The Way to Economic Suicide of the United States
A Blueprint that Would Help Avoid it
Robert A. Peterson
The Way to Economic Suicide of the United States
A Blueprint that Would Help Avoid it
Published by Robert A. Peterson at Smashwords
Copyright 2010 by Robert A. Peterson
Cover art adapted from etchings by J. J. Grandville.
The author’s compliments to David Gothard for his illustration in
the July 15, 2010 Wall Street Journal, which, though similar, was not a
known inspiration for this cover illustration.
E-Book Design by Alcuin Communications, LLC, Tucson, Arizona
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Table of Contents
1 - The Cause Of The Economic Downturn
3 - The Mega Banks: Too Big to Fail
4 - The Global Warming Religion
5 - Government Mandates That Ruined the Automobile Business
6 - Middle-East Oil Cartels Exposure
7 - The Case Against Abusive Lawsuits
8 - The Two Legs of Debt Spiral: Stimulus, and Healthcare
10 - The Destruction of American Jobs
11 - The Danger of United States Financial Meltdown
12 - The Myth of a Broken Healthcare System
13 - The Road to Economic Ruin
Additional Notes and References
Introduction
The following is an examination of the deterioration of the economic activity in the United States, its root cause and those practices that enhance the down turn
President Obama has frequently said he inherited this mess, which has some element of truth. However, he inherited it from President Carter, the author of the Community Development Act, and President Clinton whose administration put in rules and penalties to the banks that gave them little choice but to take on excessive risks. In addition, HUD increased the amount of risky loans required and Freddie Mac and Fannie Mae acquiesced to these coercions. Senator Obama joined with his Democratic colleagues to sustain the filibuster of the 2005 McCain Bill to regulate Fannie and Freddie. Additionally the Democrats became the majority party in 2006 and did not pursue regulations for Freddie and Fannie. The risks increased when President Clinton signed the bill that rescinded the Glass-Steagall Act that previously prevented Banks from also being an investment bank and permitted the risks they subsequently took.
The legislation action, such as the Stimulus Bill, added to the current push for a carbon tax, plus a new Healthcare Bill, which under both the House and Senate versions result in massive tax and fee increase and will result in lower economic activity. The result will be decreased tax revenues. The forgoing combined with additional spending, equals ballooning deficits. It is hoped this does not result in the financial pandemic that appears likely.
The damage being done to the liberty of this republic in the name of needed changes for the economy to recover cannot be ignored and would show:
The federal government now has control of the banking system and may determine who gets borrowed funds and who does not.
The federal government has control of the mortgage market and may determine who gets mortgages and who does not.
The U.S. Government now controls student loans with no outside source of these loans. As a result the government may determine who gets loans to go to college and universities and who does not.
`The federal government has taken over two of the big three automobile manufacturers and with imposed mileage standards (generally referred to as café standards) is mandating what cars the public can buy.
Nowhere is there a more illogical conclusion that jobs and cheap power will result from so called green energy. Economic professor Arthur Upgren once said, “it isn’t what you know that hurts you, it’s what you know that isn’t so.” Roger Meiners’ article “Talking Green in Yellowstone” (in the Wall Street Journal August 21-22, 2010 edition) reports Ennis National Fish Hatchery, U.S. Fish & Wildlife Service received $179,000 in stimulus money to install solar panels that will replace $2,550 in annual electrical power costs. Angel Gonzalez and Keith Johnson’s article in the Wall Street Journal, dated September 3, 2010, “Spain’s Solar Power Collapse Dims Subsidy Model” reflects on how “the Spanish Government slammed the brakes on generous subsidies.”
If the Carbon Tax goes through, the means of producing electricity will bear large increases in these taxes, which will result in large increases in electrical and other energy costs to the consumer. The government’s direction, in energy production toward so-called green energy will almost surely lead to electricity shortages and its rationing. Saddam Hussein used the cutoff of electricity to control the populace.
In the past, the print media and the evening newscast would have examined many of these policies in detail and reported on them. Today we have de facto censorship where the media doesn’t report news that doesn’t fit their political agenda. The government announced they would fully guarantee the obligations of Freddie and Fannie, on Christmas Eve, yet there was almost no mention of this in the media or investigation about it in subsequent editions. For whatever reason, these traditional sources of investigative journalism have abdicated their role. Similarly political correctness infringes on free speech. Where does this originate it? Who decides what is proper and what is not? A guess would be that it’s the same media.
