The Origins of “Black Monday”
He might not want to say it out loud, but Barack Obama senses, no doubt, that this past weekend’s financial meltdown will do much to boost his slumping electoral prospects. According to Democratic lore, financial woes make the “rich guy” Republicans look bad and send the reeling middle classes into the arms of the party of welfare and wealth redistribution. Wide-scale financial turmoil is the kind of political “opportunity” Paul Krugman is always talking about and which many liberal commentators think Obama is ready to seize.
In his first public statement, Obama recited the standard Party Line, blaming the whole thing on those callous Republicans who didn’t care enough about the working people and who didn’t tax enough all those greedy CEOs, whose huge bonuses were probably the source of all our troubles.
What’s most remarkable about this kind of “left-wing populism” is that its implied policies are essentially indistinguishable from those of Hank Paulson—and thus all-too compatible with the “New Class” managers of the Washington-New York corridor. Whatever his rhetoric, Obama would ultimately inject more taxpayer-funded capital into markets, prop up more of those semi-governmental financial institutions, and hand out more golden parachutes to the CEOs with connections and “pull.” Put simply, the Man of Change doesn’t threaten the status quo in the least.
Freddie and Fannie spent more than $200 million on lobbying over the past decade, most of it going to Democrats, and they were “re-nationalized” with bipartisan support. Lehman Brother, which Paulson thankfully resisted bailing out, has accounted for almost $400,000 in donations to the Obama campaign. It’s thus likely that Obama would have been more assiduous in helping out his Wall Street buddies than Paulson and the Bush administration.
At first glance, McCain might seem marginally more sensible. In his own public statement on the crisis, he said he didn’t want taxpayers to bail out Lehman, which is good. And it’s worth noting that two weeks ago, Sarah Palin claimed that Freddie and Fannie had gotten “too big and too expensive to the taxpayer,” again a very good sign.
But when McCain got down to brass tacks, as he likes to say, he seemed to argue that the situation can be righted with more efficient regulation.
Says Mac,
The McCain-Palin administration will replace the outdated and ineffective patchwork quilt of regulatory oversight in Washington and bring transparency and accountability to Wall Street.
I’m unable to make heads or tails of what this actually means, but it appears that McCain is stuck in the days of the Enron scandal and thinks that the current mess was created by a lack of transparent accounting, or something or other. Mac’s solution would thus be laws like Sarbanes Oxly, which are tedious and harmful to small business and which, in the end, simply give tax accountants more things to do.
No one wants to talk about what really caused the whole mess.
In his recent column, “Spengler” argues that the collapse of Lehman marks the “end of leverage”:
The income of American consumers might have stagnated, but the price of their houses doubled during 1998-2007 thanks to the application of leverage to mortgage finance. The profitability of American corporations might have slowed, but the application of leverage in the form of mergers and acquisitions financed with junk bonds multiplied the thin band of profitability.
Wall Street and the City of London rode an unprecedented wave of profitability by providing overpriced leverage to consumer and corporate markets. Led by the financial engineers at Lehman, the securities industry grew an enormous infrastructure of staff, systems, and financial exposure. They were so successful that when the music stopped, there was no way to liquidate this mechanism gracefully. It only could be allowed to collapse.
This is all true, but it’s important to remember where all this excess capital came from. The “leverage bubble,” if we’re to call it that, inflated not because of “de-regulation” (the timeworn bugbear of the liberal-Left) but due to the close alliance between government and finance. Washington was “pro-market” in the sense that it acted as a virtual guarantor to Freddie and Fannie, urging them to do things like socially engineer increased minority home ownership and buy up more and more rotten mortgages this past spring in a vain attempt to stabilize the housing market. The Washington-Wall Street coupling has been a disaster, and yet no one’s willing to step in and break it up.
Looking back on “Black Monday,” I can’t help but feel sympathy for the tens of thousands of financial workers who’ve been asked to “move on,” and whose families will suffer as a result. The fact that no one in Washington wants to learn anything from the crisis makes the situation all the more depressing.
