The Onion: Paulson Plan Debate

A spirited debate about the current state of the Paulson Plan, from the fine folks at The Onion:


In The Know: Should The Government Stop Dumping Money Into A Giant Hole?

What's next for dollar, stocks, crude - New video from INO.com

A plan to save the world -- part two, or is it three?
by Adam Hewison,
President, INO.com

When Paulson came out today and stated that his earlier plan to save the western world was not working, he offered up a plan "C" (or is it "D") to relieve pressure on consumer credit, scrapping his earlier effort to buy the value mortgage assets.

No matter what happens or what the next plan is here, are the 3 reasons I believe stocks are headed lower.

* Number one: The trend in most all stocks is down. This trend is likely to persist and last longer than most people imagine.

* Number two: There is no plan. The government is floundering and does not have a plan that is going to work anytime soon.

* Number three: We have a lame-duck president, and nothing is going to happen of any consequence until President-elect Obama is sworn in.

New Video analysis of what could really happen:
http://www.ino.com/info/259/CD3396/&dp=0&l=0&campaignid=3

Okay, so let's look at the first problem. Most people trading the market today have had no experience in a prolonged bear market like the one we had in the '70s. That bear market was brutal as it did not let anyone out. Over the course of the early '70s, the bear market basically wore people out to the extent they eventually just threw in the towel. We believe the market is going to make another new low and take out the recent lows that were put in place in early October. Unlike a bull market that constantly needs positive news to drive it higher, a bear market just falls under its own weight.

The second problem we have is that there is no concrete plan in place to rescue the economy. In fact, the domestic and global economic issues are so great that they are overwhelming in scope. The Paulson plan, which is being changed and will continue to change, is a major concern and creates significant uncertainty in the marketplace. Only when we see the new regime take! off ice this coming January will we see any meaningful changes.

The third problem we have is a lame-duck president. This is a major problem for the markets as President-elect Obama can not make any sweeping changes until he is sworn into office. Yes, he may hit the ground running, but the reality is, it's not for over two months from now and a lot can happen to the market in two months. The key levels that everyone is going to be watching for are the recent lows we saw in early October. If these lows are taken out, and I expect they will be, it's going to push this market and everything else down to new lows. It will exacerbate the housing situation, the unemployment situation and most of all, the morale of the country.

Having lived through the bear market of the '70s, I know firsthand how difficult the journey we face is going to be. Now this may seem like a very pessimistic outlook and in some ways it is, however there are always opportunities to make mone! y i n the marketplace. These opportunities may not be in stocks! , it may be in forex or the commodity markets.

So buckle your seatbelt. I think we are in for a bumpy ride...check out the new video analysis:
http://www.ino.com/info/259/CD3396/&dp=0&l=0&campaignid=3

Stratfor: States, Economies and Markets: Redefining the Rules

Stratfor is an intelligence and news service that provides very high quality coverage and analysis of global events. They cover events that really matter in the big picture - not the crap you see in the mainstream news.

I'm a satisfied subscriber, and was pleased to see this latest piece of analysis could be republished with attribution to www.stratfor.com. So there's my plug for them - check them out - I believe they now offer up some quality free content as well.

States, Economies and Markets: Redefining the Rules

October 13, 2008 | 1734 GMT

By George Friedman

A complex sequence of meetings addressing the international financial crisis took place this weekend. The weekend began with meetings among the finance ministers of the G-7 leading industrialized nations. It was followed by a meeting of finance ministers from the G-20, the group of industrial and emerging powers that together constitute 90 percent of the world’s economy. There were also meetings with the International Monetary Fund (IMF) and World Bank. The meetings concluded on Sunday with a summit of the eurozone, those European Union countries that use the euro as their currency. Along with these meetings, there were endless bilateral meetings far too numerous to catalog.

The weekend was essentially about this: the global political system is seeking to utilize the assets of the global economy (by taxing or printing money) in order to take control of the global financial system. The premise is that the chaos in the financial system is such that the markets cannot correct the situation themselves, and certainly not in an acceptable period of time; and that if the situation were to go on, the net result would be not just financial chaos but potentially economic disaster. Therefore, governments decided to use the resources of the economy to solve the problem. Put somewhat more simply, the various governments of the world were going to nationalize portions of the global financial system in order to stave off disaster. The assumption was that the resources of the economy, mobilized by the state, could manage — and ultimately repair — the imbalances of the financial system.

That is the simple version of what is going on in the United States and Europe — and it is only the United States and Europe that really matter right now. Japan and China — while involved in the talks — are really in different places structurally. The United States and Europe face liquidity issues, but the Asian economies are a different beast, predicated upon the concept of a flood of liquidity at all times. Damage to them will be from reduced export demand, and that will take a few weeks or months to manifest in a damning way. It will happen, but for now the crisis is a Euro-American issue.

The actual version of what happened this weekend in the financial talks is, of course, somewhat more complex. The United States and the Europeans agreed that something dramatic had to be done, but could not agree on precisely what they were going to do. The problem both are trying to solve is not technically a liquidity problem, in the sense of a lack of money in the system — the U.S. Federal Reserve, the European Central Bank and their smaller cousins have been pumping money into the system for weeks. Rather, the problem has been the reluctance of financial institutions to lend, particularly to other financial institutions. The money is there, it is just not getting to borrowers. Until that situation is rectified, economic growth is pretty much impossible. Indeed, economic contraction is inevitable.