No matter which party is in power, the foregoing is a danger to our liberties if abused by someone who would use them for their own purposes.
In our formation, the colonists tired of King George III and the rest of the royal family who took resources of their subjects as their right. The colonists threw off this ruling elite by forming the United States. How is it different from King George III where the spending and taxing bills are being rammed through Congress? The United States is supposed to be a representative democracy. How is this so when every poll shows it is not what the large majority of Americans want?
The foregoing and the following are the author’s opinion, which grew from his background, information shared by others, and his understanding of arithmetic. Where pertinent, the chapter will show where the reader can review others’ thoughts on these same subjects and draw their own conclusions. There are also some paths of different direction that the reader and others may agree holds promise.
Chapter One: The Cause of The Economic Downturn
Congress Lights the Fuse
The root cause of the economic downturn was the program to sell houses to people who couldn’t pay for them and the push to build affordable housing that resulted in every community doing so in the form of tract condos and townhouses that are not suitable for the elderly. Those responsible are those who pushed these programs. They include but are not limited to, Jimmy Carter, who arrived at the concept and got legislation passed for “the Community Development Act,” the Clinton administration believed in the act. Acorn and other similar organizations filed lawsuits (the most notable was against Citibank). In this case, a judge ruled that credit standards had to be lowered to accommodate those who did not reach the standards other borrowers had to achieve.
Senior members of the House and Senate, joined by other advocacy groups armed with the judicial ruling, appeared to intimidate the banks and other lending institutions, which resulted in the banks being aggressive in taking on these loans. Two of the most visible exponents were in the House, Barney Frank and in the Senate, Chris Dodd. This was further compounded with Fannie Mae and Freddie Mac aggressively buying up these mortgages. In some cases—it is rumored—the broker at “Countrywide Finance” was urged to upgrade his analysis of credit worthiness with the commitment that these two institutions would buy the mortgage. Recently, some of those who purchased these mortgages were preparing legal action, alleging incomes of the borrowers were not verified, as well as other pertinent data.
To arrive at a payment amount that the borrower felt they could handle, they permitted the mortgage to start out at a rate that only the best credits were given. This was done for a short period of time (a couple of years), at which point the rate was scheduled to increase to a level that reflected the normal rate they would have qualified for. Another way of keeping the original payment down was to use an adjustable rate mortgage (ARM), so that as the market rates rose, the payment amount increased to a point where it could not be met by the borrower.
Another dirty little secret is the federal government’s unfunded mandates to the states; the state government passes these mandates to the counties. The county government passes these on to the cities and other local governments and then to the homeowners that has skyrocketed the cost of taxes on real estate that have nothing to do with local services. This should be stopped; it effectively dictates federal government mandates to all of the state and local governments and it results in taxes on the local entities being imposed by the federal government. It is not unusual for these taxes to be a third of the required monthly payment. A law should be passed that these mandates can be refused and those that are put into effect be paid in full by the federal government and when they quit funding them the program stops. The funding should also include their portion of the fixed costs that are used. The housing price bubble drove assessed valuations higher and local governments are using every stalling idea to avoid reducing them.
As it became apparent that there was a glut of housing, the prices began to fall. Those homeowners who had little or no equity in their house realized they would be better off economically walking away from their mortgage. This was also encouraged by the drive up of local taxes that made their payments more difficult. This drove prices down even further, which hurt the homeowners who had played by the rules. Most people considered the equity in their house as savings. As the values began to fall they have pulled back from their spending and started to save money to replace the valuations in their home that they have lost.
Look no further for the trigger of the recession. It is the United States Congress and Senate who pushed this legislation that resulted in selling homes to people who couldn’t afford to pay for them. Those who pushed our country into this madness are responsible. It is strange that the economic downturn, which is variously described as the worst since the great depression, isn’t under investigation by an independent panel to find out what caused it.
Members of Congress, officials at HUD and management of Freddie-Fannie, know they created the environment for this mess. To divert attention from the government’s involvement, legislative hearings were held where others were berated for making these bad loans. It’s the most unkind cut of all that those who literally forced the banks to make these loans are the ones criticizing them now.
With this history, you would have thought they learned their lesson. Barney Frank and his crew are thinking of new ways to reduce the payments including forgiving parts of the loan.
This downward spiral in home valuations must be stopped. However, with the current direction of the Administration and Congress, it is feared will create the same dismal results.