Comments
Maybe one day a mainstream politician will have the nerve to speak the truth—that deficit financing and the hidden tax is the root of our problem and that the housing crisis is the result of a government designed mortgage lending process based on affirmative action.
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“Wall Street and the City of London rode an unprecedented wave of profitability by providing overpriced leverage to consumer and corporate markets.”
No.
“Overpriced leverage” would be *borrowing* at a *high cost.*
“Wall Street and the City of London rode an unprecedented wave of profitability by providing overpriced leverage to consumer and corporate markets.”
No.
“Overpriced leverage” would be *borrowing* at a *high cost.*
An overpriced hamburger is a hamburger that costs a lot, right?
Leverage is a *loan*, right?
So “overpriced leverage” would be an *expensive*loan*.
What causes bubbles is *cheap*leverage*, which *under*prices*the*risk*of*default* (i.e. not getting paid back).
“Spengler” knows not of what he writes.
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Gee, maybe investors will now have to be satisfied with the mundane drudgery of investing in things of tangible worth...like say, vehicles that created jobs and products in the lapsed-Republic. The tyranny of the quarterly report and Instant Wealth has finally run it’s course under our first “MBA President”.
The Credit Collapse is a fitting apotheosis to the gangrene of sprawl, cheap fuel and Debt as a Foreign And Domestic Policy. One could see it coming a mile away (about the time that all the young turks claimed we were in a “new economic paradigm) and still, you will hear nobody....not a soul discussing the larger philosophical lessons surrounding it. We must simply “Regulate” better. After all, Mr. Cheney asserts that our “way of life” is “non-negotiable”. Perhaps Nostradickus was talking about the fate of the dollar.
The only benefit of this 8 year Lesson in Disaster is that it is a brilliant tutorial in self-inflicted abuse and yet, the only thing we hear about it is the timid roar for “change”.
We are staring a remarkable transformation....and the economic opportunities entailed by it....directly in the face and our pettifogging political-media class has failed to utter anything comprehensive about it. Why? They will clutch onto the blasted timbers of this sinking ship because their treasure chest is lashed securely to it.....insuring that they will go down screaming loudly about “un-forseen forces beyond their control”.
Ahhhhh.... the sturdy ironies of the fact that our modern standing armies have as their root the need to combat the Barbary Pirates only to see that a couple of hundred years later, a seamy passel of homegrown Pirates boat Washington and sail it squarely onto the reef while some Born Again Dutch Bulb Fanatics create Havoc in Nieu Amsterdam. Suh are the wages of “Creating Reality” and “The End of History”.
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One of your best posts, Richard. There should have been a “wall of separation” between business and state. Where is Tom Jefferson when you need him?
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One would hope that this mess benefits Obama. What on earth else is it going to take for Americans to stop electing the Republican party? There’s little these people haven’t ruined and they are running around claiming that Obama is dangerous in some way. It’s just comical. The Republicans and their neo-con handlers ought to be driven out of Washigton and America by blows. Ship them all to Mexico and Israel.
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When ol’ JP Morgan, located on Palm Beach, Florida, in the 90s invited Old Money for conferences on derivatives and leveraging it was easy to see the country was headed for the crapper.
Back in the day, America went to JP Morgan for a bail-out,so, I guess, turn-about is fair play.
ONE of the biggest problems is the Bond Market (what some investment managers call “The Cockroach Market") which is not transparent (if it was would Mike Milken have made 5550 Million in 1986?).
Many institutions borrowed against Bonds not knowing the value of them (there is no knowable market value because there is nothing like the central transparent market like the NY Stock Exchange).
Look, I ‘d like to pistol-whip Andrea Mitchell’s Meal-Ticket, Alan Greenspan as much as the next guy but WHY did the big institutions (think banks)borrow against bond assets when there was no objective way of assessing their worth?
Was it because we Americans tolerate individual profit and socialised debt?
Barack hasn’t a clue about any of this. Neither does McCain.
