How to End the Subprime Crisis
Reforms often do more harm than good. This is currently the case with the "mark-to-market" rule, which is imploding the U.S. financial system by requiring financial institutions to value subprime mortgages at their current market values.
This makes a big problem for balance sheets. These financial instruments became troubled prior to a market being established for them, as they were marketed direct from issuers to investors. Now that they are troubled, and with their true values unknown, no one wants them. Their lack of liquidity assigns them a low value.
The result is tremendous pressure on balance sheets. The plummeting value of subprime derivatives is pushing institutions that own them into insolvency, destroying their own stock values and forcing the financial institutions to sell untroubled liquid assets, thus resulting in an overall decline in the stock market.
The solution is to suspend the mark-to-market rule. Instead, allow financial institutions to keep the troubled instruments at book value, or 85 percent to 90 percent of book value, until a market forms that can sort out values, and allow financial institutions to write down the subprime mortgages and other troubled instruments over time.
Suspending the mark-to-market rule would take pressure off the stock market and make it unnecessary for the Fed to lower interest rates in an effort to force liquidity into the economy through an impaired banking system. The problem is not a general lack of liquidity, but liquidity for poorly conceived new financial instruments. Low U.S. interest rates could worsen the crisis by accelerating the dollar's decline. Now that inflation has raised its head, more liquidity from the Fed adds to the economic distress.
It is mindless to allow a "reform" to cause a financial crisis, but that is what is happening. Unfortunately, there are people who argue that anything less than financial Armageddon would create a "moral hazard."
It is certainly true that securitized subprime mortgage instruments were a bad idea, that a lot of people who should have known better opened floodgates to greed and fraud, and that "somebody should pay." But it shouldn't be the general public and the economy that pays.
It is also true that without the Federal Reserve's irresponsible low interest rate monetary policy, which produced a housing boom, the subprime instruments would not have been created, or at least not in such amounts. Rapidly rising real estate prices were expected to make the risky loans good. What were issuers and the Federal Reserve thinking?
There's no doubt that greed, fraud and bad policy all played their roles. But at the heart of the problem is a 1999 "reform" that repealed an earlier reform known as the Glass-Steagall Act.
In 1933, the Glass-Steagall Act separated commercial banking from the securities business. It prevented securities speculation from destroying bank capital and shrinking bank deposits from bank failures and runs on banks by depositors. Congress and President Bill Clinton foolishly repealed the Glass-Steagall Act in 1999.
The repeal of the 1933 law was driven by profit lust in the banking industry and by "free market" ideology, which claims the unfettered marketplace is always superior to regulation. In pushing the repeal forward, Congress and Clinton ignored warnings from the Government Accountability Office that the banks needed to build up their capital levels before being permitted to enter a broad range of securities businesses. The GAO also noted that there were no regulatory structures in place to monitor the new financial networks that would result from removing the wall between commercial and investment banking.
Greed and ideology won over sound advice, however. The result is a crisis that, if mishandled, will be calamitous.
COPYRIGHT 2008 CREATORS SYNDICATE INC.
Entries(RSS)
All I know, Dr. Roberts, is that people like me who did not enter the reckless real estate speculation game shouldn't have to share the burden - either through higher taxes or a debased currency - with all the greedy fools, the mansion-owner wannabes and the bankers, who brought on this crisis.
Now that the mortgages are off the banking systems balance sheets and in the hands of foreign investors the fed is powerless to control the contagion. Thus the bust years will be far deeper than we have witnessed in our lifetimes. Particularly since we feel the need to protect "interests" in the Orient. The banking system has been controlled by speculators for nearly a century, it will soon be controlled by oil money speculators.
Now it shows through that Dr. Roberts is an economist. This is by far the best of his articles in recent times: hitting our idiotic plutocrats with cold hard FACTS, and nothing more.
Without going into great detail, there is only one solution to all of this, but it will never be implemented by Congress, which created the situation in the first place in 1913 so that they could borrow money at interest from private bankers, and then tax the citizens to pay for loans that they didn't sign for. The solution:
Add two numbers together. These would be the alleged "national debt," and the total amount of U.S. assets held by the foreigners that mostly run the Federal Reserve. Print up one bill with the total of those numbers, and present it to the bankers while saying, "You are now paid for everything you claim to be owed, and you're being paid in the same phony currency you've foisted on this country for the last century. By the way, we just passed legislation abolishing forever the Federal Reserve."