There are different family classes affected by the failed policies of the Community Development Act:
There are those who are working and are stressed in their financing because of losses in value of their property due to the downturn in home values.
There are those who have lost their job and have been prudent in their financing and life style in the past;
There are also those who never had the resources to own their own home and have little prospect of doing so in the future.
Some ways to reduce the pressure on the groups and as a result reduce the pressure on the housing market:
Those in the first group are making their payments on time and don’t have plans to sell their house. Even so it appears that they fear any change in their jobs would put them in difficult circumstances. A likely result may be a less spending mentality replaced by cash conservation one. This is the largest homeowner group. Their change to a more positive attitude would reap great economic benefits to the United States. There is a need to increase the cash resources of this group, which would provide cash flow, some would pay off credit cards, and others would increase their spending. The results may be an upbeat mentality in these homeowners and will likely reduce the homes going onto the market. The government should not be the source of this cash, as it would further increase the national debt. As the banks Freddie and Fanny participated in creating the housing problems their help in solving it should be required. Banks should offer the first group, a three-year moratorium on the payment of the principle of the mortgage. This is the payment portion scheduled to pay down the mortgage. This action would result in a balloon payment at the end of the mortgage, or the term would be extended for three years. This would keep the money in the hands of the homeowner. The incentive for the banks is to have the regulators and auditors agree that for book and performance requirements that they will account them as good assets. It would also be acknowledgment of their role in creating this mess.
To alleviate the fear of losing their home on those who have always been employed but have lost their jobs, a program that gives them time to adjust to their dilemma through retraining or other activities would qualify them for up to a three year non-principal payment program. The federal government would also pay, for up to an eighteen-month period, interest, real estate taxes, house insurance and medical insurance so that they had time to orderly sell their house or adjust their life needs.
The money for this program would come from the Stimulus Bill in place of planting trees in the Amazon, protecting the fuzzy mouse and other pet projects of little importance.
The third group cannot and have not been able to own a house and some program needs to be put in place to help them get into rental space and unburden them of the crushing debt of house payments, taxes, insurance and maintenance required in home ownership. To dispose of the properties, in default, set up a “Resolution Trust,” similar to the one used during the savings and loan crisis.
One of the groups that could be potential buyers for these homes and subsequently be landlords are the unemployed construction workers who have the skills necessary to maintain these properties through their sweat equity. They would need the following help from the federal government:
Where there are laws that prevent eviction for nonpayment of the rent, change the law.
Eliminate the laws that prevent a delay in eviction for non-payment of rent. Similarly, get rid of the restriction for discontinuing gas or electric service for nonpayment. Where compassion is in order, these payments are to be the responsibility of the governmental unit ordering that the utility and the landlord not enforce their right.
Additionally those who do not treat the property with respect need to become part of a register and the landlord can refuse to rent to those who have a history of trashing rental property.
Additionally, the new landlords would need attractive mortgage financing and rudimentary accounting and business training.
The foregoing would make available good structurally maintained rental housing. These lower income people are entitled to lodging that are decent places to live. This would not occur without addressing the crime and gang problems. The sale of illegal drugs provides the income for these criminals to exist.
This does not suggest that drugs should be legalized. The reality is that marijuana has been effectually legalized. The approval by many states of medical marijuana, coupled with the federal drug enforcement decision to not prosecute marijuana sale is tantamount to legalization. There is also massive growing of marijuana in our national parks. Why not recognize that this is true and put the government in control of its production and sale through drug store outlets to adults? In every case the drug store price must be significantly lower than the street price and with severe penalties imposed for those selling to the under age. Under such a program, the same penalties would apply as it does for alcohol such as driving under the influence, etc. This would dry up an enormous cash flow to this criminal element, helping to clean up crime in the neighborhoods and would certainly help our Mexican neighbors’ efforts in controlling the drug cartels. In no way does this endorse the use of marijuana, but does recognize the problems of the criminal element it creates. Our country could not control alcohol during prohibition. There are similar reasons we cannot control marijuana. Both alcohol and marijuana are easy to make or grow and there is large profit in their sale.
