Economic Stimulus / Mortgage Meltdown
A Glossary:
Alt-A: An Alt-A mortgage is a type of U.S. mortgage “product” that, for various reasons, is considered riskier than "prime", and less risky than subprime, the riskiest category. Alt-A interest rates are determined by credit risk. But Alt-A mortgages are given despite questionable borrower income and asset documentation (for example, "stated income", "stated assets", "no income verification"). In other words, rather than deny the loan, the loan “originator” issues ARMs with crushing “resets” and “bundles” these risky mortgages into a bond which is sold to investors around the world
When the housing bubble burst, many of these risky mortgages defaulted and became “toxic assets” on the balance sheets of banks, around the world. These “assets” threatened to make the banks insolvent. Banks with toxic assets on their balance sheets can’t make loans because their “reserves” have vanished. How can money disappear? It can disappear because it never existed. Now, the plan to “fix” this global disaster is for the Federal Reserve to borrow trillions of dollars from the Chinese to replace this money that never existed. And, the American taxpayer gets to pay back the money owed to the Chinese.
This is the best idea that our economic professionals can come up with. A much better solution is proposed on this web site.
The Business Cycle: We are told that the current global financial crisis is just a particularly severe example (like The Great Depression) of the “business cycle.” It might surprise many people to learn that some scholars believe that this mythical business cycle is caused by actions that can be prevented with proper government action. For example, it is a well known fact that The Great Depression, like most financial “panics,” was caused by an artificially inflated market bubble and money supply contraction. These are two problems that can be easily prevented with proper government action.
But the idea that a business cycle is a “normal” periodic economic occurrence raises important ethical and moral questions. It has been reported that many people knew the current crisis was coming. But nobody took action to stop it. People profited as the housing bubble inflated and people positioned themselves to profit from the aftermath of the crash. Billions of dollars of private capital are “sitting on the sidelines” waiting for the American taxpayer to borrow enough money to “recapitalize” the financial system and “revive investor confidence.” The collapse of the housing market has caused enormous economic hardship and the cost ultimately falls on the taxpayer. What are the moral and ethical implications of the business cycle?
Capitalist Economic Model: This is our current economic system. Under this system, virtually all economic activity functions on borrowed money. Our free market, deregulated economy permitted and encouraged massive amounts of debt – $51 trillion of debt in a $14 trillion economy. Now that the housing bubble has burst, it appears that the American people are unable to service this debt. This crisis perfectly illustrates why loaning money for interest, usury, is condemned by both the Old and New Testaments of the Bible. Ironically, loaning money for interest was sanctified by a famous televangelist when he coined the term “Christian Capitalism.”
Now that a huge percentage of our money supply has disappeared (because it never existed), we are told “Keynesian Socialism” is the solution to problem of vanished money. This solution involves borrowing trillions of dollars from the Chinese and dumping that money into the economy – a very bad idea. The actions of Abraham Lincoln in 1862 and the U.S. Constitution provide a much better solution to the problem. This is the solution proposed on this web site.
Former Federal Reserve Chairman Alan Greenspan, “The Maestro,” told Congress that home equity loans were a desirable and legitimate economic stimulus. He said this borrowed money, based on the inflated value of the house, was a part of our money supply. He made this statement when the primary driver of the American economy was the housing bubble. People wonder where all the money went that the taxpayers have to replace. It disappeared when housing prices collapsed. But Greenspan did admit that he made a “mistake.” I feel much better.
But that begs the question: why should we the taxpayers replace money that never existed?
China’s “Dollar Diplomacy”: Thanks to American retailers, particularly Wall – Mart, so-called “Communist” China has become a global economic and military powerhouse. Before discussing the China threat, we must recognize an important fact – China is not a communist country. China is a totalitarian capitalist country. It’s an investors paradise. Ever since Henry Kissinger “opened up China” in the early 1970s, foreign capital, manufacturing expertise and technology has been pouring into China. This is exactly what happened with Japan beginning in 1853 when an American naval fleet “opened up Japan.” That self-serving Western influence created the Imperial Japanese monster that attacked us at Pearl Harbor.