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McCain is clueless but has Phil Gramm lined up to be the next Sec of Treasury. Even the current incumbent is saying the changes he made were a big part of creating this mess. He ranks after Greenspan on the responsible list. He also created the black hole that Enron used to defraud people along with fellow “Texan” W who profited from Kennie Boy. Gramm fled the Senate when Enron blew up with his wife on the board and him known as Enron’s Senator. But he made a soft landing from the Chair of the Senate Banking Committee to a posh banking job making money off of dirty bank dealings.
Even the Billionaires are getting nervous. They might tell McCain not to put his old friend in charge of the economy but since McCain was a bought and paid for Congressman for Charles Keating he is more than willing to have the taxpayers bail out his rich non-elite buddies. He didn’t spend 5 years in a box to be ordered around.
Real heroes never speak of their heroism. It makes you wonder if the websites saying McCain was a collaborator might be telling the truth.
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The House of Morgan was started by the illustrious J.Pierpont himself. During the Civil War he did not bother to fight for any ideals, but busied himself making money. I suspect many of the stalwarts who post here applaud him for that.
Yet Ezra Pound did not. Pound remembered Morgan making money by financing defective rifles to the Union Army. Those who would suffer and die were of no concern to Morgan. Enriching himself only mattered. Pound thought Morgan represented the cowardly ruling class that arose from the Civil War and still plagues this country. I would add something more, but my post would be taken down.
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do you think nancy pelosi has thought about any of this for 3 seconds? they are in another world in the beltway. the state gives them a perpetual morphine drip
http://www.badmovies.org/forum/index.php/topic,121078.0.html
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Just a minute, Mr. Gibbons. Mr. Morgan may have pulled a dirty deal or two in his youth, but he grew up and did some good. One example is that he sold some railroad bonds after having been shown a set of cooked books. When it turned out that the company couldn’t make interest payments, Morgan mothballed his yacht for a year and a half to make the payments out of his own money and reorganize - or reMorganize - the railroad. It is believed that the Federal Reserve became necessary after Morgan’s death because he was no longer around to save America from catastrophic crashes as he did in the Panic of 1907. In “Atlas Shrugged” Ms. Rand drew a clear distinction between Builders and looters. Morgan and Jay Gould evolved from looting to building, which is more than most MBAs seem capable of.
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“The Federal Reserve became necessary”? What does that mean?
The Federal Reserve functions as the Great Inflator, and its inflation sprees lead directly to the growth of bubbles in various sectors of the economy. In other words, the Fed makes credit less expensive than it would be if the dollar were a stable currency, which leads to over-investment in particular sectors (dot-coms in the ‘90s, real estate in the ‘80s, etc.). The result is always a loud popping sound when the bubble bursts—and the insistence by politicians of both parties that the system would work just fine, the bubbles would expand indefinitely, if only the incumbent taxed the rich more (in the Dems’ case) or regulated better (in TR Reps’).
I doubt that McCain has any idea how the economy works. In case Obama does, he has no political incentive to say so. If we want the cycle of boom and bust to end, we must do something about the Federal Reserve. At the least, we could do what used to be done in the 19th century: discuss the money issue.
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Fair enough. Something like the Fed seems necessary; whether or not it does a good job is another question. It’s sort of like Keynesian economics. Deficit spending in bad times should be offset by paying off the deficit in good times. The only time I’m aware this occurred was during the Clinton Administration, and Mr. Greenspan fretted that paying down the national debt too fast was dangerous. I readily confess that high finance is beyond me.
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“I can’t help but feel sympathy for the tens of thousands of financial workers who’ve been asked to move on”
Why the sympathy? Financial institutions, from their managers down to the last employee, by and large do not create real wealth. They do not produce anything. They are redundant and superfluous. They are society’s parasites.
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Good summation of the Fed, Mr. Gutzman.
Strange; I applauded the Fed today for not lowering the rate again. That’s like congratulating Jack the Ripper for not claiming another victim.
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Since the founding of the Federal Reserve 95 years ago, the currency has been devalued by 97%. The purpose of its alleged founding besides maintaining a consistently valued currency was that it would prevent the ups and downs of business cycles. Only 16 years after its founding, the FED presided over the greatest financial depression in our history, and the great inflation of the seventies and early eighties followed.