Freddie and Fanny Provide the Explosives
For years, the investment public purchased certificates of deposit (CDs) of Freddie Mac and Fannie Mae under the assumption that the full faith of the United States Government was behind these obligations. This misconception by the public gave a borrowing cost to these two entities only slightly higher than U.S. Treasuries. Most of these obligations were in the medium term and were shorter than the mortgages they were buying. This strategy increased earnings but increased their risk. Money raised in this manner, was the vehicle that was used to purchase subprime mortgages. In this way, the wishes of those pushing financing homes to those who couldn’t pay for them were implemented. The executives profited immensely at Freddie Mac and Fannie Mae while doing what the Congress, court decisions, Acorn and numerous other agencies were forcing them or encouraging them to do.
These two companies were largely unsupervised by outside regulators. When members of the House and the Senate encouraged mortgages to those with low or bad credit, Fannie and Freddie took on this cause with breathtaking relish. This pumped up earnings in the short term. As a result, the executives got enormous bonuses. It appears this gusto spread through the industry. Evidently they and others did not set up corresponding reserves to cover the additional risks. They probably assumed that the housing prices would continue to increase and the borrower who was defaulting could sell the house to cover the obligation.
In addition to the accepted risks, they could not properly account for the transactions. Many in the business world warned of the extreme leverage (borrowing too much) of these institutions and the large accumulation of the mortgage market securities (Currently at 50% of the total market). Alan Greenspan, George Bush and John McCain were some of those who warned against the impending problems. Even the New York Times in their September 30, 1999 paper carried a column warning of the problems with the two companies. Whenever these critics raised these questions, Barney Frank and Chris Dodd were on television stating they were sound. John McCain sponsored a bill that would enforce some oversight and regulation on these two companies. Chris Dodd filibustered the bill in the Senate and Barney Frank evidently stopped it in the House. It’s just possible that if McCain’s bill had gone into effect when it was introduced, the enormous losses they incurred might have been avoided. At the very least they would have been reduced. The failure to do so is the result of the actions of Barney Frank, Chris Dodd and others in the Congress.
History is repeating itself. Many are encouraging lending practices with a tax credit as part of the package. A recent TV ad structured to look like a public announcement invites people to buy a home and finance it through FHA at 97.5% of the purchase price. Barney Frank wanted the agencies to reduce the requirement of developments total condos sold, from 60% to 50%, to qualify for financing. The reason it’s important for a high percentage of the condos to be sold to qualify for financing as it can affect the condo’s maintenance fees. If the developer runs into financial difficulty and can’t pay the maintenance fees on the unsold units, the ones that are owner owned (the 60%) have to pay for the 40% of the non-sold units. That is a two-thirds increase in their condo maintenance fees.
The Speculative Housing Bubble
Without the underpinning of the results from the Community Development Act, the housing bubble may never have occurred. At the very least the speculation would have been less. The unnatural demand for housing came from two sources: the buyers who couldn’t afford to pay for a home and the push to build so-called affordable housing in areas where real estate taxes were so high that buyers couldn’t pay for the house and taxes. Builders became overly optimistic about the demand for the condos or townhouses. The design of these facilities was three to four stories and the necessary provision for stairs made them unappealing to most of the elderly, so they lost that part of the market.
There developed a feeling that a home was an investment rather than a place to raise the family. The real estate sales representatives exploited this. As a result people tended to overbuy on their home purchase. In the resort type areas, the speculators fueled the price appreciation with a process known as flipping, when the buyer commits to buy a condo or a home from the developer with the intent of selling the commitment at a higher price. This type of speculation drove up the prices of houses in the resort areas of the country. When the market collapsed these homes were dumped on the market.
This resulted in a glut in properties on the market where they could not be sold for the mortgage amount, many times referred to as underwater. A Wall Street Journal article of December 17, 2010 reported First American Corelogic estimates that 5.3 million U.S. households have mortgage balances 20% higher than their home value, and 2.2 million of those households are at least 50% underwater. The problem is concentrated in Arizona, California, Florida Michigan, and Nevada. This would suggest that the balance of the country is not in as dire a problem when speaking of single-family traditional homes. This also raises the question of equity, should states that fostered overbuilding be bailed out by the other states?
Reporting underwater home ownership on a macro basis is a disservice to the single family homeowners in more moderately troubled home areas of the country as it affects liquidity, price, and financing. It results in potential home buyers with a slanted view of how little they can purchase a home in an area that has few homes with mortgages worth more than the sale price. By reporting single-family homes, townhouses, condos, and HUD built affordable homes on a percentage of the market in each area give a more accurate assessment of the problem. It might mean that a resolution trust takes over the large concentration of defaulted properties.
