Tuesday, October 7, 2008

Government, The problem or The Solution?

Ronald Reagen was elected because of a phrase "Government is the problem, not the solution". I believe that this is mostly the case. While the Government is the solution in some cases, Since the 1930s, our federal gov't has become more the problem and less the solution.

Is deregulation really the problem? Lets explore the issue. Our economy is like a human body. Money is the blood and banks are like a bunch of hearts pumping money in and out of the system. A significant amount of money banks take in comes from Securities founded on Mortgages. Banks leverage securities up to 40 times. For every security valued at $1 million they can loan up to $40 million dollars. This keeps the blood moving. Of course, 40 times is crazy. So if 5% of that $1 million is bad, then they should not have loaned out $1,000,000 *.05 * 40 = $2,000,000. Even though the security's value should only be reduced to $950,000, the money they have outstanding that shouldn't be out there is $2,000,000. And then other banks used that $2,000,000 to also create loans. House of cards!!

The 5% number comes from the Governments estimation to the loans in play in securities that they expect to fail. The $700 billion number for the bailout is 5% of the $12 trillion dollar mortgage market.

Where do these securities come from? Fannie Mae and Freddie Mac. They were created to help loan company's have more liquidity so that more people who couldn't afford houses at that time, afford houses. So Fannie Mae buys up loans from loan company's and creates securities which other companies buy because mortgages are usually a very safe bet. The security's value is based on how much the market will pay for it. So it's value is not based on it's actual value just on it's perceived value. When the sub prime mess became public knowledge these securities perceived value went down far lower than 5%.

How did fannie mae come to exist and how does it do it's job --- Government Regulation dedicated to helping people get houses that couldn't afford it.

Fannie Mae was founded as a government agency in 1938 as part of Franklin Delano
's New Deal to provide liquidity to the mortgage market. For the next thirty years, Fannie Mae held a virtual monopoly on the secondary mortgage market in the United States. In 1968, to remove the activity of Fannie Mae from the annual balance sheet of the federal budget, it was converted into a private corporation.[6] Fannie Mae ceased to be the guarantor of government-issued mortgages, and that
responsibility was transferred to the new Government National Mortgage Association (Ginnie Mae). In 1995, Fannie Mae began receiving affordable housing credit for buying subprime securities. In 1999, the Clinton administration and Fannie Mae shareholders encouraged the lender to increase the number of mortgage loans offered to those of low and moderate income, both to improve rates of home ownership among those groups and to increase profits.[7]
In 2000, due to a re-assessment of the housing market by HUD, anti-predatory lending rules were put into place that disallowed risky, high-cost loans from being credited toward affordable housing goals. In 2004, these rules were dropped and high-risk loans were again counted toward affordable housing goals.[8]

Fannie Mae and Freddie Mac gave money to many people in Congress. The person who received the second most money is Barack Obama.

So how did we get all these bad loans into securities. There were a lot of reasons but one of them was Government interference. First we have the 1977 Community Reinvestment Act. This act was passed under Jimmy Carter and it said, if you are bank that receives deposits from low income areas, you must also provide housing loans to low income areas. This was the Government telling people who they could make loans to. Now this act is 31 years old and not enough to have created the amount of poison we have in our blood stream. Now we have a set of "Community Organizers" in organizations like ACORN. This is a Federally funded organization that uses the Community Reinvestment Act to intimidate banks along with other intimidation factors to force banks to give more loans to people who normally couldn't get it. There was an attempt in Congress to give money to ACORN in the recent bailout bill. Barack Obama was a Community Organizer for ACORN. ACORN has also been linked to a fair amount of voter fraud.

So is Gov't the problem or the solution? It's is certainly a contributor to the problem. Do we need more Gov't to solve a problem that they helped create? I don't think so!

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