After the failures of so many financial institutions, many unexpected or seemingly so, financial institutions with cash were loath to lend money out of fear that invisible balance-sheet problems would suddenly destroy their borrowers, leaving lenders with worthless paper. All lending is driven by some appetite for risk, but the level of distrust — certainly after many were trapped in the Lehman Brothers meltdown — has meant that there is no appetite for risk whatsoever.

There is an interesting subtext to this discussion. Accounting rules have required that assets be “marked to market,” that is, evaluated according to their current market value — which in the current environment is not very generous, to say the least. Many want to abolish “mark to market” valuation and replace it with something based on the underlying value of the asset, which would be more generous. The problem with this theory is that, while it might create healthier balance sheets, financial institutions don’t trust anyone’s balance sheet at the moment. Revaluing assets on paper will not comfort anyone. Trust is in very short supply, and there are no bookkeeping tricks to get people to lend to borrowers they don’t trust. No one is going to say once the balance sheet is revalued, “well, you sure are better off than yesterday, here is a hundred million dollars.”

The question therefore is how to get financial institutions to trust each other again when they feel they have no reason to do so. The solution is to have someone trustworthy guarantee the loan. The eurozone solution announced Oct. 12 was straightforward. They intended to have governments directly guarantee loans between financial institutions. Given the sovereign power to tax and to print money, the assumption was — reasonable in our mind — that it would take risk out of lending, and motivate financial institutions to make loans.

The problem with this, of course, is that there are a lot of institutions who will want to borrow a lot of money. With the government guaranteeing the loans, financial institutions will be insensitive to the risk of the borrower. If there is no risk in the loan whatsoever, then banks will lend to anyone, knowing full well that they cannot lose a loan. Under these circumstances, the market would go completely haywire and the opportunities for corruption would be unprecedented.

Therefore, as part of the eurozone plan, there has to be a government process for the approval and disapproval of loans. Since the market is no longer functioning, the decision on who gets to borrow how much at what rate — with a government guarantee — becomes a government decision.

There are two problems with this. First, governments are terrible at allocating capital. Politics will rapidly intrude to shape decisions. Even if the government could be trusted to make every decision with maximum efficiency, no government has the administrative ability to manage the entire financial sector so directly. Second, having taken control of interbank finance, how do you maintain a free market in the rest of the financial system? Will the government jump into guaranteeing non-interbank loans to ensure that banks actually lend money to those who need it? Otherwise the banking system could be liquid, but the rest of the economy might remain in crisis. Once the foundation of the financial system is nationalized, the entire edifice rests on the nationalized system.

The prime virtue of this plan is that it ought to work, at least in the short run. Financial institutions should start lending to each other, at whatever rate and in whatever amounts the government dictates and the gridlock should dissolve. The government will have to dive in to regulate the system for a while but hopefully — and this is the bet — in due course the government can unwind its involvement and ease the system back to some sort of market. The tentative date for that unwinding is the end of 2009. The risk is that the distortions of the system could become so intense after a few months that unwinding would become impossible. But that is a problem for later; the crisis needs to be addressed now.

The United States seems to dislike the eurozone approach, at least for the moment. It will be interesting to see if Washington stays with this position. U.S. Treasury Secretary Henry Paulson, who appears to be making the decisions for the United States, did not want to obliterate the market completely, preferring a more indirect approach that would leave the essence of the financial markets intact.

Paulson’s approach was threefold. First, Washington would provide indirect aid to the interbank market by buying distressed mortgage-related assets from financial institutions; this would free up the lenders’ assets in a way that also provided cash, and would reduce their fears of hidden nightmares in each others’ balance sheets. Second, it would allow the Treasury to buy a limited stake in financial institutions that would be healthy if not for the fact that their assets are currently undervalued by the market; the idea being that the government takes a temporary share, in exchange for cash that will recapitalize the bank and reduce its need for access to the interbank market. Finally — and this emerged at 2 a.m. on Monday — the government would jump into the interbank market directly. The Federal Reserve promised to lend any amount of dollars to any bank so long as the borrower has some collateral that the Fed will accept (and these days the Fed accepts just about anything). The major central banks of Europe have already agreed to act as the Fed’s proxies in this regard.

The United States did not want to wind up in the position of micromanaging transactions between financial institutions. Washington felt that an intrusive but still indirect approach would keep the market functioning even as the government intervened. The Europeans feared that the indirect approach wouldn’t work fast enough and had too much risk attached to it (although the Fed’s 2 a.m. decision may take the air out of that belief). They also believed Washington’s attempt to preserve the market was an illusion. With the government buying distressed paper and investing in banks, they felt, what was left of the market wasn’t worth the risk or the time.

There is also an ideological dimension. The United States is committed to free-market economics as a cultural matter. Recent events have shown, if a demonstration was needed, that reality trumps ideology, but Paulson still retains a visceral commitment to the market for its own sake. The Europeans don’t. For them, the state is the center of society, not the market. Thus, the Europeans were ready to abandon the market much faster than the Americans.

Yet the Europeans and the Americans both had to intervene in some way, and now they face exactly the same problem: having decided to make the pig fly, there remains the small matter of how to build a flying pig. The problem is administrative. It is all very well to say that the government will buy paper or stock in companies, or that it will guarantee loans between banks. The problem is that no institutions exist to do this. There are no offices filled with officials empowered to do any of these things, no rules on how these things are to be done, no bank accounts on which to draw — not even a decision on who has to sign the checks. The faster they try to set up these institutions, the more inefficient, error-prone and even corrupt they will turn out to be. We can assure you that some bright lads are already thinking dreamily of ways to scam the system, and the faster it is set up, the fewer controls there will be.

