Economic Crisis of 2008

Who Do We Blame?
By Infonomics

Bush's Pleads for Bailout and Explains the Causes Thereof, 9-24-2008

Good evening. This is an extraordinary period for America's economy.

Over the past few weeks, many Americans have felt anxiety about their finances and their
future. I understand their worry and their frustration.

We've seen triple-digit swings in the stock market. Major financial institutions have teetered on
the edge of collapse, and some have failed. As uncertainty has grown, many banks have
restricted lending, credit markets have frozen, and families and businesses have found it harder
to borrow money.

We're in the midst of a serious financial crisis, and the federal government is responding with
decisive action.

We boosted confidence in money market mutual funds and acted to prevent major investors
from intentionally driving down stocks for their own personal gain.

Most importantly, my administration is working with Congress to address the root cause behind
much of the instability in our markets.

Financial assets related to home mortgages have lost value during the house decline, and the
banks holding these assets have restricted credit. As a result, our entire economy is in danger.
So I propose that the federal government reduce the risk posed by these troubled assets and
supply urgently needed money so banks and other financial institutions can avoid collapse and
resume lending.

This rescue effort is not aimed at preserving any individual company or industry. It is aimed at
preserving America's overall economy.

It will help American consumers and businesses get credit to meet their daily needs and create
jobs. And it will help send a signal to markets around the world that America's financial system
is back on track.

I know many Americans have questions tonight: How did we reach this point in our economy?

How will the solution I propose work? And what does this mean for your financial future?
These are good questions, and they deserve clear answers.
First, how did our economy reach this point? Well, most economists agree that the problems
we're witnessing today developed over a long period of time. For more than a decade, a massive
amount of money flowed into the United States from investors abroad because our country is an
attractive and secure place to do business.

This large influx of money to U.S. banks and financial institutions, along with low interest
rates, made it easier for Americans to get credit. These developments allowed more families to
borrow money for cars, and homes, and college tuition, some for the first time. They allowed
more entrepreneurs to get loans to start new businesses and create jobs.

Unfortunately, there were also some serious negative consequences, particularly in the housing
market. Easy credit, combined with the faulty assumption that home values would continue to
rise, led to excesses and bad decisions.

Many mortgage lenders approved loans for borrowers without carefully examining their ability
to pay. Many borrowers took out loans larger than they could afford, assuming that they could
sell or refinance their homes at a higher price later on.

Optimism about housing values also led to a boom in home construction. Eventually, the
number of new houses exceeded the number of people willing to buy them. And with supply
exceeding demand, housing prices fell, and this created a problem.

Borrowers with adjustable-rate mortgages, who had been planning to sell or refinance their
homes at a higher price, were stuck with homes worth less than expected, along with mortgage
payments they could not afford.

As a result, many mortgage-holders began to default. These widespread defaults had effects far
beyond the housing market.

See, in today's mortgage industry, home loans are often packaged together and converted into
financial products called mortgage-backed securities. These securities were sold to investors
around the world. Many investors assumed these securities were trustworthy and purchasers of
mortgage-backed securities were Fannie Mae and Freddie Mac. Because these companies were
chartered by Congress, many believed they were guaranteed by the federal government. This
allowed them to borrow enormous sums of money, fuel the market for questionable
investments, and put our financial system at risk.

The decline in the housing market set off a domino effect across our economy. When home
values declined, borrowers defaulted on their mortgages, and investors holding mortgage-
backed securities began to incur serious losses.
Before long, these securities became so unreliable that they were not being bought or sold [by]
investment banks, such as Bear Stearns and they could not sell. They ran out of money needed
to meet their immediate obligations, and they faced imminent collapse.

Other banks found themselves in severe financial trouble. These banks began holding on to
their money, and lending dried up, and the gears of the American financial system began
grinding to a halt.

With the situation becoming more precarious by the day, I faced a choice, to step in with
dramatic government action or to stand back and allow the irresponsible actions of some to
undermine the financial security of all.

I'm a strong believer in free enterprise, so my natural instinct is to oppose government

intervention. I believe companies that make bad decisions should be allowed to go out of
business.