Is there a history lesson to be learned here? Our politicians have sold enough U.S. Government debt to the Chinese capitalists that they can wreck our debt based currency any time they want. The free marketeers say that China would never do that because that would be killing the silly goose that laid all those golden interest eggs. This is true as long as we stay out of their way and let them play us for suckers.
Community Reinvestment Act (CRA): This is the favorite “explanation” of conservative commentators for the mortgage meltdown and the global financial crisis. This faulty logic goes something like this: Powerful do-gooder government bureaucrats forced the hapless bankers to give mortgages to poor people who couldn’t afford make the payments. Despite the fact that this cruel and viscous myth has been totally discredited, the talk show hosts and conservative pundits repeat it over and over and over. The following is typical of the rebuttals that are all over the Internet:
For one thing, the timeline is ludicrous. The Community Reinvestment Act was passed in 1977. Are we supposed to believe that CRA was working smoothly throughout the Carter, Reagan, Bush I, and Clinton years and then only under Bush II did overzealous anti-"redlining" enforcement come into play, perhaps a result of Dubya's legendarily close relationship with ACORN? Or maybe overzealous enforcement back in the late 1970s is somehow responsible for a real estate blowout that only materialized 30 years later? It doesn't even come close to making sense.
Beyond that, the terms of the subprime and Alt-A mortgages and the financial incentive to “originate” and “securitize” as many mortgages as possible are what caused the global financial meltdown. The mainstream media quickly raced past the causes of the crisis and now all they talk about are “solutions.” Adjustable Rate Mortgages and other predatory terms are also a big part of what caused the global crisis. Unfortunately, the Democratic controlled Congress has done nothing to outlaw these practices. Mortgage “originators” made huge amounts of money selling “risky” mortgages. Banks charged huge fees for “securitizing” these mortgages in to bonds and selling them around the world. When the non-existent money that supported the bonds and the derivatives that “insured” the bonds, vanished, the global financial system instantly became insolvent. But the burning question is this: How and why did the banker’s problem become the American taxpayer’s problem?
“Securitizing” risky mortgages and the housing bubble that it created was the primary “profit center” for the global financial system. Now that the “secondary mortgage market” has collapsed into a pile of toxic paper, where will the profits come from now? You guessed it, from us, the taxpayers! And to make the situation even more grotesque, we have to borrow the money from the Chinese and give it to the banks to make them “profitable.” Compared to the monetary and economic reforms proposed on this web site, these “solutions” are madness.
We are told that we must throw trillions of borrowed taxpayers dollars into the banking system. Otherwise, the global financial system and stock markets all over the world will collapse. But no one dares to ask the most important and explosive question: is the entire global financial services “industry” one giant Ponzi scheme? Can a $51 trillion debt be serviced by the $14 trillion contracting American economy? Is the Madoff disaster simply a scaled down version of the global financial services “industry?”
We can think of the global financial services “industry” as a gigantic loan shark feeding frenzy. When real sharks descend into a feeding frenzy they actually turn on each other, devouring their own kind. This is what the world has come to despite the Biblical prohibitions against loaning money for interest. Richard Nixon said “We are all Keynesians now.” Unfortunately, he was right.
Confiscatory Tax Code: This is a term used by one of our multi millionaire (after taxes) radio talk show hosts. I’m sure the image of the government confiscating your hard earned money really gets his audience fired up. But, if we have a confiscatory tax code how did he get to be a multi millionaire? And why does the number of millionaires, multi millionaires and billionaires increase every year?
Credit Checks and Credit Limits: Blaming the victim is the conservative answer to the global credit crisis. The world is in a severe recession because irresponsible borrowers took on more debt than they could service. Everything is all their fault, right? Wrong. What happened to credit checks and credit limits? Deregulation is what happened to them. Securitizing risky mortgages (bonds) into the secondary mortgage market was a lucrative growth “industry.” Credit checks and credit limits would have drastically reduced the profit potential of this “very important market.” This “very important market” was a cash cow composed of mostly non-existent money.
