Todays Credit Crisis: I Want To Believe

No- I'm not talking about the iconic phrase that preceded all X Files episodes, I'm talking about the essence of what created this mortgage crisis- the desire to believe in the wisdom of home ownership no matter what.

Let's recap how this whole thing went down:

1) The government told banks that they had to give home loans to people who generously could be said to not be good loan candidates. They passed laws that if banks want to build a branch in a community, they have to give loans to that community. (community reinvestment act)

2) To make this possible, Politicians created programs like the FHA and all those friendly sounding names like Fanny and Freddy Mack to help either buy up mortgages that banks originate or help them absorb some of the risk (banks haven't traditionally given loans to people they thought could not pay them back after all)

3) In an environment where almost anyone who had a pulse but not necessarily a job could get a mortgage, demand for houses increased and it drove the housing prices higher.

4) In the euphoria and belief that housing prices could only go up- Wall St. stepped in to buy up the mortgages from banks and sell them to Hedge Funds that were looking for a quick return.

5) The Insurance companies wanted in on the action, so they started selling 'insurance policies' to protect holders of mortgages from default.

6) The willing market to buy mortgages from banks and mortgage originators as well as the 'insurance' against default- led to an environment where there was no reason to have any kind of underwriting standards. The more aggressive lenders were not going to hold onto the loans they were making, so therefore had no reason to responsibly underwrite.

7) Years ago, it was pretty clear this thing was unsustainable, some companies got out of the business or expressed concern, but then the ratings agencies, hired by and working for the insurance companies and banks stepped in to give them 'AAA' ratings. They were the best independent ratings that money could buy.

8) In the name of 'free trade'- the government stopped looking into the legitimacy of these companies and ratings for even the most basic level of truth. It didn't hurt that the banks, insurance companies and ratings agencies were giving millions and millions of dollars to these politicians.

9) The money train came to a stop when the housing market stopped going up, the ratings were found out to be a fraud and half the loans that were being made were fraudulent. Not wanting to be the last person to hold the hot potato, banks stopped lending not only to their customers but also each other.

10) New homes that were already built sat empty, driving down the housing prices further. Also- in an effort to generate cash flow the only way they knew how, some home builders actually accelerated their home building, further driving the home prices down.

11) The mortgage holders that financed 100% of the value of their home in the easy credit market the government created now owed much more on their home than they could sell it for. They either walked away or if they got in trouble with money, had to declare bankruptcy since they could no longer refinance.

I don't care how shocked and appalled Barney Frank and Nancy Pelosi appear to be in their show trials of the CEO's they bring on. They can complain about the greed of Wall St. all they want- but they sure were happy to take their campaign contributions (bribes)

It's ironic that both government interference AND indifference caused this crisis. But hey- they were just promoting the American dream right?


Thomas Jefferson: Shay it ain't so rebellion

Well- I said in a previous post that in today's bad financial market, at least we don't have to pay our creditors in gold.

It's also better for the fact that there has not been an armed insurrection (yet).

The credit crisis as a result of Jefferson's disastrous financial policies was so bad that in New England, one in every four men joined the armed rebellion.

Daniel Shay, a former captain and sort of Robin hood type folk hero insighted the public to armed rebellion because in his view, the government wasn't 'bailing out the people'.

Farmers were losing there homes and land and the 'Shaysites' felt that the government shout issue paper money or suspend bankruptcy proceedings to help them out.

I hope these Jack Cafferty 'tea parties' don't get so bad as to start an armed rebellion.

It's interesting to think about how different the country would look had there been a Civil War stated so early in American history.


Thomas Jefferson: America's First Credit Crisis

I suppose it's human nature for people to think that they're living in unprecedented times, but the credit crisis that we're going through now has been repeated many times in world history and even American history.

It's no surprise that the first major crisis occurred under Thomas Jefferson's watch as he was a great lover of embargoes against then world power Great Britain and a hater of the banking industry.

Britain, the biggest trading partner with America at the time, upset over the increasingly punitive measures against its commerce and what it felt was the arrogance of its former colonial possession, chose to retaliate by requiring all importers of British goods to pay in gold at time of purchase.

Since the banking industry was in disarray with two presidents, Adams and Jefferson who did not even want a national banking system, this caused a major problem. Compounding the economic crisis, most of the importers of British goods had the credit lines they were purchasing goods with eliminated by this policy.

This made the importers cut the credit lines of the large wholesalers, who cut the lines of the merchants, who then squeezed the small farmers and manufacturers that were buying their goods.

This led to deflation and a 'liquidity crisis' that stopped many companies from going into business, people lending to each other etc. It also led to a major armed regional rebellion, but that's for another post.

Times may be bad, but at least we don't have to pay in gold bullion yet.


Thomas Jefferson: Pirates?

If you're like me, when you picture America in the late 1700's and early 1800's, you don't picture swashbuckling battles with pirates. However, that was one of the main foreign policy challenges of the young republic.

Early on, the vast ocean that protected America from foreign attack also made its shipping more susceptible to attacks by pirates.

The 'Barbary states' which were mainly in territories in North Africa which are now Libya, Algeria and Morocco became so bold at one point that they demanded tribute from the United States Government in order to offer 'protection' of its ships in the Mediterranean.

At that point, Jefferson, failing to create an international alliance with France or Britain, actually declared war on the Barbary states. We invaded Tripoli (sound familiar?) and threatened to topple the war lord/sheik in charge there unless they released our ships and stopped attacking our commerce.

It's funny that even today, piracy in the traditional sense exists in the age of airplanes and GPS. It's hard to imagine how much of a threat it was when a compass and the stars were the height of navigation technology.


Thomas Jefferson: Religious Freedom

In his own words- religious toleration:

"Well aware that the opinions and belief of men depend not on their own will but follow involuntarily the evidence proposed to their minds; that Almighty God hath created the mind free, and manifested his supreme will that free it shall remain by making it altogether insusceptible of restraint; that all attempts to influence it by corporal punishments, or burdens, or by civil incapacitation, tend only to beget habits of hypocrisy and meanness, and are a departure from the plan of the holy author of our religion, who being lord both of body and mind, yet chose not to propagate it by coercions on either, as was in his Almighty power to do, but to extend it by its influence on reason alone; that the impious presumption of legislators and rulers, civil as well as ecclesiastical, who, being themselves but fallible and uninspired men, have assumed dominion over the faith of others, setting up their own opinions and modes of thinking as the only true and infallible, and as such endeavoring to impose them on others, hath established and maintained false religions over the greatest part of the world and through all time...."

Aside from being the longest run on sentence ever, that seems like a nice sentiment.

Jefferson deserves much more criticism than he gets, but deserves praise for this.

Before the civil war, various colonies in America were set up as enclaves for one religion or another, and to insist that the new nation simply tolerate it's various religions was an idea at the time that would have been considered unpopular on almost a John Adams level.