Under normal circumstances, I would have followed this course. But these are not normal
circumstances. The market is not functioning properly. There has been a widespread loss of
confidence, and major sectors of America's financial system are at risk of shutting down.
The government's top economic experts warn that, without immediate action by Congress,
America could slip into a financial panic and a distressing scenario would unfold.
More banks could fail, including some in your community. The stock market would drop even
more, which would reduce the value of your retirement account. The value of your home could
plummet. Foreclosures would rise dramatically.

And if you own a business or a farm, you would find it harder and more expensive to get credit.
More businesses would close their doors, and millions of Americans could lose their jobs.
Even if you have good credit history, it would be more difficult for you to get the loans you
need to buy a car or send your children to college. And, ultimately, our country could
experience a long and painful recession.

Fellow citizens, we must not let this happen. I appreciate the work of leaders from both parties
in both houses of Congress to address this problem and to make improvements to the proposal
my administration sent to them.

There is a spirit of cooperation between Democrats and Republicans and between Congress and
this administration. In that spirit, I've invited Senators McCain and Obama to join congressional
leaders of both parties at the White House tomorrow to help speed our discussions toward a
bipartisan bill.

I know that an economic rescue package will present a tough vote for many members of
Congress. It is difficult to pass a bill that commits so much of the taxpayers' hard-earned
money.
I also understand the frustration of responsible Americans who pay their mortgages on time, file
their tax returns every April 15, and are reluctant to pay the cost of excesses on Wall Street.
But given the situation we are facing, not passing a bill now would cost these Americans much
more later.

Many Americans are asking, how would a rescue plan work? After much discussion, there's
now widespread agreement on the principles such a plan would include.

It would remove the risk posed by the troubled assets, including mortgage-backed securities,
now clogging the financial system. This would free banks to resume the flow of credit to
American families and businesses.

Any rescue plan should also be designed to ensure that taxpayers are protected. It should
welcome the participation of financial institutions, large and small. It should make certain that
failed executives do not receive a windfall from your tax dollars.

It should establish a bipartisan board to oversee the plan's implementation, and it should be
enacted as soon as possible.

In close consultation with Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben
Bernanke, and SEC Chairman Chris Cox, I announced a plan on Friday.

First, the plan is big enough to solve a serious problem. Under our proposal, the federal
government would put up to $700 billion taxpayer dollars on the line to purchase troubled
assets that are clogging the financial system.

In the short term, this will free up banks to resume the flow of credit to American families and
businesses, and this will help our economy grow.

Second, as markets have lost confidence in mortgage-backed securities, their prices have
dropped sharply, yet the value of many of these assets will likely be higher than their current
price, because the vast majority of Americans will ultimately pay off their mortgages.

The government is the one institution with the patience and resources to buy these assets at their
current low prices and hold them until markets return to normal.

And when that happens, money will flow back to the Treasury as these assets are sold, and we
expect that much, if not all, of the tax dollars we invest will be paid back.

The final question is, what does this mean for your economic future? Well, the primary steps --
purpose of the steps I've outlined tonight is to safeguard the financial security of American
workers, and families, and small businesses. The federal government also continues to enforce
laws and regulations protecting your money.
The Treasury Department recently offered government insurance for money market mutual
funds. And through the FDIC, every savings account, checking account, and certificate of
deposit is insured by the federal government for up to $100,000.

The FDIC has been in existence for 75 years, and no one has ever lost a penny on an insured
deposit, and this will not change.

Once this crisis is resolved, there will be time to update our financial regulatory structures. Our
21st-century global economy remains regulated largely by outdated 20th-century laws.

Recently, we've seen how one company can grow so large that its failure jeopardizes the entire
financial system.

Earlier this year, Secretary Paulson proposed a blueprint that would modernize our financial
regulations. For example, the Federal Reserve would be authorized to take a closer look at the
operations of companies across the financial spectrum and ensure that their practices do not
threaten overall financial stability.

There are other good ideas, and members of Congress should consider them. As they do, they
must ensure that efforts to regulate Wall Street do not end up hampering our economy's ability
to grow.

