Fixing the Financial Crisis Without Socializing the Market

A giveaway of hundreds of billions of dollars is not only bad policy, it is not necessary!  Unfortunately, the Democrats have successfully brainwashed the public into believing that the problem was caused by deregulation, when in fact it was caused by Democrat inspired rules and regulations which set up a house of cards in our economy.

 

When it became apparent that this house of cards was getting large, and wobbly, those who raised the warning flag (Republicans) were shot down by defenders of the system (Democrats).  See:  http://www.youtube.com/watch?v=fa0agm7lIPQ  There you’ll see video of the 2004 Fannie/Freddie hearings.  You’ll see who tried to forestall the collapse, and who denied there was a problem.  Who questioned the management of Fannie & Freddie, and who declared the raising of the question to be a “lynching” of Franklin Raines, and who praised Raines management at the helm.

 

Despite the minimal likelihood that the fix outlined below would stand a chance of being implemented, given our current political environment, I will outline a plan that WOULD work in the hopes that SOME of these proposals might be incorporated into any plan that makes its way thru congress.

 

• NO taxpayer giveaway of hundred of billions of dollars and don’t put it in the hands of Paulson and Bernanke!
• Provide assistance in the form of LOANS and INSURANCE.  The government does not need to take OWNERSHIP of private institutions like AIG!  Do NOT SOCIALIZE our markets.
• Prohibit all naked market trading.  If you want to trade it… OWN it!
• ELIMINATE the “Mark to Market” rule – which artificially pulls capital off the books of financial institutions and is a contributing factor to the crisis.  This rule requires securities to be recorded on the books at the lowest value it might be sold for in a panic firesale – even zero - rather than their ACTUAL value.  This results in under-capitalization even when REAL assets are adequate!
• REPEAL the Community Redevelopment Act, and dismantle or downsize Fannie Mae & Freddie Mac
  • Well intentioned, the act sought to end the practice of “redlining” where certain neighborhoods were deemed unsuitable risks for mortgage loans.  While the purpose to put homeownership within the reach of more lower income people is laudable… the execution was poor.
  • As Fannie Mae and Freddie Mac grew under Clinton, and the “Affordable Housing” mandates forced the lowering of lending standards to allow more and more people to “qualify”, the “sub prime” market ballooned.  Variable rate loans with low intro rates to get people INTO homes were the norm for these “sub prime” loans.   But adjustable rates WILL adjust, and if artificially low at inception, the direction of that inevitable  adjustment is most assuredly upward.  Lenders and borrowers alike completely ignored the factor of affordability AFTER an upward adjustment in the interest rate!
  • Lending institutions were COMPELLED by federal regulators to write more and more of these sub-prime loans.  They had target numbers of low-income homes they had to finance or face penalties and further regulation.  So qualification requirements were further relaxed, and more “creative” financing options emerged.  No money down; Interest Only financing; Negative Amortization loans.  Anyone who was paying attention at the time was asking, “How the heck can that work??
  • Mortgage brokers ORIGINATED loans, with no intention of CARRYING the loan thru amortization!  They wrote the paper to sell it to a larger entity – who was happy to buy them up, as they were securitized by the GSEs (Government Secured Entities) such as Fannie and Freddie.  Fannie & Freddie grew and grew, securitizing ultimately 80% of all mortgages – meaning they held just about ALL the bad paper!  A house of cards DOOMED to fall!
• Institute a moratorium on Capital Gains taxes… allow businesses to put their OWN money to work to climb out of the crisis.
• Make the Bush Tax Cuts permanent.  More money in the hands of consumers will stimulate the economy.  Raising taxes in a period of economic downturn is suicidal.
• PULL DOWN the tax DISincentives to repatriating overseas operations back home in the USA.
  • There are no tax INCENTIVES (existing or proposed) to move job overseas, Obama ads notwithstanding.  There are, however tax BARRIERS to bringing overseas operations BACK HOME.
  • A company with offshore operations pays the taxes in that country.  If those taxes are lower than US taxes… the difference is owed to the USA.  BUT as long as they REMAIN overseas, they defer that debt.  An incentive to STAY overseas.
  • Upon repatriating those operations, a company would owe ALL the difference in tax.  A company will not have to pay that for as long as they REMAIN overseas.
  • A moratorium on collecting the deferred tax difference for companies repatriating operations back home would stimulate the economy by creating domestic jobs and returning industry to our shores.
• ENFORCE our borders and our immigration laws.  Illegal immigration is a huge drain upon our nation’s resources.
• Return to the gold standard.  Set the dollar at 1/500 of an ounce of gold and back our dollar with more than a promise to pay.  Stabilize the dollar's value abroad and eliminate short selling of our currency.
• Eliminate the Federal Reserve.  A PRIVATE CORPORATION which creates currency out of nothing, and LENDS it to the government at interest!  The CONGRESS is constitutionally empowered to coin money… not the FED.
• REPEAL Sarbanes-Oxley.  Another well-intentioned but poorly executed regulation crafted in the wake of Enron/Worldcom.  (Which are small potatoes scandals when laid next to Fannie/Freddie!!)  SARBOX compliance has placed an undue burden upon “play by the rules” companies, but has done little to curtail the abuses by those who have purposed to “cook the books”.

Of course, too many have too much vested interest in NOT implementing the above for it all come about, though if it did our economy would BOOM!

 

On the other hand, if SOME or ANY of the above can be incorporated into any next attempt at a rescue bill… we may achieve a bill that will stop the bleeding and restore confidence in our markets.

 

 

Copyright © 2008 by

Doug Edelman

 

Doug Edelman is a conservative political commentator and has been a contributing editor for The Conservative Voice.  His work is also seen on News By Us, The American Daily, The Post Chronicle, New Media Journal, Capitol Hill Coffee House etc. For the support of his family, however, he is also an IT Consultant/Contractor and owner of a Computer Services Business.  He has taught PC Maintenance & Repair and Networking at his local Community College.