But even if all of that is thrown aside, and it is determined that failure, error and corruption are an acceptable price to pay to avoid economic crisis, it will still take weeks to set up either plan (with the possible exception of the Fed’s announcement to jump into the interbank market directly). Some symbolic transactions can take place within days — and they will undoubtedly be important. But the infrastructure for processing tens of thousands of transactions simply takes time to build.

This, of course, is known to the eurozone finance ministers. Indeed, the Europeans will hold an EU-wide summit on the topic this week, while the Americans are going to be working very hard to clarify their own processes in the next few days. The financial institutions will need to have guarantees to start lending — or some sort of retroactive guarantee — but the bet is that the stock markets will stop falling long enough to give the finance ministries time to get organized. It might work.

We need to add to this another dimension we find very interesting. We have discussed elsewhere the axes on which this decision will be made: one is the degree of government intervention, the other is the degree of international collaboration. Clearly, governments are going to play the pivotal role. What is interesting is the degree to which genuine international collaboration is missing. Certainly there is voluntary collaboration — but there is not an integrated global strategy, there is not an integrated global institution administering the strategy, nor is there an irrevocable commitment on the part of governments to subordinate their sovereignty to relevant global institutions.

The Americans and Europeans seem to be diverging in their approaches, with Paulson delivering a warning about the consequences of protectionism. But the European Union is also now being split between members of the eurozone and EU members who have their own currencies (primarily the United Kingdom). Indeed, even within the eurozone, the solutions will be national. Germany, France, Italy and the rest are all pursuing their own bailouts of their own institutions. They have pledged to operate on certain principles and to coordinate — as have the United States and Europe — but the fact is that each state is going to execute a national policy through national institutions with its own money and bureaucracies.

What is most interesting in the long run is the fact the Europeans, even in the eurozone, have not attempted a European solution. Nationalism is very much alive in Europe and has emerged, as one would expect, in a time of crisis. And this raises a crucial question. Some countries have greater exposure and fewer resources than others. Will the stronger members of the eurozone help the weaker? At present it seems any such help would be simply coincidental. This is a global question as well. The Europeans have pointed out that the contagion started in the United States. It is true that the Americans sold the paper. But it is also true that the Europeans bought it readily. If ever there was a systemic failure it was this one.

However, it has always been our view that the state ultimately trumps the economy and the nation trumps multinational institutions. We are strong believers in the durability of the nation-state. It seems to us that we are seeing here the failure of multinational institutions and the re-emergence of national power. The IMF, the World Bank, the Bank for International Settlements, the European Union and the rest have all failed to function either to prevent the crisis or to contain it. The reason is not their inadequacy. Rather it is that, when push comes to shove, nation-states are not prepared to surrender their sovereignty to multinational entities or to other countries if they don’t have to. What we saw this weekend was the devolution of power to the state. All the summits notwithstanding, Berlin, Rome, Paris and London are looking out for the Germans, Italians, French and British. Globalism and the idea of “Europe” became a lot less applicable to the real world this weekend.

It is difficult to say that this weekend became a defining moment, simply because there is so much left unknown and undone. Above all it is unclear whether the equity markets will give governments the time they need to organize the nationalization (temporary we assume) of the financial system. No matter what happens this week, we simply don’t yet know the answer. The markets have not fallen enough yet to pose an overwhelming danger to the system, but at the moment, that is the biggest threat. If the governments do not have enough credibility to cause the market to believe that a solution is at hand, the government will either have to throw in the towel or begin thinking even more radically. And things have already gotten pretty radical.

Tell Stratfor What You Think

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Clayton Makepeace: A Conspiracy of Imbeciles

A really great article here by Clayton Makepeace on the current economic turmoil. Clayton is one of my favorite marketers - I read his blog religiously for marketing insights. At the end of his article, he encouraged people to link to the article or post in its entirety - so I am doing both. Enjoy, and prepare yourself to get riled up!

A Conspiracy of Imbeciles
by Clayton Makepeace

Washington is playing you for a sucker
— shamelessly robbing you blind —
and they’re not just getting away with it;
they’re actually being rewarded for it

Here’s what you must do now
to hit them where it hurts
and quite possibly, to save your financial future

Dear Business-Builder,

I sincerely hope that by now, you fully understand how deeply all of us here at The Total Package are committed to your success.

That’s why our team spends hundreds of hours every week and well over one-hundred thousand dollars each year to bring you all the business-building, response-boosting secrets this blog has become known for. All for free.

But this issue isn’t about any of that. Because the fact is, there’s an 800-pound gorilla in the room — a crisis that overshadows and dwarfs the importance of our individual careers and businesses.

I’ve avoided writing about this situation here for months. But now, it’s getting to the point where it could hurt you. I can’t, in all good conscience, stay silent and let that happen.

Now, I’m well aware that what I’m going to say will be controversial. The truths I’m about to present will be welcomed by many of my readers. Many others will be offended by these facts. For that, I can only apologize in advance — and humbly suggest that if the truth offends you, it just might be a hint that your point of view could benefit from an honest re-examination.

I’m also aware that a few readers will complain that this is another “political” article — and that I should shut the hell up and stick to what I know.

Fair enough: I know this stuff. True, I’m only a high-school drop-out; self-taught in the ways of the world. But had my first immersion in this very early in life.

At the age of 12, I could tell you all about the Hegelian dialectic, the foundations of Fabian socialism and the tenets of free market capitalism. Since then, I’ve devoured the works of Keynes, von Mises, Friedman and many other legendary economists.

