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Capitalizing On Capitalism

Recognize that capitalism is under assault from within our own country. There is little need to cloud the waters with nuance. The Obama campaign is busy ascribing the current economic crisis as a failure of government, the current government specifically. And the implication is that the answer is... government, a government led by an Obama administration, specifically. He is, of course, half right.

To understand why, we need to look at why so many sub-prime interest mortgage loans were made, and then why so many failed. And you will see that government was indeed a huge contributor to the problem as it implemented policies that Obama may very well have supported. This is by no means a hyper-technical analysis. But it doesn't need to be in order for your mother, your neighbor and your friends to 'get it.'

Today's news of failures and impending failures on Wall Street are commonly and consistently linked to sub-prime mortgage loans gone bad. The genesis for these loans came from government demands that mortgage companies extend a certain percentage of their loans to mathematically under-qualified home buyers in the spirit of extending the American dream to more Americans. If the mortgage companies did not comply, they would either be penalized or not be extended certain relief.

Government got involved.

Not a charity, mortgage lenders could only extend mortgages to buyers lacking sufficient income to maintain payments by dropping the initial years' rates, and then raising them later - the concept of an ARM (Adjustable Rate Mortgage). When the rates went up over time, the under-qualified buyers could often no longer maintain what had once been a manageable monthly payment.

Couple that eventual reality with national and localized economies that struggled resulting in some with lost jobs and/or reduced income, and loans began to go into default. With so many risky loans out, there were also a great number of defaults: Mortgage companies who had laid out hundreds of thousands of dollars in exchange for a long stream of monthly payments that simply stopped.

Get enough of those, and mortgage companies begin to go under, with expenses continuing apace but income from agreed-to payments decreasing exponentially. Enough of that going on, and companies who own or are largely invested in those mortgage lending companies, and they begin to go under. Investment firms, banks and the like. It's a trickle-up collapse.

And why? Largely because the federal government mandated socialist policies on a purely capitalistic economic system.

In this governmentally-forced merger of oil and water, we continue to transfer what cash wealth we have abroad for energy at historic prices. No part of the answer to this siphoning, according to those who seek to transform the American economy into a socialized government managed charity, is producing more of our own energy, wherever it lays or in whatever form. No part of the answer is in producing more for ourselves what we are paying far away states unimaginable sums for every day.

We continue to allow stupid policy after stupid policy to wreak havoc on our economy in the name of extending the American dream, saving polar bears and turning back the rising tides. We continue to allow the world's largest, most productive economy ever to be bled dry in a death by a thousand cuts. Our waters and our snowcapped ranges, you see, are not ours. They belong to the fish and the polar bear.

Obama is half right: Government is largely the cause of the current economic crisis. But more of that same government is not the answer, no matter which administration staffs the White House. You are. We are. Our entire economic system may hang in the balance of our electoral decisions this fall. And there are no do-overs.

NOTE: I failed to directly and overtly express the entire point of this post, which is to say that we cannot increase 'access' to the American dream by lowering the bar without risking the entire economic system any more than we can increase access to Olympic dream by handing out two gold medals and a silver instead. But, unlike the Olympic system, our economic system is not a zero-sum game, with a predetermined number of winners and scales.

Instead of lowering the bar, we should be raising the level of the American citizen - or more correctly, assisting them in raising themselves. This is done through education, training and the championing of entrepreneurship - effectively increasing the level of productivity and the resultant economic gain the individual realizes through that.


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Comments (18)

I'm confused, are the funda... (Below threshold)
Dave:

I'm confused, are the fundamentals of our economy strong or is our economy in crisis?

Dave - depends on what you ... (Below threshold)

Dave - depends on what you consider the "fundamentals" to be.

Good job Steve!... (Below threshold)
Larry:


Good job Steve!

Loans to under qualified applicants started the trend toward mortgage lenders and upstream bulk mortgage brokers looking at the cash flow stream and initial profits from handling those types of loans.

They then got greedy and began offering those same loans to more and more people while creating many different types of loan products, all calculated to line their pockets and to hell with tomorrow. "It is too good to be true by there anyway," caused many people who should have known better to sign up for more monthly payment than they could manage.

Tomorrow has arrived.