In the long run, Americans have good reason to be confident in our economic strength. Despite
corrections in the marketplace and instances of abuse, democratic capitalism is the best system
ever devised.

It has unleashed the talents and the productivity and entrepreneurial spirit of our citizens. It has
made this country the best place in the world to invest and do business. And it gives our
economy the flexibility and resilience to absorb shocks, adjust and bounce back.

Our economy is facing a moment of great challenge, but we've overcome tough challenges
before, and we will overcome this one.

I know that Americans sometimes get discouraged by the tone in Washington and the seemingly
endless partisan struggles, yet history has shown that, in times of real trial, elected officials rise
to the occasion.

And together we will show the world once again what kind of country America is: a nation that
tackles problems head on, where leaders come together to meet great tests, and where people of
every background can work hard, develop their talents, and realize their dreams.

Thank you for listening. May God bless you.

The Economist Magazine cites their reasons for the economic collapse.

As you read the reason, note that The Economist, save one instance, blames people, not
abstract ideas.

1. The Federal Reserve, which slashed interest rates after the dot-com bubble burst, making
credit cheap.

 Infonomics: If they had not eased credit, they would have been damned; thus,
damn if they do, damn if they don't.

2. Home buyers took advantage of easy credit to bid up the prices of homes excessively.

 Infonomics: This is Economics 101 which every American should know.

3. Congress, which continues to support a mortgage tax deduction that gives consumers a tax
incentive to buy more expensive houses.

 Infonomics: Don't blame Congress alone on this one. The American people have
had repeated opportunities to replace the current income tax system and they have
rejected it resoundingly each time.

4. Real estate agents, most of whom work for the sellers rather than the buyers and who earned
higher commissions from selling more expensive homes.

 Infonomics: Whether it is expensive homes or drugs, some people can not say
'no'. Even million dollar ad campaigns can not apparently help some people with
the word 'no'.

5. The Clinton administration, which pushed for less stringent credit and downpayment
requirements for working- and middle-class families.

 Infonomics: They don't call them liberals for nothing.

6. Mortgage brokers, who offered less-credit-worthy home buyers subprime, adjustable rate
loans with low initial payments, but exploding interest rates.

 Infonomics: To hell with tomorrow and a possible upward interest rate

adjustment; after all tomorrow is another day.
7. Former Federal Reserve chairman Alan Greenspan, who in 2004, near the peak of the
housing bubble, encouraged Americans to take out adjustable rate mortgages.

 Infonomics: Encouraged but not coerced.

8. Wall Street firms, who paid too little attention to the quality of the risky loans that they
bundled into Mortgage Backed Securities (MBS), and issued bonds using those securities as
collateral.

 If you have not seen the movie "Wall Street", then shame on you. Trusting Wall
Street with your money is akin to trusting Jimmy Jones with your catering needs.
Think Madoff.

9. The Bush administration, which failed to provide needed government oversight of the
increasingly dicey mortgage-backed securities market.

 Infonomics: "We don't need no sticking regulations." Oh, yes we do!

10. An obscure accounting rule called mark-to-market, which can have the paradoxical result of
making assets be worth less on paper than they are in reality during times of panic.

 Infonomics: Market-to-market accounting is the practice of presenting certain

assets at market value on the date of the accounting period ending. For example,
if a balance sheet is presented as of December 31, 2008, then assets subject to this
method will bear the market value as of December 31, 2008. Readers of financial
statements must understand that balance sheet numbers are not static, especially
market-to-market assets. By January 15th, 2009 market-to-market assets may not
be the same in value as they were on December 31, 2008. If you think accounting
rules are complicated, then maybe laissez-faire is not for you.

11. Collective delusion, or a belief on the part of all parties that home prices would keep rising
forever, no matter how high or how fast they had already gone up.

 Infonomics: To profess to be anything other than an optimist in America is

considered sacrilegious. Mr. Harry Markolos, the man who tried to alert us to the
thieving Bernie Madoff, draws attention to the yet another cause of our economic
crisis: Americans who have knowledge of corruption or should have knowledge
of it but choose to ignore it. These Americans are complicit with corruption
because their silence aids its longevity. From here forward (on this site) I will
refer to this cowardice behavior as the complicity-by-silence syndrome or more
succinctly as "CBSS". Incidentally, I make no apology for my cowardice
assessment.

