Chaos On Wall Street, Mayhem Coming To Main Street?

I wrote my first article on gameriot about the economy back in June. At the end, I mentioned all of the bad paper floating around, and it looks like it finally come back to bite us in the butt this week.

So what exactly motivated the large downturn earlier this week? A few things, in order by time frame.

1. The Community Reinvestment Act - Started by Carter, and expanded by Clinton this was designed to increase minority home ownership. You see back in the 70's and 80's banks wouldn't make loans to people who couldn't repay them. These banks were accused of racism because often the people they wouldn't make loans to were disproportionally minority groups. So the federal government got involved and forced banks some banks to make the loans, and let others know that 'Discriminatory practices in lending will be punished.'.

2. The natural outcome of the socialism in item 1 led to banks making loans to people who couldn't afford them. After all, it's better to have a bad loan on the books than having the federal government coming to audit you, and Reverend al coming to picket you. So companies went above and beyond to make loans to people who shouldn't get them. Some intelligent people in the banking business even reasoned that real estate "always goes up" so things should work out for the best.

3. Some smart people at the banks realized this whole idea probably sucks. They rolled up home mortgage loans, and resold them to other banks. The ratings agencies that should police this sort of thing, overvalued the mortgages that were sold. this led to investment banks buying up mortgages from traditional lending institutions with the impression they were solid investments.

4. In 1999 Clinton repealed the Glass-Stegal act, which contained important safeguards to keep banking institutions solvent. Replacing Glass-Stegal was a bill written by banking lobbyists, pushed through by Republicans in congress.

5. Interest rates were kept artificially low throughout the Clinton and Bush years by Alan Greenspan, which made lending easier for the banks.

6. President Bush tried to reform Fannie and Freddie a few years back, but was shot down by the democrats. In typical "What me worry?" fashion, he resumed paying attention to his crusades in the middle east rather than pushing the issue domestically.

7. Banks got very wacky in the past few years during the housing bubble. Since the CRA stuff went so well, they decided that housing would never ever go bad, and basically gave loans to anyone who could fog a mirror.

8. Housing prices declined, first hurting the Subprime market, and now the regular housing market. People are stuck in situations where they have no equity in their home, and have loans larger than the value of the house. This makes defaulting an attractive option.

9. Investment Banks started realizing all these bundled mortgages they have aren't worth what they should be. Some might be worth pennies on the dollar. Once that shit started hitting the fan a few months ago, people started selling the stocks of the investment banks, leading some of them to insolvency.

So those are the basic things that led to this mess. I probably missed a few details, but whatever. Both the Republicans and Democrats are blaming each other for this mess, but it's really the fault of both parties.

So why is the market rebounding? Well, the fed decided to ban short selling, and is considering the creation of a government trust to buy all the bad mortgages from the banks, to try to work out deals with the owners to keep them in their houses.

Put very simply, we had one socialist program designed to get poor people into housing. That program dragged the economy down, so now the government is going to socialize the losses onto the taxpayer, and replace the program with outright socialism. The government will basically become the mortgage lender for these people who shouldn't have had mortgages in the first place.

Since the government doesn't want to own a bunch of shitty real estate, odds are the people having problems will get sweetheart deals to keep them in their houses.

People who actually behaved responsibly will get stuck with the tax bill.

While many people are blaming capitalism for this debacle, it's clearly the results of government interference in private markets. The banking system should work pretty easily. Banks make loans. If said loans aren't paid back, then the consumer defaults and the bank gets whatever collateral there was. If the bank makes too many bad loans and goes under, then fuck it, it goes under. That is capitalism.

Telling banks they must lend to those that are unqualified, then bailing out certain banks while letting others fail is not capitalism. It is socialism mixed with a tinge of corporatism and a shitload of stupidity.

In the government's mad dash to fix these problems in an election year, they've socialize (ie taken over) the largest insurance company in America, along with the two biggest mortgage lenders. The government is now on the hook for these companies if they fail, possibly to the tune of trillions of dollars.

As our government falls further and further in debt, the US dollar looks less attractive to foreign countries. When it gets to the point that foreign countries will no longer invest here because the US government is basically insolvent, then the party ends.

At some point America has to wake up and realize that everyone can't have everything. As a society we can guarantee equality of opportunity, but not equality of result. At some point, we need our politicians to become serious people, rather than pie in the sky socialists trying to create utopia.

EDIT: A short addendum: If the actions taken today (the govt buying the bad paper from the banks and the ban on shorts) do not "work", you're likely seeing the start of another Great Depression.

This was running a bit long for a blog entry, and I didn't even get into the Credit Default swaps, who Hank Paulson worked for before, or all the sweet conspiracy theories about Hedge funds and SWF's killing companies on purpose. But considering you're all from gameriot, odds are you don't read past the first four paragraphs anyway. ;)