Plus, to create the promotions I do every day for financial clients, I’ve spent my life studying and writing about how the economy and the financial markets work. I have to eat, sleep and breathe politics and economics just to do my job.

And although I have, by any measure, passed this 37-year long college-level course in politics and economics with flying colors, I don’t mind telling you that I spent several additional weeks researching and documenting the particulars in this article.

Nevertheless, if it helps, you might try not thinking of this as a political article or even an economic one. Think of it as an example of how a veteran copywriter tackles a complex subject and makes it simple enough and entertaining enough to engage the man on the street.

And no matter who you are, you would do well to heed the suggestions to help you through this at the end of this article.

That said, let’s dive in …

They call this 800-pound gorilla the “Credit Crisis”
— and whether you realize it yet or not,
it is the single greatest financial catastrophe
of your lifetime …

• It has probably already cost you tens of thousands of dollars and crippled your retirement – whether you know it or not: Depending on where you live, this crisis has already slashed as much as 35% off the value of your home. And since home equity is the #1 source of retirement savings for most Americans, it is destroying the retirement dreams of millions.
• It has cost investors and retirees and pension funds hundreds of billions more: Skyrocketing mortgage defaults have killed great American institutions like Bear Stearns, Lehman Brothers, AIG, Washington Mutual and more … caused Washington to take control of mortgage giants Fannie Mae and Freddie Mac … and gutted the share value of nearly every U.S. bank and brokerage. Millions of people who owned those stocks are now hundreds of billions; perhaps trillions of dollars poorer.
• It has launched U.S federal deficits through the roof: The attempt to save our dying institutions has caused the U.S. government to spend $25 billion to rescue Bear Stearns … another $80 billion to save American Insurance Group (AIG) … $200 billion to save Fannie and Freddie … $165 billion on last spring’s stimulus package for consumers … and in the next few hours — a few days at the most — Washington will blow another $700 billion attempting to prevent a financial meltdown that could surpass the Great Depression.

  Altogether, that’s more than $1 trillion (one thousand billion dollars!) spent so far in an attempt to fight this crisis … an attempt that may — or may not — prevent, as Treasury Secretary Henry Paulson phrased it recently, “The total meltdown of the entire U.S. financial system.”

• It is crushing the dollar and killing jobs: A global loss of confidence in Washington’s ability to manage the U.S. economy combined with the tidal wave of paper dollars Washington has created to fight this crisis have contributed to the greatest crash in the value of the U.S. dollar in ages and raised the specter of hyper-inflation.

  Plus, as banks get stingier with borrowers out of sheer self-defense, this crisis is crushing corporate earnings and share prices. Private investors, retirees, pension funds and institutions have lost more than $3 trillion in the past 12 months alone.

  And it has stalled the U.S. economy in its tracks. America’s three largest automakers are now begging Congress for $25 billion to help them survive. Unemployment is careening higher; costing legions of Americans the ability to provide for their families.

• It’s pushing the U.S. economy relentlessly towards what may well be a new Dark Age: With that $1 trillion plus, plus, PLUS being added to America’s skyrocketing budget deficits for 2008 and 2009, there’s a real danger this crisis will also crush the bond market … send interest rates exploding through the roof … and trigger yet another, more intense phase of business failures, stock market losses and soaring unemployment in the months ahead.

And make no mistake:
It’s not over yet. Not by a long shot.

Compared to the losses now being suffered in every part of America’s $13 trillion economy, the $700 billion bank bailout that’s being rammed through Congress is like putting a Band-Aid on a sucking chest wound.

And remember: That money is just to save the banks that have already suffered huge losses from past mortgage defaults. Not even Washington could print enough money to stop the massive NEW tidal wave of mortgage defaults that’s taking shape now.

The monthly payments on more than six million adjustable rate mortgages with an estimated face value of $1.2 trillion are poised to reset in the months ahead. Some of the payments on these loans are expected to more than double. And many of them on homes that are no longer worth anywhere near what buyers owe on them.

That means millions more mortgage defaults are dead ahead no matter what Congress does. Millions more repossessed homes will flood onto the market and homeowners will suffer even more dramatic losses of home equity as the glut of unsold properties hammers the value of our homes into the ground.

And it means even greater pain for those who had counted on that equity to see them through retirement.

It also means that lenders who are fighting for their companies’ lives will have no choice but to continue raising credit requirements … slashing credit limits … and denying loans to all but the most supremely qualified applicants.

And that, in turn, means that every manufacturer, wholesaler, retailer and service business in America is now facing the specter of plunging sales, profits, share prices and in all too many cases, bankruptcy.

As those companies slash jobs or vanish altogether, millions of family paychecks will vanish, too. Nearly every American family is now a candidate for having to live off their savings; many are sitting ducks for bankruptcy and poverty. And every American child and even the as-yet unborn will suffer the consequences and pay the price for decades to come.

But that’s not what really scares me …

What terrifies me … what wakes me in a cold sweat … is that the single most corrupt, inefficient, incompetent and idiotic institution on face of the planet is now trying to “fix” the problem.

And that especially frightens me because, the closer I examine the roots of this crisis, the clearer it becomes that it was engineered almost entirely by the very bumbling buffoons who are now charged with ending it: The U.S. government.

And yet nowhere in the media do I see anyone even trying to uncover the roots of this crisis. What caused it? How can we make sure it will never happen again?