In the present crisis, the FED was the enabler of the housing bubble hence the CAUSE of the present international credit crisis.
Central banking is a tool to control the economy and to loot the people of their wealth. It is evil.
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Mr Stocking wrote: “Just a minute, Mr. Gibbons. Mr. Morgan may have pulled a dirty deal or two in his youth, but he grew up and did some good. One example is that he sold some railroad bonds after having been shown a set of cooked books. When it turned out that the company couldn’t make interest payments, Morgan mothballed his yacht for a year and a half to make the payments out of his own money and reorganize - or reMorganize - the railroad.
Mr Stocking like the illustrious Morgan showed little interest in those who did not grow up, but died. The United States has no natural aristocracy, but greedy thugs such as Morgan and Friends. Our lack of leadership is evident in world affairs.
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Mr. Gibbons might do well to consider what he’s said. Granted, the US has never had an official hereditary aristocracy; we’ve had an unofficial aristocracy of wealth and influence. Is he suggesting democratic socialism or maybe Christian anarchy? Morgan, Gould, Huntington, Vanderbilt, Astor, Harriman, Carnegie, Rockefeller, and their sort built the infrastructure of modern America, like it or not. Oh, and Ford, Hearst &c;. Self-interest is what makes America work. A bit of altruism and enlightenment do indeed help. I have serious doubts about laisser-faire, and regulation tends to get corrupted and debased, especially in America. If anyone has any positive answer
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...to this dilemma, please by all means advise.
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The vast majority of overinflated loans did NOT go to minorities in low income neighborhoods.
The entire inland empire in Riverside and San Bernadino counties was a bubble. Stockton was a bubble. As long as Wall Street could buy and repackage loans there was money available. A nondescript 2 bedroom house in Newport Beach when from 220,000 in 1994 to 2.1 million in 2005 to 1.4 million and unsold in 2007. How was this related to CRA lending?
Just another attempt to continue the yarn that government is at the root of every problem. Until Reagan, none of these entities were insolvent - not making much money yes, but not insolvent.
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Does anybody still believes that we live in a free market? Still anybody believes in these myths of free markets and individual free initiatives? Do you see how well it is arranged with the gay of the view, the movie? The government paying out with our money the rich gays out there? For them to be able kipping up the same standards of life? I have some difficulties paying my bills lately and I thought to ask my Representative to bail me out too. We all have the same rights after all. Do you think my initiative gonna be successful? I’m pretty sure my self!!!
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Marius’ remarks about the gummamint paying out our money to rich gays is being sent on to a gay couple I know. If indeed their rich brethren are cleaning up, they will file for their share. Kipping up the same standards of life? I don’t think they have kippers for breakfast, but I’ll ask.
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Fair enough. Something like the Fed seems necessary; whether or not it does a good job is another question.
I don’t see why the Fed is in any way necessary. All it does it socialize banking costs and invite collusion between big financial interests and government.
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Spencer has taken too much of the “Libertarian” kool-aid. Oh you silly “free marketeers” with your silly ideas. Look, Spencer, the crisis is not being caused by low income minority borrowers, but by the Big Guys, the real estate speculators and the like, abandoing’ their “investments” when the appraised value fell below the mortgates. There are more $500,000 homes going belly up then little $150,000 homes for the minority types.
The reason America works so well originally was cheap land, and in the 20th Century, cheap credit so woring ffolk could afford to buy their own homes in suburbia. And behind all this was the government backing up the
loans, providing the guarantee that the “private sector” wouldn’t and couldn’t provide. Without Fannie
Mae and Freddie Mae, there would be no widespread homeownership in the USA, and our working class would
look like Mexico or Eastern Europe.
Rather then dump government guarantees that created widespread home ownership and the American middle class, ,we we might better be advised to limit government assistance to people who actually work for a living, rather then real estate speculators, and maybe limit the size of the mortgage guarantees so that multimillionaires and
Wall Street tycoons can’t get mortage deductions on 7000 square foot homes with 2 or 3 people living in them.