Pat the bankers down to make sure there are no weapons on them, and then punch their tickets. Take all remaining currency in the country and tie it to a gold standard, after writing off every bit of phony debt that was created out of thin air by these thieving counterfeiters and passed on to the American people.
If anybody has a better solution, let's see it.
PCM's 'heart of the problem' point is hyperbole, a throw-away wonk line.
The heart of the problem is the Federal Reserve working with the Congress that can punish the saver to the benefit of the Bankers at the detriment of the savers. Yet within this article is the necesary components to make the responsible, the evil, selfish chap who wants to capitalize on this alleged 'Armageddon.'
If my Mortgage Company is hurting for cash, I suggest we negotiate a buy-out with that deed on my property they have. Savers should not only not be punished, they can yet carry the day and purchase their freedom, and serious folks should stop the hysterics that the mortgage lenders are between federal bailout and Armageddon.
I think they have my phone number. I propose 25 cents on the dollar of debt I agreed to pay back.
Mr. Bowen,
I am with you, though the settlement you offer is far too generous. I will offer 5 cents on the dollar and settle for 10.
The lender/bankers are already giving bargain priced equity away (i.e., stakes in the legal structures that hold our property) to the foreign investors. That "aid" and "infusion" is not free, even though the dumbed-down media will not explain it. Why not "incent" the lender/bankers to sell to the occupants of the property, or at least to those who have some liquidity and can thereby "save" the lender/bankers' companies while being properly rewarded themselves with greater/total ownership in the property they occupy?
It's about property. They (the lender/bankers) hold plenty of it to settle their problem brought on by wild speculation. They don't need or deserve the taxpayers' "assistance" as they (the lender/bankers) sell off their "shares" and our deeds to Arab and Chinese interests.
Mr.Eagle;
I am after all, a generous man, though it's good to see you set the floor lower than my offer. I am a dream come true in these times of troubles.
(PS, I am withdrawing my initial offer, but I will stand firm at a generous 12.5 cents on the dollar.)
Do keep in mind, that our proposal would also create the opportunity for new capital formations to finance these sorts of buyouts. Granted it would take relaxed (not increased) lending regulation so that our capital pools can serve clients based on merit and credit risk, not racial or ethnic preference.
Here PCR with whom I usually agree is a tad off base...
but I wish it would all be brought Down.
But it won't be. I like to call us 'customers' - we once were Producers... but 'they' to manipulate us to Their ends... like to call us today as you know - consumers.
we're MORE important (sadly) to their errant ways... than their as PCR worries so-called 'financial system' which is almost now completely maleable... That is IF there yet exist what are - what they like to call us - 'consumers'.
so they at least Remembered that.. they're so FAT they almost forgot their most important tenet. Screwing around in the air above us in their corporate jets... they almost 'forgot.'
It's like me and my dog. A gorgeous labRetriever .... ok, (sorry) so I named him Consumer. He gets love... he don't know except the 'sound' of his name.
So why on the university campus when I throw the Frisbee for - Consumer to retrieve... and no matter how far I throw it - he's amazing and catches it in the end - out of mid-Air... and he's so far away I fear he'll be distracted and never come back to his daddy... so I YELL -
"That's it... come here Consumer... come here, bring it here..."
He's happy as a clam in sea froth and so am I as long as he's coming back...
But all of the students on the lawn give me these dark looks - 'like how could you Name a DOG Consumer? ... like man - couldn't you have thought of something better, dude?'
go figure... eh. ?!
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The only solution I can propose to this crisis is to abolish the Federal Reserve system and to declare invalid all debts owed to the fraudsters who own that system.
The subprime crisis was created out of thin air by the federal reserve which "loaned" money that they not only didn't have, but which didn't exist until loaned into existence. The debts owed by loan originators have already been shuffled to other owners and there is simply nothing to be gained by allowing dozens of financial institutions to foreclose on properties which represent the entire net worth of many families. That is especially true since those dozens of financial institutions will still be bankrupted after transferring ownership of those millions of houses to the Federal Reserve and the Federal government.
Regardless of what the intent may have been in the creation of this mess, the end result will be the further transfer of wealth from the middle class to a morally retarded financial elite and its lapdog political class. The final result will eventually be the total enslavement of the American people. I'm afraid that this whole thing is not the result of random events.
A YouTube search of John Bird and John Fortune will bring up some great satire on the sub-prime crisis. They also do phony interviews about other topics such as imperialism and militarism. Satire might be our best weapon as the Monty Python Show suggested.
Wake up taxpayers, consumers, voters and sports fans!