When the housing bubble burst the non-existence of this money was exposed and the global financial system inevitably froze up. But the conservative commentators blamed the hapless borrowers facing foreclosure for the credit freeze. What a way to make a living. No wonder conservative talk radio pays so well.
Economic Stimulus Package: Today, January 19, 2009, the credit crisis has plagued our economy for more than a year. We are told that we must throw trillions of borrowed tax dollars at the banks to “restore confidence” so that the banks will loan us our tax dollars that we were forced to give them. This is supposed to stimulate the economy. So far, it hasn’t worked. Abraham Lincoln proved that the federal government can loan money directly into the economy or create any part of the economy without borrowing from the private sector. This is the ultimate, fiscally responsible, economic stimulus.
The fact that this stimulus has not been proposed is a national scandal and a crime against the American people, in my opinion.
Inflation / Hyperinflation: This is the textbook objection to the issuance of debt free United States Notes as a multi billion dollar stimulus package. That this will cause inflation is a myth right up there with UFOs and the Loch Ness monster.
Fact: in the last two or three months, the Federal Reserve has injected more than a trillion dollars of “liquidity” into the money supply (this is called “quantitative easing”). Fact: there was no unusual change in the value of the dollar. Fact: not only has there been no inflation or hyperinflation, we are having deflation. Myth: money is just another commodity like corn or soy beans. Fact: money is not a commodity – it is our medium of exchange and as such its value comes under the legal authority of the U.S. Constitution, not the currency markets. Myth: the law of supply and demand sets the value of the dollar. Fact: the value of the dollar, in violation of the U.S. Constitution, is set by currency speculators. Fact: inflation occurs when the seller thinks the buyer will pay the price. As they say, what ever the traffic will bear.
Inevitable Deficits: Why do so many economic “experts” say we must borrow trillions of dollars to stimulate the economy in order to pull out of the recession? Haven’t they ever heard of debt free, legal tender United States Notes? On the other side of the argument, the conservatives say cut taxes and let the business cycle work itself out. Hey, it worked for Herbert Hoover. Haven’t they ever heard of debt free, legal tender United States Notes?
The Gold Standard: Some people think that going back on the Gold Standard would fix our economic problems because this would give us “honest money”. The Gold Standard solution is a myth. The Gold Standard was one of the major causes of the Great Depression. Why? Because it restricted the money supply that was needed to pull the nation out of the Great Depression. If we went to a Gold Standard today, exactly the same thing would happen again.
There is talk of a “partial Gold Standard”. The only thing this would accomplish would be to make a bunch of gold speculators rich. I guess it beats working for a living.
Global Currency Markets: It has been said the global currency markets and foreign governments will not accept debt free United States Notes (USN). According to this faulty logic, only debt based Federal Reserve Notes (FRN) – the currency now in circulation -- will be accepted globally. I would prefer that U.S. Notes stay within our borders but that isn’t necessary because: USN and FRN are both now part of our money supply. USN and FRN are interchangeable. USN and FRN have exactly the same value. Thus, if the global currency markets and foreign governments accept Federal Reserve Notes they must accept United States Notes.
“Government Insured” Reverse Mortgage – The Taxpayer Takes The Risk And The Bankers Get The Money: If the borrower out lives the equity in their home, does the taxpayer take the hit? If the taxpayer takes the risk – why doesn’t the taxpayer get the money and lower taxes?
Long Term Economic Recovery: The predictions for the American economy going forward are grim. According to the book “I.O.U.S.A.,” if we maintain our present fiscal policies, our exploding national debt will destroy the country. This is true. However, the book’s analysis the problem and its proposed “solutions,” in my opinion, are laughable. In fact, I challenge the entire ”Mt. Rushmore Crowd” of “heavy hitters” celebrated in the book to a debate. I want them to explain why they never proposed or implemented the reforms outlined on this web site
The economic recovery plan proposed by the Obama Administration, in my opinion, won’t work. The damage to the American financial system is too massive. The Obama plan calls for the politicians to borrow trillions of dollars, at interest, from the capital markets. Stick the taxpayers with the bill. And then give the money to the banks so they can loan it back to the taxpayers, at interest. This is a plan only Wall Street could love.