Many brave military men and women risk their lives in foreign countries as we
remain secure stateside. For their sacrifice, is it so much to ask of ourselves that
we act as individual oversight agents for our fellow Americans? Sadly, I have
learned, that many Americans can not "afford" to call attention to the errant
practices that allows corporate American to benefit a few at the expense of many.
I recall one American coworker who thought our Vietnam Vets shamed us with
their post-war traumatic behavior. She said the WWII veterans showed no such
weakness. As she spoke, I thought about those little league ball games I played on
the grounds of a veteran hospital. She obviously had never seen those WWII
shell-shocked victims who walked about the hospital grounds with their
seemingly permanent, aimless gazes. How accurate we are when we acknowledge
that the more removed from the act, the more false courage we manifest. I
wondered about her courage when I was out on that proverbial limb alone
fighting the same corruption she also had knowledge. Later, to my astonishment,
she would apologize to me for her "inability" to join me in the struggle.

I wish to close this discussion by stating that without the collapse of Arthur
Anderson and the implications thereof, my arguments would be the equivalent of
a screen door on submarine. Arthur Anderson validated my arguments but they
are not alone. Just recently, the SEC admitted to their failure to arrest the
shenanigans of Bernie Madoff. And the SEC is not alone. As I have written
elsewhere on this site, the auditing profession is structurally flawed and until we
remedy the flaw we will learn of more Enron's and more Arthur Anderson's.
Think about it, Americans. Do you really expect a CPA firm to write harshly
about the very company who pays their immense fees? The only absurdity that
exceeds this absurdity is the length of time that the CPA profession has been able
to perpetuate this absurdity. (The CPA profession has also been instrumental in
perpetuating a 66,000 page IRS code.)
Commentary by Infonomics

Often when trying to associate blame to any presidential administration, we must consider the
lag or lingering years factor. For example, in 1982 when America suffered a significant
recession during the Reagan Administration, many ardent Republicans simply cited the
lingering inflation caused by the previous president Jimmy Carter. To fault an administration
only two years removed from your own is generally considered acceptable reasoning.
Recently, as I discussed the cause of the current economic crisis with an ardent Republican, I
learned that the lag time can be apparently without a limit. As expected this faithful party
member found a scapegoat for an economic downturn which appeared to be one of Bush's
responsibility; after all, it manifested itself seven and one-half years into his Administration.
Who is that scapegoat for our current economic malaise? Jimmy Carter. That's right, the same
Jimmy Carter who left the White House some thirty years ago. Ronald Reagan eradicated
communism, George W. H. Bush saved Kuwait and George W. Bush thwarted terrorism, but
the three Republican titans together could not save America from the lingering effects of the
Carter years of some thirty years ago.

Even George W. Bush himself does not agree with this fantastic claim and neither does The
Economist magazine. Allow me to begin with George Bush, who stated "easy credit, combined
with the faulty assumption that home values would continue to rise, led to excesses and bad
decisions." Note Bush's language. Instead of blaming a voter, he attacks ideas, “easy credit,
combined with the faulty assumption that home values would continue to rise, led to excesses
and bad decisions." Bush imagines that he is safe in sparing the voter. Bush and/or his speech
writer are obviously unaware that they have attacked one of their party's greatest ideals, laissez-
faire economics. Is he not unwittingly indicting a system where a private lender and private
home buyer, using their respective free wills, engage in a free market transaction that will lead
to the detriment of the system? Oh what a web we weave when first we practice to deceive.

