Yes, another email letter from your crazy brother. You raised a lot of questions in your last email and I am going to try to answer all of them.
I think all of your questions fall into three areas: (1) how did we get here; (2) what's coming; and (3) what can I do to prepare myself and my family.
Consider this email as my answer to your first question, "how did we get here?". I'll be sending you 2 more emails answering your other two questions. Since there's a lot of misinformation out there I will document each of the facts in my emails so you know where I pulled the information from and where you can go to read and learn more.
What you shouldn't do is panic. We'll get through this--don't pull all of your money out of the bank but have enough cash on-hand to meet any possible emergencies.
First, you've got to get the stock market's ups-and-downs out of your mind. The recent drops and upticks are short-term. Our economic problems are much bigger and deeper. Too many people believe that if the stock market goes up our problems are behind us and that's simply not true.
Last week the market had big drops and big upswings. In the end, the market ended down more than 800 points and lots of 'experts' were shouting it was a time to buy. I don't see it that way.
Did you know that just two days after the stock market crashed in October 1929 the market actually gained ground the next two days? The New York Times reported that "the market quickly regained its poise and stability...." Today, Wall Street 'pros' are telling us it's a good time to invest because Warren Buffet is investing. A lot of people were probably using the same argument when the Rockefeller family was buying stocks right after the 1929 crash, what they didn't know was that it would take Wall Street ten more years to see those prices again.
Our current economic crisis was caused by politicians, both Democrats and Republicans, who perverted the American Dream by treating home ownership as an undeniable right rather than what it really is, a privilege. President Bush aggressively promoted the benefits of home ownership through various policy positions, including a reckless zero down-payment initiative for some homebuyers and praised Fannie Mae and Freddie Mac even after concerns about their accounting standards began to surface.
Home ownership has always been part of the American Dream. It allows individuals and families to build wealth by having them pay themselves instead of a landlord or rental company and vests people in their communities by grounding them in local schools, stores and government.
The concept that owning a home was a privilege and not a right began to change in 1992 following a flawed Boston Federal Reserve Board study which allegedly found subtle discrimination in loan and mortgage lending by banks and mortgage lenders.
Politicians didn't care that the study was full of errors. The study found discrimination took place when five minority applicants were rejected for special low-income loans even though the applicants were rejected because they made too much money to qualify for a low-income loan, not because of their race. The report also classified as 'rejected' the applications of eight minority borrowers even though these borrowers voluntarily withdrew their mortgage applications. The study's sloppiness also went the other way.
The study reported that a white applicant was approved for a $3,115,000 loan in order to purchase a home valued at $445,000. It was later demonstrated that the actual loan was approved for $311,500, far less than $3 million reported and more importantly, less than the home's purchase price. When these and other errors were corrected no evidence of discrimination existed.
But politicians didn't care. They used this report as the basis to
fix a problem which didn't exist. Leading the charge for change was
President Clinton who immediately set-out to rework the Community Reinvestment Act to give federal officials the power to pressure banks to make loans they otherwise considered too risky or uneconomical.
Traditional lending requirements were labeled 'outdated' and
discriminatory. What 'traditional lending requirements' were viewed as
'outdated' and 'discriminatory'? (1) banks were told that a "lack of credit history should not be seen as a negative factor" and that "past credit problems" should be viewed and considered in light of any "extenuating circumstances"
so loans could be extended when they otherwise would have been denied;
(2) banks were encouraged to let borrowers without enough money for a
down-payment make-up any deficiency with "gifts, grants, or loans from relatives, nonprofit organizations, or municipal agencies"
even though banks considered this risky as the home buyer would have
little or no equity in the house; (3) banks were also instructed that
borrowers who received child support, welfare payments or unemployment
benefits could count that as 'income' for borrowing purposes.
Call me crazy but if you need to count child support money that's
intended for your child, or are in such bad economic shape that you're
relying on welfare payments to make ends meet or are unemployed, maybe,
just maybe, you shouldn't be buying a house. Too bad our politicians
and the 'best and brightest' on Wall Street couldn't figure that out!
Community groups like ACORN, threatened to cry racism
if banks didn't increase their loans to subprime borrowers. Banks
typically avoided subprime loans as they carried a greater risk of
default, but with law on its side, ACORN and other groups intimidated
lending institutions into making such loans.
Banks soon learned, however, that making subprime loans actually
could increase their profits without increasing their risk. Once the
banks extended a loan to a subprime borrower that loan could then be
sold by the bank to Fannie Mae or Freddie Mac, two government sponsored
entities charged with making home ownership affordable to all
Americans.
Banks, Wall Street, and mortgage lenders were soon eager to extend
mortgages to subprime borrowers because they could make lots of money
without carrying any risk. Fannie and Freddie carried all the risk once
the original lending agency sold the loan to them. And once Fannie and
Freddie bought the loan this freed up the banks to make even more
subprime loans.
So everyone was a winner. The subprime borrower got the money to buy
a house. The banks generated mortgages and made a nice profit and
Fannie and Freddie executives made tens-of-millions of dollars in
salaries and bonuses by hitting their annual goals.
The problem was that in order to keep all of this going lending
standards were continually lowered to help the next level of subprime
borrowers qualify for mortgages and no one had an incentive to make
sure that the new subprime borrowers would actually be capable of
making regular mortgage payments. The banks which extended the loans
really didn't care because they were just going to sell the loan off to
Fannie or Freddie. Fannie and Freddie weren't too concerned because it
wasn't their money-they knew that they were insured by the 'full faith
and credit' of the federal government (that's government lingo for "you
and me").