It is unknown if there is a national inventory of residences by category, however it is reasonable to suspect that the large majority of properties in distress are condos and townhouses. Those mortgage-backed securities that cover only single-family homes in the non-speculative states would seem to be worth more. Wouldn’t this suggest the speculative states might need to be handled in a liquidation manner?
The largest group that are the victims of these policies are the majority of the people who played by the rules of making sizable down payments, practicing restraint in their financial habits and meeting their obligations in a timely manner. They are the ones who won’t be able to put their homes on the market and retire to a warmer climate or be able to sell their house and upgrade to a bigger house, as the size of their family grows larger. Congress focuses on the subprime properties but is less inclined to assist these deserving homeowners.
It is important that the single-family homes do not flood the market with foreclosed homes so at least this market will stabilize first. The layoffs in this recession have hit men with long-term stable jobs hard and this group is more traditionally head of married households.
In the past families bought homes because they wanted to live in them. Their expectations were a modest return and liquidity. They could trade up when their income and needs increased. The environment of the market blurred that concept.
Some of the people who couldn’t afford to buy a house bought them, as they couldn’t find available single and dual family rental homes. Traditionally, small entrepreneurs owned these rentals. They have been driven out of the business by unreasonable restrictions on eviction for nonpayment of rent, the restriction on eviction in winter and the avoidance of renters that do not treat the property with respect. They also feared the potential liability of sharing information on the history of renters. Compassion is in order but, where given, should be the obligation of the government and not a mandate to the landlord. The vast majority of renters are the ones hurt the worst. It’s no wonder they bought houses they couldn’t afford.
Chapter Two: The Mortgage Crisis
The Attempted Cure of the Mortgage Markets and the Probable Risk of Future Financial Meltdown
There is a saying: “When you have dug yourself in a hole, quit digging.” Evidently our administration doesn’t believe that when it comes to the mortgage crisis. To this layperson it’s easy to conclude that the actions of those in control of the mortgage markets and the financing of the outstanding and new mortgages are digging a deeper and deeper hole. Straws in the wind that point to this conclusion are:
On Christmas Eve the Treasury Department announced taking the $400 billion cap from what the Administration believes will be necessary to keep Fannie Mae and Freebie Mac solvent. (It was reported in an article of Peter J. Wallison in the Wall Street Journal Dec. 30, 2009)
Peter Eavis reported in the January 13, 2010 Wall Street Journal, The Federal Reserve had little or no mortgage-backed securities on January 1, 2009 but owned $550 billion of these securities by the end of 2009.
The “Review and Outlook” portion of the Wall Street Journal of August 11, 2009 reported that the Ginnie Mae or the Government National Mortgage Association value of subprime mortgage securities guaranteed will soon reach a trillion dollars. In 2006 Ginnie Mae guaranteed $410 billion, which is estimated to be $1 trillion in 2010. The Wall Street Journal of September 29, 2009 report that the Federal Housing Administration borrowing ratio (the leverage ratio) has increased as follows:
2006 14-1
2007 15-1
2008 33-1
2009 50-1
(Source: Department of Housing and Urban Development, Bloomberg)
Bear Stearns in 2008 had a leverage ratio of 33-1, which was a firm that failed.
The two housing agencies continue with high levels of debt, lower quality mortgages and contingent liability through guarantees. In the October 16, 2009 Wall Street Journal Opinion Page, an article by Peter J. Wallison, a senior fellow of the American Enterprise Institutes, has found the following, “Almost two-thirds of the bad mortgages in our financial system were bought by the government or were required by regulations.”
“The FHA will suffer default rates of more than 20% on the loans guaranteed in 2007 and 2008.” “When housing was inflating during 2005 and 2006, the FHA’s delinquency rate was between 20% and 30%.”
Mortgage brokers have been accused of predatory lending to unsuspecting buyers when they could not have done so unless the government was buying these mortgages. In the same Wall Street Journal article by Peter J. Wallison, “The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending.” Mr. Wallison goes on to state, “the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income.” Since the early 1990’s the government has been increasing its efforts in the expansion of the number of people with low income to own their own house. A praiseworthy goal, however, the unintended consequences result in a reduction in prudent lending standards, which lead to the subprime impact on the financial system. Freddie and Fannie were subject to “affordable housing” regulations issued by HUD, which required them to buy mortgages made by homeowners below the median income. This quota began at 30% in the early 1990’s and gradually increased to 52% by 2005 and was a large contributor to the housing bubble.