose value. If a loan is written, some serious steps must be taken to ensure that the loan will be repaid. If not, the bank will own the house, but will have a harder time finding new buyers. Otherwise, the bank should not underwrite the loan.

3. Junk loans such as Jumbo loans, HELOCs, ARMs, balloons, and other subprime loans should never have been created. These tools of the financial industry were the fuse to the dynamite of the collapse to the economic system. Nobody ever thought that the prices of homes would drop, so this should have never happened. But it did, and the market collapsed as a result of this poor assumption.

4. If we, God forbid, ever find ourselves in a situation where our greed begins to comprimise our economic system, the people responsible should be fired immediately and their licenses should be revoked. This kind of recklessness has done nothing but help people lose their jobs and livelihoods, and waste a lot of taxpayer dollars.

5. There should never be “too big to fail”. While Pres. Bush and Obama were correct for implementing TARP, it should have never come to this situation. Banks and other entities that have so much of our financial system at stake should have bigger regulations and safeguards to prevent this kind of calamity from ever occuring again.

6 Power and greed corrupt. All politicians should have term limits and lobbying restrictions. There is no reason why elected officials should have the ability to earn unrestricted money, either through salary or donations to PACs and other political funds. The system should be reformed with tighter controls and increased accountablity on all involved.

The GOP, the Dems, and Wall Street all share blame. America shares blame as well if you voted and are a member of the parties that hold responsiblity in this fiasco. A bona fied third party would allow this type of transparency to exist. My next blog post will deal with the idea and feasiblity of a national third party. Stay tuned.

Until we meet again, this is Eric Stinson, signing off.