And of course, Spencer, you’ve completely FoRGOT the Gingrich Republicans (Gingrich is a libertarian)
passed the Financial Services Modernization Act of 1999, which overturned the Glass Steagall Act which
prohibited the consolidation of commerical, insurance and investment banks. We can thank idiots like YOU and
yours for the dumb idea of turning real estate mortgages into speculative investments. The reason
the Glass Stegall Act was passed in the first place was to keep situations like we are facing right now.
Thanks to the “freedom” agenda of idiots like Gingrich spouting “regulation is bad” nonsense, the entire American economy is now at risk.
Do we need new regulation? You betcha. So shut up about minority poor people causing this problem. YOU ‘
caused it. YOu and yours.
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Marius sed: “Does anybody still believes that we live in a free market? Still anybody believes in these myths of free markets and individual free initiatives?”
Oh dear, Marius. YOu must have been born under the Christmas Tree. Look there is no such thing
as a “free market”...it is a utopian fantasy. Government regulation is hardly the only barrier to entry of competitors into the marketplace. Get your head of the dusty old texts of simpletons like Rothbard and Von Mises, and take a walk in the REAL World.
If you took a walk down Main Street in the REAL world, you would know that government guarantees of home mortgages to working class folks that private banks would not provide, there would be no widespread home ownership in the USA, and the US would look like Mexico, or Eastern Europe.
Now if there is any culprit in this crisis, it is the “libertarian” Gingrich Congress---with the cooperation ‘
of Bill Clinton---which passed the Financial Services Modernization Act of 1999, which did away with the laws separating investment, commerical and insurance industries, and led to the bank consolidations, and to the idiotic idea of turning working folk mortgages into speculative investments for foreign banks and hedge funds.
Hey Obama is no saint, and I agree he is beholden to Wall Street, but I’m sick and tired of you so-called
“libertarians” blaming minority home owners for this crisis. YOU caused it, you and yours, and the idiotic
idea of “deregulating” everything.
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Exactly, Joe Populist, exactly. I’m extremely weary of the sloppy logic Spencer applies. Witness his nod of approval when knucklehead Palin claimed that “Fannie and Freddie were costing the taxpayer too much.” Yeesh.
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Saint John of Kanty, you were unjustly fired from your work. Please pray for those who are jobless or in danger of losing their jobs that they may find work that is fulfilling in every way. Guide us to ways to help those looking for work. Amen
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Gingrich is a LIBERTARIAN?!?!? His Congress was LIBERTARIAN??!?!
Holy $%!#, Joe, you really shouldn’t soapbox with your underwear on your head.
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Trying to look at things in a calm manner, it seems that there were numerous causes of this market catastrophe.
Can we blame the “Gingrich-type” legislation for this mess, as one of the responders has suggested? Yes, certainly. Can we also blame the insane affirmative action/minority lending practices for contributing greatly to this horror? Yes, of course. Can we blame that ubiquitous financial oligarchy that has, in effect, been directing the fortunes of this country for the past 200 years no matter which party was in power? I believe so. Were well-connected poofs given preferential treatment in some financial areas? Entirely plausible, given this new fascination with buggery we are now suffering from. Do we need more regulation? Tentatively, yes; but I would rather be regulated by a regime other than the terminally corrupt two-parties we live under now who would regulate not for the public good but for their favored friends.
It is interesting how precisely all of this was predicted by those hated “distributist” thinkers like Belloc, Penty, Chesterton, et al. While the distributism they championed could never take hold in America perhaps re-reading and implementing some of the ideas of these fine historians might possibly offer us a guide out of this mess.
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.... america’s dead - history.... last chance was in ‘92 - Pat was RIGHT
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Can we also blame the insane affirmative action/minority lending practices for contributing greatly to this horror? Yes, of course
Dead on. Vdare and Sailer have been working that angle. But lets not forget immigration, which is of course connected to the above. How much of the subprime paper was issued to illegals and other immigrants who couldn’t pay and didn’t understand what they were doing? How much was for second mortgages on ‘home equity’ , equity derived from the insane run up of housing prices , itself due to demand, in turn due to rapid immigration driven increases population.