Instead, they simply report that …

• Banks and mortgage companies made loans to unqualified borrowers.
• Banks then sold those loans to Fannie, Freddie and other financial institutions.
• Fannie, Freddie and others then turned those loans into investment vehicles – and sold them to governments, banks and investors both here in the U.S. and worldwide.
• When all those unqualified borrowers inevitably defaulted on their mortgages, these investments crashed in value.
• And when their investments crashed, they pushed institutions and investors who had bought them to the brink – or in the case of Bear Stearns, Lehman, Fannie, Freddie, IndyMac, AIG and many other banks and investment banks, over the cliff.

But nobody I know is asking the obvious question …

“Why did so many smart lenders
make so many stupid loans
to so many people who couldn’t pay?”

It’s clear that lenders granted mortgages to millions of people with no savings or down payment … no proof of income, too little income to qualify and even no income at all … with no assets and with a record for welching on every debt they’d ever incurred; who’d had flaked out on credit cards, auto loans and pretty much every other loan they had ever been granted.

But why?

Why did lenders begin saying “YES” to these abysmal credit risks instead of their standard, resounding “NO”?

Were the CEOs at the helm of these lending institutions merely overpaid idiots who had no idea that loaning money to unqualified borrowers — and worse; to borrowers who had proven time and time again that they would NOT repay — would come back to bite them on the arse?

Or were they simply financial masochists; intentionally bankrupting their institutions and destroying their shareholders’ wealth just to get a cheap thrill?

The answer, of course, is neither. They were simply doing what they were told to do: What Washington forced them to do — under penalty of law.

Here’s the simple, frank truth about this crisis
the mainstream media will never tell you …

Here’s a quick timeline — all easily checkable online:

Gee, thanks, Mr. Carter …

1977: Jimmy Carter rams the Community Reinvestment Act through Congress. It all began 31 years ago when Billy Carter’s brother Jimmy heard that some lenders were “discriminating” against low-income borrowers …

Now, nobody I know has ever accused Mr. Carter of being the sharpest crayon in the box … But he did know one thing: He was by-god incensed — incensed, I tell you — at discrimination of any kind!

Make no mistake here: Oprah was NOT having problems getting loans; nor were most of the millions of other hard-working, responsible minority wage-earners in America.

And it’s not like credit was available to low-income white people with no savings, no down payment and lousy credit histories.

But the facts, of course, didn’t matter to Carter. All that mattered was that someone had used the “D” word, so something had to be done. Political correctness demanded it.

And so, unfazed by the fact that lenders are supposed to be discriminating when deciding who’s a good credit risk — and blissfully unburdened by even the glimmer of an understanding of the catastrophic long-term impact of his actions — Mr. Carter sprang into action.

And in no time flat, Jimmy’s Community Reinvestment Act – “CRA” for short – had sailed through the Democratic Congress.

Suddenly, any lender caught denying mortgages and other loans to low-income people faced serious penalties — including denial of applications to open new branches, to do mergers and acquisitions and other draconian measures.

1992: The Fed drops a bombshell. In what was then heralded as a "landmark study,” the Boston branch of the U.S. Federal Reserve announced that, despite the many pounds of flesh the CRA exacted from lenders who turned down low-income loan applicants, mortgage discrimination was still pandemic in the financial system.

So in a matter of days, the Boston Fed produced a manual for mortgage lenders nation-wide stating, "Discrimination may be observed when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants."

“Hey buddy – forget the beer.
You want a HOUSE?”

So what were these "arbitrary” and “outdated" criteria?

“Oh, little things,” said the Fed. “Like the size of the mortgage payment relative to income. And the prospective borrower’s savings or credit history.

“And don’t even bother checking to see if the borrower has any income at all,” said the Fed. “If you do … and he doesn’t … and you deny the loan … you’re a dirty, no good discriminator!”

“In fact, come to think of it,” the Fed mused, “if the applicant has participated in a credit-counseling program, that means he’s now a responsible borrower. Better grant him the loan or you’re toast!”

“Oh. And also? Welfare payments and unemployment benefits are valid income so you’d better include them when qualifying loan applicants.”

And so lenders did what they were told under penalty of law and the surge of bad loans accelerated.

1995: Bill Clinton cranks it up a notch. Thirty-six months later, still alarmed at the “discrimination” the Fed had uncovered and eager to reward low-income voters for sending Bubba to the White House, Andrew Cuomo — Clinton’s secretary of Housing and Urban Development — investigated Fannie Mae for racial discrimination.

He “found” it of course — and quickly proposed that fully HALF of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low-income borrowers by the year 2001.

Next, Clinton introduced significant revisions to the Community Reinvestment Act. In testimony prior to the new bill’s passage, Gene Ludwig — Clinton’s Comptroller of the Currency — explained why reform was so desperately needed:

“Fifteen years ago,” said Ludwig, “Congress passed the Community Reinvestment Act. But the CRA has never achieved its full promise.

“The proposed reform package will channel billions of dollars a year in new credit into America’s distressed communities.”

PLAIN ENGLISH TRANSLATION: Hey, lenders! You’re still not giving enough money to people who can’t — or won’t — pay it back. This law ensures that you will!

“Don’t want to give loans to lousy credit risks?

“I’ll fix you!”

Staggeringly idiotic. Right? But wait — the Clinton administration was only getting warmed up.

According to the Los Angeles Times, the president and his Democratic majority in Congress "… mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers. Operating under that requirement, Fannie Mae, in particular, has been aggressive and creative in stimulating minority gains."

