Bob Williams

“For great powers never go into receivership. However dreadful a financial situation they may get into, there generally will always be moneymen lurking in the wings prepared to set them on their feet—at a price.” (Citizens: A Chronicle of the French Revolution, 1989)

These days, those moneymen propping up U.S. government finances are from Saudi Arabia, Qatar and China. We are on the verge of becoming pre-revolutionary France, and in my opinion, our nation’s sovereignty is at stake.

We did it to ourselves. We elected the people who created the financial environment that led to the greedy excesses culminating in the mortgage crisis that threatens to bring down our entire financial system. And we keep re-electing them. We need to take a long look into the mirror.

The problem is not a failure of the free market. The problems are government regulations and government intervention. We would not be in this financial crisis today if it weren’t for bad public policy and poor Congressional oversight. For example:

Extreme pressure from the government forced lenders to loan money to people who formerly wouldn’t have qualified for loans. Congressional Democrats and former President Bill Clinton argued for the loosening of previous sound underwriting standards so that high risk loans were made in low income neighborhoods.

Artificially low interest rates that enabled the mortgage-backed security market to grow rapidly.

Easy credit and “no money down” loans resulting in housing demands exceeding housing supply which, in turn, resulted in housing prices soaring FAR above true market value.

Of course, Wall Street is also to blame. Too many firms that are distressed, defunct or have been taken over by the government were all too willing to buy bundled mortgage-backed securities of dubious value. For a while, they made money. Then reality hit.

Reality has a way of doing that. The housing bubble burst. Home values plummeted and mortgage backed securities became nooses around the necks of those that held them. Financial liquidity dried up to such an extent that banks wouldn’t lend to other banks—even overnight. The stock market plummeted and consumers stopped spending.

We can trace this back to the 1977 passage of the Community Reinvestment Act (CRA) under President Jimmy Carter. The idea was to promote “affordable housing” so that all Americans could achieve the American dream of home ownership. Political correctness in lending practices became the law of the land and grew over the years until the mid-1990s when it became a cancer.

In 1991, the government began to require lenders to report loan rejection rates by race. The intent was to prevent unlawful discrimination—a noble goal—but the intent ended up being used unethically as a heavy hammer of fear. Lenders were put on notice that their lending practices would be scrutinized for evidence of bias with violators facing the possibility of fines as high as $500,000. Unfair allegations of “bias” became a tool of intimidation, thus frustrating the good intentions.

The CRA was expanded in 1995 to include the securitization of sub-prime mortgage loans. Securitization combines a large number of loans into a security that can be sold on the market. The idea was that while some loans would default, most would not, so securities would spread the risk and make it safe to hold portfolios of sub-prime loans. That opened the floodgates of mortgage lending to unqualified buyers

Originating mortgage lenders had little incentive to consider high risk because they held the mortgages for such a short time before they were securitized.

The home ownership dream had been turned into an investment gimmick.

But the crusher was that Congress also pressured Fannie Mae and Freddie Mac, quasi-public, quasi-private institutions, to buy risky loans from other financial institutions. That gave those loans federal guarantees and, with the reduction in financial reserves required of them (2.5 percent as opposed to 10% required of other financial institutions), left both Fannie and Freddie vulnerable to a housing downturn.

In 1999, Fannie Mae eased credit to aid mortgage lending. By doing so, it further encouraged banks to extend home mortgages to individuals whose credit was generally not good enough to qualify for conventional loans.

Then the Federal Accounting Standards Board issued Statement 157 on November 15, 2007. It was a new accounting rule for all companies forcing them to show on their balance sheets the value of its assets at current market prices; in other words, what they could get on the market if their assets were sold then and there. This so-called “mark to market” valuation rule meant that holders of mortgage securities, which still had some underlying value, had to value their securities near $0.

Why $0? Because there were no more buyers. There was no market. If, however, the banks had been allowed to value those assets at closer to book values, their balance sheets would have improved, affecting the banks’ capital reserve requirements and keeping the credit markets fluid. Fannie and Freddie were hammered by the accounting rule change.

So who oversees Fannie and Freddie? Congress. This might be the greatest dereliction of duty by the United States Congress in the history of America. And you and I will get stuck with the bill.

Tom Friedman, the distinguished Pulitzer Prize winning columnist at the New York Times, put it pretty well on October 1: “I’ve always believed that America’s government was a unique political system—one designed by geniuses so that it could be run by idiots. I was wrong. No system can be smart enough to survive this level of incompetence and recklessness by the people charged to run it.”

In what they claim is meant to help fix this mess, Congress passed a bailout bill. The $700 billion (and a whole lot more) has more than one problem. It was larded up with all kinds of special interest spending, courtesy of you and me as taxpayers. But there is more.

As Sen. Jim DeMint (R-SC) said on the Senate floor during debate on the on the bill, “Years of wasteful spending and bad policies have resulted in a huge national debt of nearly $10 trillion. Much of this debt is held by China and Saudi Arabia and other foreign countries that some now say are dictating our financial policies.”

The moneymen coming to the rescue are not always our friends.

Senator DeMint continued: “We are telling the American people to hand over $700 billion or the world economy is going to collapse. This is why people are so upset. It is because Congress is being dishonest and arrogant. We are not being honest with them about how we got into this mess, and we are not being honest with them about what we need to get out of it.”

You are so right, Sen. DeMint.