Those we elect to keep watch over such happenings and trends were well fed by lobbyists for Fannie and Freddie so they were asleep at the switch. Bush has frankly not done the greatest job domestically.

I guess the most fundamenta... (Below threshold)
Dave:

I guess the most fundamental aspect of our economy is our banking system.

Three things to consider:</... (Below threshold)
Mike:

Three things to consider:

1) In spite of the myth that Herbert Hoover "did nothing" to stop the Depression, the Hoover administration in fact employed a number of heavy-handed government tactics designed to prevent the 1929-1930 recession from becoming a depression. They all failed spectacularly. Chief among the failed Hoover policies was a massive income tax rate increase -- the same policy that Democrats have been salivating over for the past two years, and that Barack Obama has promised to implement as soon as he is sworn in.

2) From the WSJ, November 2006:

Operating in at least 38 states (as well as Canada and Mexico), Acorn pushes a highly partisan agenda, and its organizers are best understood as shock troops for the AFL-CIO and even the Democratic Party. As part of the Fannie Mae reform bill, House Democrats pushed an "affordable housing trust fund" designed to use Fannie Mae and Freddie Mac profits to subsidize Acorn, among other groups. A version of this trust fund actually passed the Republican House and will surely be on the agenda again next year.

That's right -- the same ACORN that has been directly involved with some of the nation's worst voter registration fraud also acted as an advocate for low income housing applicants, pressuring financial institutions into offering mortgages to low income families with threats of racial discrimination lawsuits and other strong-arm tactics. And ACORN even got funding from Fannie Mae and Freddie Mac in order to be able to do this. Barack Obama has intimate ties to ACORN.

3) Guess what former disgraced Fannie Mae CEO Franklin Raines -- fired for cooking the books at Fannie Mae in order to hide billions of dollars in losses -- is doing now? He's a senior economic advisor for Barack Obama. Also, Jim Johnson, Fannie Mae's CEO prior to Raines' tenure, was on the team tasked with vetting potential Obama running mates -- until it was revealed that Johnson received a sweetheart mortgage deal from Countrywide. He was summarily thrown under the Obama bus.

Obama can blame McCain and the Republicans all he wants to for the current banking/mortgage mess, but does he really offer "change"? I seriously doubt it.

... Mortgage compa... (Below threshold)
Mac Lorry:
... Mortgage companies who had laid out hundreds of thousands of dollars in exchange for a long stream of monthly payments that simply stopped.

Get enough of those, and mortgage companies begin to go under, with expenses continuing apace but income from agreed-to payments decreasing exponentially.

Mortgages are secured by the property, so in a normal market, mortgage holders recover most or all of the loan when they foreclose on the property. The widespread nature of the problem caused a tightening of credit so that even otherwise qualified borrowers couldn't get mortgage loans, which reduced the number of buyers even more. As demand decreased the value of the property that secured many mortgages went below the mortgage amount. Thus was born the upside-down mortgage.

Consumers quickly figured out that they could purchase these devalued properties as second homes. Then move in and default on their own upside-down mortgage saving themselves hundreds of thousands in exchange for 7 years bad credit.

And there's a lot more contributing to the mess including the fact that many 401k and pension plans have some mortgage holdings. It's not just the fat cats on wall street who will pay for this mess.

. . . And mortgage b... (Below threshold)
Larry:


. . . And mortgage brokers offered 125% of home value as loans so consumers could pay off credit cards, go on vacation, college expenese, etc.

Good points all and all val... (Below threshold)
Steve Schippert:

Good points all and all valid.

For what it's worth, my take in this was from a strictly governmental approach and the folly of posing it as the solution, explicitly or implied.

No doubt, there was enough 'fuzzy math' on the calculators of idiots in the lending process to sink a battleship.

No doubt, there were a lot of borrowers looking to do stupid things suddenly available: such as the upside-down mortgage, or the dumbest thing of all: Signing an ARM when interest rates are at record lows, and buying so much that the first - and lowest - point of the arm is at the fringe of their budget already. Saw some of the idiots myself, and shook my head while I took a flat rate at record lows.

All contributing factors.

Government is NOT the solution.

dave - "I'm confused"</... (Below threshold)
marc:

dave - "I'm confused"

Eureka! dave has had an epiphany!