Then, the Clinton administration added the final kicker: Fannie, Freddie and the nation’s lenders would be allowed to turn these subprime loans into securities and sell them to financial institutions and investors world-wide!

Given the fact that Clinton enjoyed a Democratic majority in Congress at the time, it should come no surprise that the revisions sailed through Congress in no time flat.

1999: It’s working! Four years later, with low-income borrowing skyrocketing, an enthusiastic Fannie Mae could be heard publicly bragging about “the end of discriminatory lending in America.”

It even singled out its most shining example: A lender, it said, that worked with community organizers and followed "the most flexible underwriting criteria permitted."

Previously, this lender had made only $1 billion in low-income loans. By 1992, under the provisions of the Community Reinvestment Act, it had loaned $80 billion to low-income borrowers. And thanks to Clinton’s “refinements,” that firm’s loans to low-income borrowers were well on their way to surging to over $600 billion.

“We just did what Congress told us to do. ”

– Angelo Mozilo, CEO Countrywide Financial

So, one might ask, “Who was this virtuous lender that had increased its loans to low-income people a whopping 59,900% in just over one decade?”

You guessed it: It was the very lender whose demise in 2007 turned out to be the first domino to fall in the subprime lending mess: Countrywide Financial.

2001: Bush administration warns of impending doom. In Bush’s first year in office, the White House’s chief economist, N. Gregory Mankiw, warned Fannie and Freddie’s loans to unqualified borrowers and other complications at the two institutions were creating a huge risk for the entire financial system.

Representative Barney Frank (D-MA) denounced Mankiw, accusing him of having no "concern about housing."

The New York Times fell into lockstep with its Democratic masters in Congress, reporting that Fannie Mae and Freddie Mac were "under heavy assault by the Republicans," but that it was O.K. — because these entities still had "important political allies" in the Democrats.

Congressional Democrats dug in their heels and made absolutely sure nothing was done to address the impending crisis.

2003: The Bush administration tries to avert catastrophe a second time. Alarmed by fraud and abuses that had been discovered at Fannie and Freddie, President Bush repeatedly urged Congress to pass a bill increasing oversight on the two companies.

The Bush administration had every reason to be worried: A report by outside investigators had concluded that Freddie Mac manipulated its accounting to mislead investors. Experts were warning that Fannie Mae was not adequately hedging against rising interest rates.

“These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis.”

Representative Barney Frank (D-MA)
Arguing against Republican attempts to reform the two corrupt mortgage lenders in 2003.

Bush’s Treasury Secretary, John Snow, told the House Financial Services Committee, ”There is a general recognition that the supervisory system for housing-related government-sponsored enterprises neither has the tools, nor the stature, to deal effectively with the current size, complexity and importance of these enterprises.”

After the hearing, two Republican congressmen — Representative Michael G. Oxley of Ohio, chairman of the Financial Services Committee, and Senator Richard Shelby of Alabama, chairman of the Senate Banking Committee — announced their intention to draft legislation based on the administration’s proposal.

”We have seen in recent months that mismanagement and questionable accounting practices went largely unnoticed” by the independent agency that regulated Fannie and Freddie, said Oxley.

But once again, congressional Democrats and their lackeys in the media scoffed at the Bush plan to save Fannie and Freddie. Some went so far as to point at the plan as proof that Republicans hate minorities and poor people.

And Barney Frank (D-MA) now the Chairman of the powerful House Financial Services Committee — the sack of excrement in a suit you see grandstanding on TV as Congress mulls this newest bail-out — denied there was any crisis at all.

“These two entities — Fannie Mae and Freddie Mac,” declared Frank, “are not facing any kind of financial crisis.”

And so, yet another opportunity to avert the crisis that now is — according to Treasury Secretary Hank Paulson — threatening to “completely destroy the entire U.S. financial system” was lost.

The simple truth

Despite everything the Democrats in Congress are telling you now …

Despite all the mindless spin the mainstream media is trying to shove down your throat on the six-o’clock news …

Despite all the talk about how “greedy lenders and incompetent CEOs and lax government regulation” caused this crisis …

Despite the ridiculous claims that only increased government regulation and intensified congressional oversight can end the crisis (regardless of the fact that political regulation and oversight caused it) …

“The Government Did It” “Through the stick of the CRA and the carrot of Fannie Mae and Freddie Mac, the Fed created the mortgage market debacle.” – Economist Yaron Brook

And despite the lies congressional Democrats and their presidential candidate are telling in an unbelievably hypocritical attempt to hang this crisis on the Bush administration (and by extension, on John McCain) …

The simple truth is, this crisis was engineered and implemented almost entirely by Democrats.

The more frightening truth is, they once again control Congress — just like they did when the laws were passed that created this crisis.

And the terrifying truth to anyone who cares about his family’s financial security is that they will probably also control the White House, come next January.

The CRA — the idiotic law that created this crisis — also made Obama who he is today.

“Why is that so terrifying?” you ask …

Consider this: According to his autobiography, Obama spent his years after college and before he ran for the Illinois Senate becoming an expert in real estate law and fair housing while working as a “community organizer.”

What he was really doing was blackmailing Chicago lenders into throwing money at his low-income constituents. And the club Obama used to bludgeon banks into submission — into granting loans to people with no down payment, no job, no income and lousy credit histories — was called … you guessed it … “The Community Reinvestment Act of 1977.”

