Saturday, December 08, 2007

An Amazing Spectacle to Watch

I listened to Hank Paulson on the tube, ex-Mr. Goldman Sachs, presently Sec. of Treasury, talk about the incredible mortgage mess that was triggered by individuals such as...Hank Paulson.

He was CEO of Goldman at the time many of these sub-prime loans were bundled, shipped all across the globe, and loaded with derivatives (options and futures) that even most experts do not understand.

The sub-prime mortgages at the heart of this issue are not the whole problem given that, in relative terms, the number of individuals unable to refinance or repay their mortgages is small. However, what was left unmentioned is the leverage of derivatives that were slapped on these bundled securities that are rumored to be in the trillions.

True, derivatives can result in enormous profits given their leverage. However, if incorrectly positioned, they can lead to humongous losses. Obviously, Greed Street got it wrong. While no one knows for sure the extent of the losses incurred in these transactions, they continue over hanging financial markets and threaten the whole system.

To understand how this incredible MESS started, one must go back in time to the beginning of the Bush administration with its emphasis on the "ownership society" and tax cuts as well as Mr. Greenspan's willingness to lower interest rates to next to nothing, thereby flooding the system with liquidity in an effort to rekindle the economy.

Those of us watching his "generosity," could not help but wonder where the money trees were growing from which these $$$ were being picked.

While ownership is indeed a worthy goal of most individuals, it was understood in the pre-Bush era that in order to own a home, certain qualifying requirements must be met. Yes, a down payment was among them as were potential earnings to determine if a given candidate qualified for a given loan amount.

But, all those requirements went the way of the dinosaur once the system was flooded with cheap dollars.

Banks and S&Ls had a field day issuing mortgages to both, qualified and non-qualified buyers...owner occupied as well as speculators.

The name of the game: Anything Goes!

Pre-approved credit card solicitations flooded our mail boxes and credit was extended to most individuals with the ability to sign on the dotted line.

It did not take long for Wall St. a.k.a. GREED STREET to participate in the "Games People Play," and the result became a threat to the global financial system.

Predictably, economic growth accelerated in the short run and prices of homes started to go up...and up....and up....leading to a frenzy with all the signs of a potential bust.

And bust they did, leaving in their wake a disfunctional debt market that continues overhanging the economy not only to this day but for many days/months to come.

Spending non-existent funds was the hallmark of the "conservative" Bush administration. The enormous cost of the unprovoked war on Iraq was financed by foreigners with $$$ they collected from the American consumer as the trade imbalance of payments continued growing.

Meantime, back at the ranch, the dollar started tanking and continues tanking to this day. Against the Euro, the dollar lost roughly half of its value during the Bush years. Americans traveling overseas are shocked by the prices they must pay given that their former almighty dollar is on life support.

If there ever was an administration that threw caution to the winds, the Bush-Cheney administration is it. They waged a very costly war while cutting taxes for the wealthiest in our nation, never asking where the money to repay our debts would come from.

Amazingly, "conservative" Republicans in Congress were silent as this saga unfolded and they were still in the majority. Had Democrats behaved in such an irresponsible manner, all hell would have broken loose.

The question then becomes: with friends like these....who needs enemies?


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