Now the question is what will he do about it?

I suspect the same thing he does in almost every comment here. Push is aside and continue on down the wrong path.

This sounds so much to me l... (Below threshold)
Grace:

This sounds so much to me like a pyramid scheme which finally collapses under it's own weight. A few win big, a few win small, many lose badly.
I am satisfied that the government has finally gotten some backbone and will not bail out these institutions. Though some people are losing the house they live in, many more are losing investment properties and many many seem to be losing the properties and the goods they bought on credit because credit was too easy.
If grownups do not realize that you cannot get something for nothing, it is a time for them to get that hard education.

On the bright side, I just ... (Below threshold)

On the bright side, I just bought a condo last month for half the assessed value. (Do I sound like Hooson yet?)

This is also an education i... (Below threshold)
Robin:

This is also an education issue. The basic understanding of home economics should start with the economics of home mortgages, credit dept and interest, family budgets, etc. This should be started by tenth grade and by the senior year they should have a thorough understanding of investment strategies covering everything from real-estate, small business start up, and long term retirement plans.

How many students sign for collage loans and car loans and never really understand the financial details beyond the monthly payment.

In school, we covered the basic formula I=prt, but were never made to realize the applications in real life.

I know many collage students who do not even have checking accounts and couldn't write a check if they had too. It was this way before debit cards were common. The students' parents are paying the bills and the spending allowance goes on a card.

Economics 101 never happened past using short term memory to pass a test, and all is forgotten the next day.

People are learning economics at the school of hard knocks.

We can not a ford for them to learn the difference between capitalism and socialism the same way!

I don't claim to be well educated in economics myself, but I have only obtained my own hard knocks degree. I do though; have the basic understanding of capitalism and socialism. Enough to know that were are sliding into socialism. Actually, sliding is not the right word. It sounds too much like a result of carelessness. I think it is a well thought out plan by people seeking power.

It is a lot easier to gain and maintain power over a poorly educated society. Convincing those people that they are underprivileged and that capitalism and the rich are their enemies is a primary step.

There are a bunch of self-important people out there who think they can direct the lives of the masses better than the individuals can direct their own lives, and they are all too happy to help them. Unfortunately, for much of the masses it is true. They don't even care about the issues, because they can't understand them. They will base their vote on the charisma of the candidate and the promise they make, whether those promises can be are realistically achieved or not.

Is this a conspiracy? I won't try to answer that. I do know that there have been enough books written, and enough history behind the human race, to know there is no excuse for this to be happening haphazardly.

Public education is the handiest tool in the shed of dummying down and influencing the future generation. The people are indoctrinated before they are ever old enough to vote. The freedom to go to the poles and make your individual choice is an allusion for many. That choice was made for them by those who gave them the information that they use to form their opinions. We all know the media plays a part in this too.

Thank God for the WWW. This age of oceans worth of instant information has it's draw backs, but it also has the power to free the mind. (Which is of course why see it being restricted in some communist countries.)

This is also why those in control at the NEA are so against homeschooling and vouchers. ("Every child deserves the right to a public education.") Give me a break.

When I read that McCain was for education vouchers, I knew he was the one to vote for. I personally can afford alternative education for my children, and use it. So this is a personal thing.

I want every parent to be able to send their children to the school of their choice. It will free the minds of the coming generation from the powers that be, and save the tax payers money too. Freedom of mind is our most important freedom. Without it, all the other freedoms are allusions.

Well enough rambling...

If you think this is a fina... (Below threshold)
John S:

If you think this is a financial disaster (and it is) wait until Obama's Marxist medicine is applied. A thousand bank failures is possible and the FDIC already is broke. In order to prevent millions from losing their life savings and retirement, the governmnt will have to print trillions of dollars. Holy hyperinflation!

Robin, I couldn't have said... (Below threshold)
Grace:

Robin, I couldn't have said it better myself. My education was, fortunately, better than most, IMHO, and I had many teachers who used math as a practical application to real life situations. I, too, learned with hard knocks, but they were small in comparison to many in this present mortgage situation.

A personal aside. My son has just purchased a home. Before that he moved three times and in every case but the last, they were improvements. This last time was more of a lateral move and with moving costs, painting, fixing up, etc. actually was a net loss. He bemoaned the fact and I told him sometimes you go to school, pay tuition, fees, buy books and learn. He made a poor decision, it cost him money and he learned.