So when federal regulators began to warn the executives at Fannie
and Freddie about the increasing risks of non-payment by subprime
borrowers the companies did nothing and when the regulators took their
concerns to congress their warnings were met with scorn and contempt. The politicians who received the most political contributions
from Fannie and Freddie, by pure coincidence, just happened to be their
biggest defenders: Chris Dodd (D-$133,900), John Kerry (D-$111,000) and
Barack Obama (D-$105,189).
Representative Barney Frank, who has been a fierce defender of
Fannie and Freddie, actually said, while arguing against more
regulation, "I want to roll the dice a little bit more in this
situation towards subsidized housing....
" It's nice to know that he doesn't mind gambling with our money.
Senator Chris Dodd, in praising Fannie and Freddie said, "I, just
briefly will say, Mr. Chairman, obviously, like most of us here, this
is one of the great success stories of all time.
"While Senator Charles Schumer said, "And my worry is that we're using
the recent safety and soundness concerns, particularly with Freddie,
and with a poor regulator, as a straw man to curtail Fannie and Freddie's mission."
Barack Obama has received more money from Fannie and Freddie than any other senator, with the exception of Senator Dodd, in the last four years. Before entering the senate, Obama filed a class-action lawsuit
against Citibank, alleging that the bank was red-lining, or not doing
enough lending in certain areas. That lawsuit was eventually settled.
Arguably, Barack Obama helped cause the problem he now wants to fix.
The Federal Reserve Board was doing its part by throwing huge piles
of cash at would-be home buyers by keeping interest rates too low. With
low interest rates speculators began to look at houses as business
opportunities, while others began to look at their homes as a giant
piggy bank rather than a place where you actually lived and raised a
family. Alan Greenspan encouraged this type of behavior and proudly
said, "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgages..." President Bush, responding to September 11th unwisely encouraged us to "go shopping" rather than hunker down financially and contribute to the War on Terror in other ways (can you say home equity loans?).
The SEC also shares in the blame. It failed to do its job (failed to adequately regulate mortgage brokers, the credit rating companies, and naked short-sellers), acted only after the markets froze-up (finally addressed mark-to-market rules) and refused to examine how the credit-default-swap market could grow from $919 billion in 2001 to over $54 trillion by 2008
(which allowed companies to make wild financial bets with the false
confidence that 'insurance' would be there if the deal went south).
So what happened? Home-ownership rates which had been relatively
constant for 25 years began a 10 year upward climb beginning in 1995,
around the same time that government began its push and pressure for
banks to make more subprime loans. The politicians, banks, lenders and
Wall Streeters were thrilled because they were all making gobs of money.
Today we are all paying the price for the decisions made long ago. I
have spoken to people involved at the highest levels and they now are
all saying the same thing, "it is worse than anyone knows" and "worse
than I even thought." Political and business leaders who I respect have
told me that the economy is on the edge of an abyss.
The bailout is an outrage and is designed only to buy time for the
politicians. It will delay the real hard times from hitting until after
the November elections. Not one politician has said that this bailout
legislation will put us on a better financial footing or that our
economic problems will be put behind us. In fact, we'll be worse off
because our politicians, even in this crisis, can't stop themselves
from spending. This bill includes an extension of the rum tax benefits
for Puerto Rico and the US Virgin Islands ($192 million), tax benefits for companies which manufacture wooden arrows for kids ($6 million), car racing tracks ($128 million), a provision which forces insurance companies to treat mental health problems like physical problems ($3.8 billion) and many, many more.
International markets don't offer any better alternative. Germany, England, the Netherlands, and Russia have all come out with their own government backed bailout plans. There are now calls for more international regulation (presumably led by the United Nations) and China has taken this opportunity to call for "a diversified currency and financial system and fair and just financial order that is not dependent on the United States." Meanwhile, there is increasing international indications that the dollar will lose its place as the reserve currency of the world.
The politicians from both political parties continue to lie to us.
They promise us better healthcare and more government programs. The
only thing either party will be able to deliver is higher, much higher,
taxes as the debt swells and government revenues fall. The same
politicians remain silent, while capitalism, which brought us the
highest standard of living in the world, is increasingly attacked and discredited by its enemies.
But it's not capitalism which has been discredited by our current
crisis, it's greed that has been shown to be at the root of our present
economic uncertainty, and greed is unfortunately a universal human
trait and has demonstrated its reach in socialism, fascism, communism
and capitalism. The greed of Wall Street is nothing compared to the
greed of our politicians who have continued to expand their power and
influence at the expense of their country.
Our children and grandchildren will ultimately pay the price for
their failure to act prudently and in the best interest of our country
because they will be the ones saddled with mountains of debt and
diminished standard of living.
I hope that this summary gives you a better idea of how the people
who caused this fire are the same ones who are now telling us that they
know best how to put it out and a reason not to believe their current
promises.
We have faced tough times before. We fought the Nazis in World War
II, defeated communism in the Cold War and Americans fought each other
to keep our country together in our own Civil War. These tough times
require us to educate ourselves and help others understand what has brought us to this point and the grave consequences of what will happen if we let this continue-that is our fight.
In my next email letter I will answer the other question you asked, "what's coming?"
Sis, I know you will always consider me your crazy brother but
please pass this message on to all of your friends. There are too
many rumors circulating and I want to put the facts out there. This
isn't about slamming the Democrats or Republicans--this is about
getting the truth out to as many people as possible. The more
people we can wake-up the more people we will have restoring the hope,
promise and opportunity of our great country.
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