Of course Bush's language here smacks of political correctness and euphemisms. To blame
abstractions is to talk nonsense. The boogey man is not easy credit or a faulty assumption. You
can not sue or jail ideas. Easy credit is a euphemism for irresponsibility or false optimism. Easy
credit does not excuse the borrower from the responsibility of knowing his/her own ability to
repay. The same people who would have us believe that they are the better candidate for a job
can not even manage their own debt. Some of our politicians have contributed to this
irresponsibility. Recently, Obama referred to mortgage lending practices as predatory lending.
Obama would have me believe that mortgage loans were forced upon home buyers, who had no
free will. Politicians, like Obama, should be very careful with such an argument because, in
doing so; they also make the argument that these same Americans may be easily influenced in
other matters, including the latest caprice in political thinking. Isn't that what many feared about
the Domino Theory? Given free will, did not many conservatives fear that some (or is it many?)
Americans might choose a new ideology more accommodating to their plight.
From childhood, Americans are taught that America is the greatest country on the earth and that
any dream is possible in America. The reality is, however, that things do go bump in the night,
that the best laid plans often go awry and that bad things happen to good people all the time.
Even God was a victim of false optimism. In Genesis 1, God creates Adam and Eve but by
Genesis 3, the two have broken their covenant with God. If the consequences of false optimism
ended with the misery of the immediate parties, then misery would be contained. God did not
limit his punishment to just Adam and Eve; no, it extended punishment to all subsequent
mankind. Obama not only excuses the "victims" of "predatory lending" but he also punishes the
responsible when he takes their taxes and rescues the irresponsible. Obama's action also breeds
resentment. In closing on this topic, I would like to say that the entire discourse would be
rendered irrelevant if the offenders demonstrated character worthy of a responsible American;
that is, I would ask the offenders to reject Obama's hand-out and take the pain.

Many mortgage lenders approved loans for borrowers without carefully examining their ability
to pay. Many borrowers took out loans larger than they could afford, assuming that they could
sell or refinance their homes at a higher price later on. Optimism about housing values also led
to a boom in home construction. Eventually, the number of new houses exceeded the number of
people willing to buy them. And with supply exceeding demand, housing prices fell, and this
created a problem.

Is Bush arguing that the combined scholarship of the lender and the borrower is inadequate for
determining the viability of a loan?

How does Bush know that the borrowers were perfectly forthcoming about their finances with
the mortgage lender?

Bush finally explicitly mentions optimism and he implicitly alludes to false optimism. Surely,
Bush is aware that pessimism (or realism according to Murphy's Law) and atheism are very
much alike. Neither pessimism nor atheism is illegal but one's general welfare is improved if
both are denied. Imagine a presidential candidate with the gumption to admit to pessimism
and/or atheism. I think Catch 22's General Cathgart speaks for America when he replies that
atheism may not be illegal but it is un-American. Cathgart could have just as well spoken the
same for pessimism. In America practicing the proper "ism" is essential.

In 2005 during the peak of the homebuilding bonanza, I asked one homebuilding lender when
he could identify the slowdown. He replied that he learned of the last slowdown when the
bank's largest homebuilding debtor visited the bank and dropped his office keys on the banker's
desk. Let us be thankful that the National Weather Service does not predict hurricane with this
level of sophistication.
Again, is not Bush unintentionally criticizing laissez-faire economics?

Borrowers with adjustable-rate mortgages, who had been planning to sell or refinance their
homes at a higher price, were stuck with homes worth less than expected, along with mortgage
payments they could not afford.

In other words, some homeowners gambled and lost.

I'm beginning to believe that laissez-faire economics, like democracy, requires an educated
populace.

As a result of many homeowner defaults, many mortgage-holders, including investors holding

mortgage-backed securities, began to default. Many investors assumed these securities were
trustworthy. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and
Freddie Mac. Because these companies were chartered by Congress, many believed they were
guaranteed by the federal government. This allowed them to borrow enormous sums of money,
fuel the market for questionable investments, and put our financial system at risk. When home
values declined, borrowers defaulted on their mortgages, and investors holding mortgage-
backed securities began to incur serious losses.

In other words, not only did some homeowners gamble and lose but some investors gambled on
the gambling homeowners and lost. My liberal ex-girlfriend addressed these matters with "too
bad, so sad, move on." Yes, we keep moving on, leaving a trail of financial ruin and that
attitude will eventually topple America’s house of cards.