This is what the Obama Administration should do to fix our national financial crisis.
STOP borrowing money, period. Issue debt free United States Notes (Greenbacks) in the exact proportion that this legal tender currency occupied in the money supply when it was first issued by Abraham Lincoln in 1862. This can be done immediately. Not one penny of this money should be given to the banks. Their problems are not America’s problem. United States Notes (USN) should be used for business loans, consumer loans, mortgages, government issued credit cards and domestic government operations.
USN can be used for international transactions, if necessary, because: USN and Federal Reserve Notes (FRN) are both now part of the national money supply. USN and FRN have exactly the same value and they are interchangeable. This is the law and it is clearly stated on the United States Treasury web site. The site can be accessed as explained below:
Do an Internet search for “United States Notes.” Then go into the U.S. Treasury web site (below) and read the article titled: What are United States Notes and how are they different from Federal Reserve notes?
What are United States Notes and how are they different from Federal Reserve notes? ... Both United States Notes and Federal Reserve Notes are parts of our ...
www.treas.gov/education/faq/currency/legal-tende... - 31k - Similar pages
The Treasury web site article clearly states the legal justification for my economic reform proposals as they are presented on this web site.
Free markets, the global economy, deregulation, market speculation, offshore tax havens, irresponsible tax cuts, union busting and the unfettered, opaque free flow of capital have made some people very rich. These “reforms” also gave us the housing bubble, the tech bubble, a credit crisis, numerous stock market swoons, a hollowed out shell of an economy, a wrecked manufacturing sector, a 10.6 trillion dollar debt, crumbling infrastructure, a health care system that many hard working people can’t afford and social security and Medicare “trust funds” gutted by larcenous politicians and more.
Our globalized, free market country has become a happy hunting ground for cash flush foreigners. Despite the claims of conservative commentators, this is a bad thing. To end a foolish argument quickly, I will simply say, money, profits and resources that we need should stay here. If a profitable corporation is publicly held, it can be snatched away and the assets and profits are gone forever. This might be a good thing for the shareholders but it’s a bad thing for the country.
For this reason, the government, with USN, must buy up the ruins left in the wake of free market globalization. Chrysler Corporation and whatever assets are not wanted by Ford and General Motors should be bought by the government. The Markets applaud when the taxpayers throw trillions of borrowed dollars at worthless, useless banks. The Markets should have nothing to say about the government fixing American manufacturing. The private sector
had their chance, and they blew it. Now let’s see what the public sector can do with unlimited debt free money.
We waste lots of oil shipping our scrap metal to China. The Chinese take the scrap metal, pay their fellow citizens (who live in poverty) $10 a day to make our light bulbs. We then waste a lot more oil shipping the light bulbs back to the Wall – Mart stores. This is free market stupidity.
The government can build a light bulb factory with debt free USN. We can use our scrap metal to make our light bulbs, sell them on the market, for an appropriate price, and pay a wage high enough for a worker to raise a family. The proceeds from the sale of the light bulbs goes into the U.S. Treasury. We save all that oil, reduce our trade imbalance and strengthen our currency. And no borrowed money is tacked on to our gigantic corporate and national debt. What’s the matter with that economic stimulus?
Government owned and operated businesses are nothing new. The Naval Aircraft Factory did aeronautical research and built military aircraft from 1917 until 1945. The factory was set up at the Philadelphia Navy Yard. Government subsidized products from China, Europe and other countries are welcomed into our market. Why can’t we subsidize our industry, everybody else does.
But the greatest advantage of government owned American businesses is that they can’t be bought by cash flush foreigners. No greedy stockholders will have an opportunity to sell out their country. Much of the American economy is already owned by foreigners. We must stop this trend before it is too late.
Barack Obama’s “Making Work Pay” tax cut: How much will this cost the social security “trust fund” per year? Barack Obama’s web site says this so-called tax cut will be “offset.” What does offset mean?