Now, to anyone who has even the glimmer of an understanding of how Washington works, it should come as no surprise that Mr. Obama was well-rewarded for his untiring efforts to force banks to throw money at unqualified borrowers — and it should also come as no surprise that those rewards flowed from the two quasi-private companies that benefited most from the explosion in subprime mortgages: Fannie and Freddie.

Recently, we learned that of the hundreds of political contributions made by Fannie Mae over the last couple of years, Obama received the second highest amount — second only to the Chairman of the Senate Banking Committee, Christopher Dodd (D-CT).

Other Democrats were also well-rewarded for this catastrophic explosion in subprime lending with lucrative jobs at Fannie and Freddie. And four of these former Fannie and Freddie big shots — former CEOs and a board member of these corrupt institutions — have been on the Obama bandwagon since Day One:

1. Franklin Raines, former Clinton administration budget director who earned $90 million in his five years as Fannie Mae CEO, from 1999 to 2004 — has been called by the Obama campaign several times for advice on (believe it or not) housing and the economy according to The Washington Post …

2. James Johnson, former aide to Democratic Vice President Walter Mondale, who earned $21 million in his last year alone serving as Fannie Mae CEO from 1991 to 1998 — was appointed to head Obama’s vice presidential selection committee …

3. Jamie Gorelick, former Clinton administration deputy attorney general, who earned $26 million as vice chair of Fannie Mae from 1998 to 2003 — has been mentioned as a prime candidate for a possible cabinet position in an Obama administration by insiders, and …

4. Rahm Emanuel, former Senior Advisor in the Clinton White House served on the Board of Directors for Freddie Mac where he is said to have opposed every reform proposed by the Bush Administration. Emanuel is credited with being the one man responsible for rallying support for Obama early on among Congressional Democrats.

Take a good, long look at those names and faces: These, along with the aforementioned Jimmy Carter, Bill Clinton, Barney Frank and Christopher Dodd, are the eight people who created this crisis and who profited the most from it — both politically and financially.

Now, their abysmal economic ignorance, political ambition and mindless greed are killing great American companies … robbing millions of their home equity and their paychecks … driving the federal deficit through the roof … and pushing us to the brink of the greatest financial catastrophe in U.S. history.

Plenty more blame to go around

Now, I make it no secret that I’m no fan of either one of the major political parties.

Like Reagan, I believe that government isn’t the solution; it’s the problem. And by studying history, I’ve learned that whenever Washington attempts to solve any problem, it’s a slam-dunk it will only wind up creating two, three or even more far more serious ones.

Even the most casual observer would conclude that as a class, politicians in both parties are notorious for their inability to locate their own arses — even if allowed to use both hands. Until now, we have tolerated them because they — and the massive, bloated, abusive, oppressive government they have created — have been merely a dead weight on us.

Not now. Now, there’s a very real risk that their lust for power, political ambition, corruption and cowardice will cost you your job, your home, and any prospects for a prosperous life.

The ONLY way to limit the damage they do to you, to me and to every other American is to keep Washington on a short leash … prohibit them from dabbling in matters they have no business fooling with … and to strictly limit the size and scope of the government.

“A pox on both their houses,” is my studied philosophy.

So I don’t mind telling you that plenty of Republicans bear guilt for this crisis as well.

Many are guilty of not having the guts to scream bloody murder while these mindless laws were being passed …

Of not taking a stand when Bush tried not once but twice to head off this crisis at the pass …

Or worse; voting with the Democratic majority for laws that elevated populism and political correctness above financial prudence.

And sure: Many CEOs at our distressed or defunct financial institutions are guilty of the same things.

And of extending the same courtesies the government demanded for low-income borrowers to the middle class; luring millions of others into more house than they could afford with no-down-payment loans and adjustable rate mortgages with irresistibly low interest rates.

Plus, the way I see it, there’s no reason why anyone with an IQ larger than my shoe size (11) would invest a penny in mortgages signed by people who had no means or no intent of repaying them.

And of course, millions of Americans are also complicit for allowing themselves to be seduced into taking on more debt than they could ever repay.

But make no mistake: It took two Democratic presidents working with Democratic majorities in Congress to engineer this crisis. Without the disastrous “fair housing” legislation imposed on this country by Carter, Clinton, Frank, Dodd and other Democratic lawmakers, this crisis would never have happened.

And never forget; it was the Democratic Party that killed not one but two attempts by the Bush administration to stop this credit catastrophe before the first subprime lender bit the dust.

This is what happens when hysterical race-baiting and populist politics are allowed to subvert prudent business practices.

This is what happens when despicable politicians are allowed to buy votes from low-income people with laws that endanger your financial survival.

This is what happens when imbeciles — most of whom have never held a real job or have had to make payroll in a company of their own — are allowed to tamper with the economy.

And now, these same clowns
are about to make matters worse
… AGAIN!

Unbelievably, these same drooling morons — the very people who caused this mess in the first place — are now charged with saving our economic system from certain destruction.

Because they are the majority party in Congress, the very Democrats who engineered this crisis — most notably Senate Banking Committee Chairman Christopher Dodd (Fannie Mae’s fair-haired boy and #1 beneficiary of its political contributions) and House Financial Services Committee Chairman Barney Frank (who blocked every early attempt to avoid this crisis) — are running the show.

And if the current state of the presidential polls are any indication, our next vice president — Obama’s running mate, Joe Biden, a loyal Democrat while this disaster was being created in Congress — will be available to break any ties on future Senate votes.

