Dowaco wrote:Furthermore, The recent Fanny Mae, Freddy Mac disasters can be directly attributed to Democrats who wanted easy mortgages for their "disenfranchised" constituents. Sub-prime mortgages, it turns out, they could not pay for which resulted in numerous foreclosures.
That's the standard Republican excuse. (I've been receiving all of the email chain-letters about it from my dear, deluded mother.) But the truth is actually a lot more complicated than saying, "Banks were forced by Democrats to make bad loans to low-income homeowners and they all defaulted and that's why our economy is in such bad shape right now."
Our current economic problems began back in the 80s and 90s when all of the banks were deregulated. McCain's own senior economic advisor, former-Senator-turned lobbyist Phil Gramm, was one of the people most responsible for deregulation. The banks did much more than make bad loans to minority homeowners; they made bad loans to EVERYONE, regardless of income. Mortgages with variable interest rates, low down-payments, and "cash back" incentives (which were really just more loans that most people didn't seem to realize they had to pay back) enticed a lot of people to sign up for mortgages they couldn't afford. When it was so easy to get a mortgage (especially with "cash back" loans that enabled a lot of people to live beyond their means), more people bought houses they couldn't afford, and housing prices were artificially inflated. The fact is, the people of this country do not make enough money to afford all of the homes for sale at their current prices. Sure, you can blame a lot of people for living beyond their means, and you can blame the banks for making irresponsible loans to people who can never pay them back. When a large percentage of homeowners--most of whom are NOT minorities--began defaulting on their mortgages, the chickens came home to roost, so to speak. The actual total loss from bad mortgages is probably about $100 billion or so. But that's chicken feed when you look at the big picture.
Do you know anything about derivatives? I don't think I can explain how they work, because very few people even understand them. Commie pinko liberals like Warren Buffet call them "weapons of mass financial destruction". But here's a simplistic explanation. Basically, you start with a mortgage, which is a loan. You
assume that the loan will be paid in full someday. So you count the full value of the loan as an "asset" on your balance sheet. The money is gone, already spent, but the bank is supposed to get it back, right? So you've got a nice, fat juicy number on paper. ("That house down the road is worth $500,000 because we can always get someone to sign a $500,000 mortgage, and next year, we'll refinance it for $700,000. Isn't this a great country?") If you're a bank, money keeps flowing in from mortgage payments and
loans from other banks. That's how you maintain enough liquidity to keep paying out the money for all of those houses you're financing and all of the "cash back" loans you're giving to people who already owe you a bunch of money. Except for the questionable refinancing and the "cash back" part, all of that is traditional banking activity. But here's a new twist that resulted directly from deregulation. Your friends at the big investment firms say they know a way to reduce your risk and increase your profit. They buy your mortgages, convert them into securities, and sell them to other investors. Most of those investors buy more of them than they can afford by using
leverage, and then they sell them to other investors who also use leverage. After a long chain of events, nobody has any idea what those securities would actually be worth if everyone tried to cash theirs in, but the investment companies are holding 700 frigging TRILLION dollars worth of leveraged obligations. When people start defaulting on their mortgage payments--which is what the whole house of cards is ultimately based on--the value of all of those securities starts to decline. A few weeks or months later when investors begin to realize what's happening, they start to panic. The investment companies are in big trouble. Meanwhile, banks are suffering from mortgage defaults, they can't sell any more of their mortgages to the investment companies, and banks stop lending money to other banks. They all begin having liquidity problems, since most of their so-called "assets" cannot be converted into cash. At the big investment firms, most of their so-called "assets" are now considered to be "worthless junk". But they still have obligations, and they're strapped. Then they find out that the companies who are supposed to insure their investments only have enough money to cover a fraction of all of those bad "investment instruments", and a couple of those insurance companies even go out of business. Oops. The game is up. It's the biggest freaking margin call in the history of the universe. The play money is gone, and there's about $10 trillion in bills left to pay.
So basically, the investment companies--and their Republican enablers--turned a $100 billion problem into a $10 trillion dollar problem. And you think that "disenfranchised" homeowners--and the Democrats who represent them--deserve all the blame for that?
Aside from low consumer confidence, which hurts sales, the problem that is affecting businesses the most right now is that credit is very tight. Our wonderful credit-based economy cannot run without credit. Businesses need short-term loans just to pay their daily bills--things like payroll, for example. Altogether, they need about $20-30 trillion to keep operating for a year. But credit sources are drying up. That's why the Bush administration said the original bailout was so urgent: we have to rescue the investment companies so that banks can keep lending out money to businesses to keep the economy going. (They said it, not me.) Now the Bush administration is talking about getting more directly involved in "commercial paper" (that means short-term loans). But not even a few trillion dollars from the U.S. treasury would solve the problem. To get our financial system back on firm footing by eliminating all bad debts and making credit available to everyone, it would take more like $30-40 trillion to cover everything. That is, if you expect the U.S. government to solve every problem.
Do you think the American taxpayers can handle a burden like that? The total GDP of the United States is about $14 trillion. By that particular measure, that's how much the U.S. produces on American soil every year. In other words, the American people do not make enough money in one year to solve our current economic problems. Let's look at some more numbers. The total worth of all real assets in the U.S. is about $30-35 trillion (and declining). Arabs already own about $10 trillion of the real property in the U.S., so we won't get another $30 trillion from them even if we sold
everything to them. The U.S. trade deficit is about half a trillion dollars a year--that much of our wealth is being transferred to other countries every year. And our national debt, which hasn't really entered the picture yet because no one has been very worried about the federal government's ability to meets its financial obligations--at least NOT YET--is skyrocketing. It's over $10 trillion now, and by the end of Bush's term, it will probably be close to $13 trillion with all of these fancy bailout packages and glorious wars. Interest adds about another half a trillion every year, and budget deficits (thanks to Bush) have been adding about another half a trillion to the national debt every year. How much more do you want to add to the national debt? When it reaches about $20 trillion, and interest alone is over a trillion dollars a year, and tax revenue is only $2-3 trillion a year, I don't think we can prevent major defaults. Oops.
Let's put what you're talking about in perspective. 25% of the American population--including most of the "disenfranchised" people you're talking about--have a total combined income of less than 1% of GDP. Their total combined wealth is about $10 billion. And you're talking about a $30-40 trillion dollar problem. You really think you understand what's going on? I really don't know all that much myself, but I know better than to fall for phony Republican excuses that pathetically try to shift blame.