Meanwhile, American-born young couples couldn’t afford a house in which to start a family.
None dare call it genocide.
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My summation of the American political dialogue regarding the results of Fed inflation was vindicated, perhaps parodied, by the exchange that ensued in this very thread. I suppose that it is just much easier to blame “speculators,” “deregulation,” “Libertarian” neoconservatives (!), rich people, and immigrants than to get one’s Madonna/Simpsons/football-befuddled head around the operations of the Federal Reserve.
In the 19th century, money—the ratio of gold to silver—was a central political issue in the United States. Now, virtually no one can understand it. Have we extended the suffrage too broadly, or just dumbed down our education system woefully far?
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Mr. Stocking is asking for answers. He idolizes the Robber Barons. “we’ve had an unofficial aristocracy of wealth and influence. Is he suggesting democratic socialism or maybe Christian anarchy? Morgan, Gould, Huntington, Vanderbilt, Astor, Harriman, Carnegie, Rockefeller, and their sort built the infrastructure of modern America, like it or not. Oh, and Ford, Hearst &c;. ¨
In both wars of the 20th century George Marshall noted the United States went into them virtually unprepared. This was due to a rich class that would not spend money on defense as the lives of their serfs mattered little to them. Marshall reminded his biographer that in WWI we did not manufacture one American designed weapon. In WWII the British and the Russians bailed us out while we reaped the economic benefits.
At one time Conservatives cared for honor and courage. Not any more as one can see from this website.
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Mr. Gibbons should consider that the US jolly well could and should have sat out WWI. And indeed we did develop and produce the Liberty aircraft engine and the Tommy gun, though the latter wasn’t ready for production before the armistice. As for unpreparedness for WWII, WWI was the war to end all wars and from its conclusion the American public and Congress weren’t enthusiastic about giving money to the merchants of death when there were other pressing needs, not to mention that it wasn’t just the plutocratic class which objected to paying taxes.
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Come to think about it, the plutocrats would have loved to land some nice juicy government contracts. And, if memory serves, J. Pierpont Morgan gave his yacht Corsair II to the US for duty in the Spanish- American War and was gratified to learn that it performed meritorious service. Of course he ordered Corsair III after the war, but that’s another matter.
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Jim puts his head in the underwear drawer: Gingrich is a LIBERTARIAN?!?!? His Congress was LIBERTARIAN??!?!
Holy $%!#, Joe, you really shouldn’t soapbox with your underwear on your head.”
Look silly, Gingrich, Phil Gramm, Bob Barr, Alan Greenspan--all cut from the same cloth. What would YOU call them?
I call them pimps for the big money boys. That’s what “libertarianism” is.
And it was YOU and YOURS that deregulated the banking industry and caused of course the OPPOSITE of what your ideological idiocy promised, and thanks to you, the federal
debt just doubled by the latest bailouts.
Not since the “deregulation” that caused the Saving and Loan collapses in the 1980’s has there been such clear proof that so-called “free market” economics do not work, and in fact, have the opposite effect.
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Mark in LA said: The vast majority of overinflated loans did NOT go to minorities in low income
neighborhoods...A nondescript 2 bedroom house in Newport Beach when from 220,000 in 1994 to 2.1 million in 2005 to 1.4 million and unsold in 2007. How was this related to CRA lending?....Just another attempt to continue the yarn that government is at the root of every problem. Until Reagan, none of these entities were insolvent - not making much money yes, but not insolvent.”
Mark is exactly right. The minority lending is insignificant compared to the huge loans on mega-mansions where the well-to-do owners are bailing out on homes where the appraised value is now less then the mortgage. He is also right that these institutions were not insolvent until the deregulation championed by free market fundamentalists of the Spencer ilk got ahold of them.
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Post hoc, ergo propter hoc is a fallacy. What “regulation,” exactly, will prevent the appearance of market bubbles at a time when the Fed is inflating the money supply by lending at less than the rate of inflation? Answer: none.
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It isn’t so complicated, folks. It’s called the sin of Usury.
End of speculation. Disagree?
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White, marble rye, sliced whole grain--it don’t matter: we’re all toast.
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