Mortgage “Securitization:” This was a major source of profits for investment banks and pension funds. Now that the mortgage boom has gone bust, this “profit center” has been lost. What is securitization? Securitization is a fancy word for debt. The so-called secondary mortgage market consists of mortgages “bundled into bonds and sold around the world to investors. Investors who feed on debt. In order for this “very important market” to satisfy the investors growing appetite for “returns” on invested capital, two things happened. One, mortgages “were given out like candy.” And two, home prices were inflated far beyond the actual value of the house. These two factors made everybody involved in the “very important” secondary mortgage market lots of money. But not a bit of actual productive work was accomplished. This market was a major pillar of our “new economy.” Now that the bubble has burst, Wall Street and the politicians want the taxpayers to replace the non-existent money that inflated the housing bubble. And we are supposed to do it with borrowed money.
Nationalizing Banks: This is one of the proposals for “restoring confidence” to the banking sector. The economy is in recession because the banks won’t loan money. The so-called “nationalization” of banks means that tax money will be given to the banks that got themselves into trouble. The bank’s toxic assets will be removed in various ways and then the repaired bank will be either sold or resume operations as a private sector institution.
What the taxpayer gets or loses in the deal is not specified. What does it cost the government to run the bank and pour tax money into it? Meanwhile, billions of dollars of private sector capital sits on the sidelines an waits for the government (taxpayer) to fix the problem. This is called “socialism,” but it isn’t. This is nothing but the irresponsible private sector playing the taxpayer for a sucker.
We are told that we must do this in order to restore confidence to the capital markets or the entire global economy will collapse. It sounds like economic blackmail to me.
Reregulation: One of the excuses for the current financial disaster is “understaffed regulatory agencies.” We can use United States Notes to fully staff these agencies in the future. It was claimed, the regulators didn’t understand the “products” and the markets that they were regulating. If the regulators didn’t understand them, the products and markets shouldn’t have existed. Why did we pay regulators who couldn’t do the job? This is what caused the global financial crisis, not poor people stuck with predatory mortgages.
United States Notes (Greenbacks): What is the solution to our economic problems? The solution is United States Notes. Before we can fix our economic problems we have to recognize exactly what the problem is. The problem is free market, deregulated, global Capitalism. This is not to say that Communism, or what claimed to be Communism since the Russian revolution of 1917, is the answer either. If the solution to our economic problems must have a name then we can call it Lincolnian Populism.
The basic principals of Lincolnian Populism can be found on the home page of this web site. Lincolnian Populist economics is based on U.S. Treasury issued debt free money. The national debt would have been paid off in 1865 at the direction of Abraham Lincoln – if he hadn’t been assassinated. Some historians see a connection but we won’t go there.
Nobody will dispute the fact that the current global financial/economic disaster began when the housing bubble burst. Government oversight and regulation could have and should prevented the bubble. The question of malfeasance on the part of the people involved in creating the bubble seems to be a non-issue. The issue is how much borrowed taxpayer money will it take to fix the banks and the disaster that they created. The banks destroyed their own capital base, now the taxpayers are “recapitalizing” them in order to get them to loan our money back to us! What a plan.
Lets not throw good money after bad. What would Abraham Lincoln do if he was alive today? First, all the people laid off by the private sector would be hired by the government and paid with United States Notes. What would these people do for their debt free money? They would
work for it by setting up a brand new totally government run banking system. You don’t “nationalize” existing failed banks, pour tax dollars into them and then resell them back to the private sector. This outrageous taxpayer rip off has been suggested by our college trained economists.
Second, the government would use United States Notes to create a government owned and operated manufacturing sector. Government owned means owned by the American people not absentee foreign owners as is the case with the auto transplants in the Southern states.
Third, the government would STOP borrowing money. Three hundred million dollars of debt free United States Notes are part of our money supply right now. Why isn’t this money in circulation? I’ve been asking this question for over 4 ½ years but I can’t get anybody in a position of authority or influence to talk about it. In 1862, legal tender United States Notes
were a significant percentage of the money supply. They can be again with a stroke of the Congressional pen. In fact, the Constitution gives Congress the authority to issue any amount of debt free money that would be appropriate.