Hopefully, those caught in this current situation will learn.

Thegovernment bullied the f... (Below threshold)
Thomas Jackson:

Thegovernment bullied the financial sector into lending to the uncredit worthy through the Community Redevelopment Act. It essentially forced banks to lend to those who didn't meet standard credit measures or be subject to government "scrutiny" (aka "you have a nice business there kid and you wouldn't want anything to happen to it.)

So the government forced loans to people with no documentation, no income, zero, nada, zilch.

We hear about reckless lending but who in his right mind lends 700,000to a cleaning lady and her laborer husband (both illegals) as detailed in the WSJ some months ago? Only if some government little birdie told you don't worry the government will make good on bad loans. How else can one explain it.


Can this be demonstrated. Sure. Look at the payrolls of Freddie Mac and Fannie May. They are filled with ex Congressmen, the idiot sons of Congressmen, the unemployable spouses and alcoholic relatives, and cast off mistresses of these knaves. Worse both groups filled the campaign coffers of politicians. No wonder there are no investigations or criminal charges being filled. Corruption doesn't know party lines. But the dhimmie rats created this mess just as they did 20 years ago with the S&Ls. The antics then have not changed.

Only this time we have seen a craven president cave in instead of letting the chips fall where they may and saving the ill gotten gains of politicians and their cronies at the expense of the taxpayer.


While the figure of 200 billion is floated the true cost will be closer to 2 trillion or ten times cost, or probably more than the Iraq war. Why because it isn't just bad mortgages, it was lending to people who used their homes as ATMs, to finance new cars, vacations, furnishings and the like because our politicians were buying votes.

Like Barnuam said "there's a sucker born every minute." Only it usually happens to be a taxpayer. The chief architect of all this disaster is Andrew Cuomo who allowed these agencies to underwrite subprime mortgages.

So we will see inflation as the government seeks to monterize the debt rather than deal with it, with the consequent economic stagflation, just like Jimmy Carter.


And idiot Obama would give us more of the same by increasing spending and taxes. Anybody know the definition of insanity? Why don't the dhimmies ever learn?

"Why don't the dhimmi... (Below threshold)

"Why don't the dhimmies ever learn?"

They look at the failures of the past and go "This time - THIS time - we'll get it right!"

And if they don't, it'll aways be someone else's fault.

'iresponsible risk taking w... (Below threshold)
Steve Crickmore:

'iresponsible risk taking with cheap money'..sounds like a pretty upshot of Wall Street`s performance of the last ten years.

But I don't think socialism and capitalism is as distinct as our host Steve Schippert
makes out. The investment bank tycoons who have ultimately failed, but who all greedily profited were all `capitalists` who believed in cheap money but also with a large corporate welfare safety net, provided by the government, the lowly taxpayer to bail them out.

The tycoon executive credo like many of their class was to privatize the profits and socialize the losses (that`s you and I)...except that as John Authers says the decade of moral hazard is now over.

"But I don't think socia... (Below threshold)

"But I don't think socialism and capitalism is as distinct as our host Steve Schippert makes out."
...

"...'capitalists' who believed in cheap money but also with a large corporate welfare safety net, provided by the government, the lowly taxpayer to bail them out."

It's quite distinct, else why would you put capitalists in quotes? Capitalism implies personal responsibility for success or failure. Socialism implies indiscriminate group responsibility. Once they threw in the taxpayer safety net and excluded them from the same rules others had to play by, it was no longer a capitalistic endeavor.

Capitalism and socialism don't mix in the same pot. Mr. Schippert stated this correctly. You can't pretend it was a little of both, and then blame one for the failure.

That there are a number of government officials who also benefited financially from this agreement and are now permitted to determine its outcome is, in my opinion, seriously messed up.

Many of these people who are in foreclosure by acting irresponsibly are no better for the lesson. They have no idea how complex the situation is, who was involved and why it happened. They still think it was simply result of evil capitalists (they've been told over and over for years that whatever it is, it's not their fault) that illegally subverted government oversight and exploited them and they're now walking away with the impression that government is good for helping out.

I know one of these people.




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