And of course, Obama himself — the self-proclaimed “Candidate of Change” — who has never attempted to change or reform one, blessed thing in his entire life …

Who, much to the contrary, shamelessly exploited Chicago’s notoriously corrupt “pay-to-play” political system for all it’s worth and also built his entire political base on the very law that created this crisis …

… Will soon be lighting up his beloved Marlboros in the Oval Office.

So …

• The next time you hear that your home equity has vanished into thin air and that your house is now worth less than you paid for it; maybe even less than you OWE on it …
• Or find that your credit limit has just been slashed or you get rejected when you apply for a loan …
• Or check your stock portfolio or retirement plan only to find that it’s a mere shadow of what it once was …
• Or discover to your horror that our massive federal deficit has gutted your buying power and driven the price you pay at the supermarket or gas station sky high …
• The next time you hear that a friend or family member has been laid-off, is teetering on the brink of bankruptcy and in danger of losing everything he or she has ever worked for …
• The next time you want to kick the dog because your newly nationalized mortgage or insurance company is suddenly exhibiting all the competence of the U.S. Post Office and the sensitivity of an IRS collection agent …
• And the next time Barney Frank or Charlie Rangel or Joe Biden or any other one of these unrepentant, hypocritical scoundrels tells you he’s raising your taxes because you’re not shouldering “your fair share” of the $1 trillion burden his blundering has saddled you with …

You know who to thank.

The moral of the story:
If you trust Washington to save you; you’re screwed.

If this crisis proves anything, it’s that these people don’t give a good goldarn about you. You’re not rich enough to bail out or poor enough to be given a hand-out.

So you, my friend, are on your own.

There are certain things you can do to protect yourself, though. And with this crisis unraveling at a breakneck pace, there’s no time to waste.

Here’s a checklist I hope will come in handy …

1. Rake in every dollar you can. First and foremost, it is absolutely critical that you do everything in your power to increase your income while you still can. Pull out all the stops in your business. If you work for someone else, work overtime or even multiple jobs if you have to. Sell stuff you don’t need or don’t use. Scrape together all the dollars you can.

2. Save every dollar you can. Guard every one of them like a junkyard dog. You’re going to need them. Go through your family budget with a fine-toothed comb and ruthlessly, unapologetically slash every unnecessary expense. The more you save now, the more you’ll have to see you through when the ca-ca hits the air conditioner.

You might also want to check with a financial advisor to explore ways to cut every payment you have to the bone. Because when the trillions of counterfeit paper dollars Washington’s now creating out of thin air begin working their way through the economy, you’ll probably be able to repay every debt you owe with dollars that are worth a fraction of what they’re worth today.

Also — whether you realize it or not, your single largest monthly expense is NOT your mortgage or your car or your health insurance or anything else. Your largest financial burden by far is the government — the federal, state and local taxes you pay dwarf every other expense you have.

So seeing a qualified tax advisor about ways to make absolutely sure you’re paying the absolute minimum required by law would be a stellar idea. Be sure not to forget your property taxes. If your home is declining in value, you may be able to appeal for a downward adjustment that could save you thousands.

3. Watch your bank accounts like a hawk. Whatever you do, do NOT assume that your bank is safe just because this most recent bail-out proposal is likely to become law.

Most banks have already suffered massive losses. Many are wounded; bleeding; struggling to survive. And many still have huge amounts of toxic loans in their portfolios that are steadily eroding their asset bases even further.

The bail-out is NOT going to replace the money they originally paid to buy those investments — and that means they’ll be booking even more losses as they dump those investments into the U.S. Treasury in the months ahead.

If you have more than $100,000 in a bank, make absolutely sure that no single account at any one bank contains even a single dollar more than the limit that’s insured by the FDIC. If you’re not clear on the rules, check out the FDIC website at WWW.FDIC.GOV

4. Program your business for success in this tough environment. If you are starting a business or are considering expanding your business’ product line, carefully consider this new economic environment when setting your strategy.

Think especially hard about recession-proof products and services — the things people can’t live without. Seriously consider products and services that cater to the very wealthy who are likely to be least affected as this crisis unfolds. Also consider things that might help beleaguered wage-earners, consumers, taxpayers, and other business owners get through this alive.

5. Expect stocks and mutual funds to plunge. If you own stocks — either directly, in a mutual fund or ETF or through a retirement or pension plan — you should seriously consider the risk you’re taking with that money.

Some analysts, including the ones who have been the most accurate in their warnings about this crisis from the get-go, are warning that, with the economy and stock market now as nervous as a hooker at a snake-handler convention, the next chunk of bad news that hits the wires could be the straw that breaks the market’s back.

And please — for all our sakes:
HELP US GET THE WORD OUT!

Send this article — in its entirety — to everyone you know. Post it or link to it on every blog, every forum you can think of. Send more links to everyone on your Contacts List and to reporters at the newspapers you read and the TV networks you watch.

Write letters to both of your Senators and Congressperson and urge everyone you know to do the same.

Demand that they repeal the Community Reinvestment Act that caused this crisis (yes, it’s still on the books and still being enforced!).

Tell them you know what they did to cause this crisis.

Demand that criminals in Congress who actually DID cause this crisis suffer at least as distressing a fate as the corporate CEOs they’re scapegoating.

The sooner Washington gets the message that we’re on to them and that we’re not going to take it any more, the sooner things can begin to change.

This is YOUR financial future we’re talking about here. If Washington’s power brokers have proven anything, it’s that they can NOT be trusted to do the right thing until millions of us rise as one and shout “Enough!”

Yours for Bigger Winners, More Often,

Clayton Makepeace
Publisher & Editor
THE TOTAL PACKAGE™