United Auto Workers Union: We now have a brand new non-union “American” auto industry in the Southern states. The class warrior Southern politicians who coughed up millions of tax dollars to help build the foreign transplants can now dance on the grave of our auto industry. I thought the government sticking its nose in the “free market” was SOCIALISM. But socialism is just fine with these conservatives as long as it’s used as a weapon against unionized American workers.
Am I the only one who wondered why Detroit went into self-destruct mode shortly after the end of World War II, just as the Cold War was heating up? I suppose it’s just a coincidence that Detroit’s decline coincided perfectly with the global capitalist Cold War strategy to build up the post war economies of Germany and Japan. Some cynics say the real victors of World War II were Germany and Japan.
Over the last fifty years, Detroit management never missed an opportunity to foul their nest. It was one long, consistent string of honest “mistakes.” To paraphrase a disgusted Texas Chevrolet dealer: “They couldn’t have lost market share more effectively if they would have done it deliberately.” Was it deliberate? Capitalism abhors a union and the “smart money” is betting on the transplants. No unions, no legacy costs, slashed labor costs and a disposable workforce. It’s an investor’s paradise! Mega dealers sell Japanese, European, Korean and soon Chinese and Indian cars. If Detroit folded up tomorrow, would they care?
American auto executives and politicians like to cry the blues about legacy costs. Unless they give up their health insurance and pensions, they should never bring up the subject again. Otherwise, they will expose themselves for the hypocrites that they are.
If a foreign manufacture has no legacy costs, why should they be permitted to compete without tariffs? If foreign competitors operate with slave labor do our workers have to become slaves to be competitive? The global economy is the ultimate class warfare weapon. The wreckage of the American economy is the battlefield. And our 10.6 trillion dollar national debt is Wall Street’s victory parade.
Vanishing Money: In 1990, the Japanese Nikkei 225 stock market was just under 40,000, today it is around 8000. It wasn’t that long ago that the Dow was over 14,000, today it is under 8000. In 2000 the Nasdaq market was over 5000. It crashed to 1100 in 2002, a loss of over four trillion dollars. Where did all that money go?
When markets crash, we hear a lot of talk about a “flight to safety” or a “flight to quality.” For investors, safety and quality usually means bonds. What is a bond? A bond is debt, corporate, municipal or federal government debt. Conservatives moan and complain about taxes on corporations. They say corporations never actually pay taxes because they pass the cost of taxes on to the consumer. True. But conservatives never complain about cost of corporate debt that is passed on to the consumer or the cost of dividends that is passed on to the consumer.
They also never complain about the higher taxes that are paid because of the 10.6 trillion dollar national debt. The interest on this debt is paid to investors with no requirement that the investors do any productive work for that money. What a racket! This flight to safety is a giant rip off of the taxpayer. The investors park their money in T bills and wait for the market to “bottom” so they can jump in and buy stocks for pennied on the dollar.
In the case of municipal bonds, this unearned interest money is tax free! Who said the only things that are certain in life are death and taxes? Another Wall Street myth.
What does all this have to do with vanishing money? For the steelworker, autoworker or teacher who just saw a big part of their pension vanish, this is a good insight into how the financial system works. Debt can produce unearned, tax free money. What ever happened to the work ethic?
When four trillion dollars vanished from the Nasdaq, who were the “fortunate” ones who got out at the top? How did they know to get out at just the right time? In 1929, it is widely assumed that certain insiders saw the crash coming well in advance. Of course, insider trading is illegal. And we all know that the Securities and Exchange Commission has sparkling reputation for diligent enforcement what little financial regulation still remains.
But the question for the age is this. Are stock markets a gigantic Ponzi scheme? What would happen if there were no crashes? What would happen if people stopped pouring money into 401(k)s and IRAs? What would happen if the taxpayer’s money wasn’t taken by the politicians a shoved into the financial markets? Would it make the Madoff disaster look like a hiccup?
The stock markets are like a giant bucket with a spiggot in the bottom. When the markets crash, the spigot is opened and the money flows out into the pockets of the “fortunate few shrewd investors.” Then, the trusting masses fill up the money bucket again and hope for the best. Is there an ethical question in there somewhere? What would happen if nobody lost their shirt?