First off, this topic is complex. Many books and theories have been written. After studying the meltdown and taking a close look at history, I have come to the following conclusion.
It seems Government intervention most always has a negative impact on the free market system. Their tinkering with business in un-natural, artificial ways may seem to some to have benefits but a common sense evaluation of this approach clearly shows both short term and long-term consequences.
In the 1990's Congress attempted to artificially force the American Dream of home ownership onto millions of Americans who were not yet qualified and not prepared to take on the responsibility.
The financial institutions initially said no. They could not lower their requirements for home loans. The risk would be great and they would surely lose money.
The government enabled a situation where the lenders could quickly move these risky home loans to institutions such as Fanny Mae and Freddy Mac. In that case, the lenders were willing to make loans to who would otherwise be unqualified.
Once the process started it was not long before unscrupulous loan originators got very involved in the process. They knew that it only took 90 days to remove the risk from their desk to someone else's.
"Think about that for a minute. If a bank is on the hook for the loan long term, the lender would act more like an adviser to the borrower, because it would be in the lenders best interest to make sure the borrower was truly ready to handle the responsibility. By taking away the lenders liability the lender goes from being an adviser to a salesman."
The more they lend the more they make so they began inflating loans to as high a level as possible, as long as the borrower could cover the payment for at least 90 days the lender was home free, literally. This began to artificially inflate the real estate values.
There were lots of deals with appraisers inflating property values; the rating agencies rated bulk real-estate holdings as AAA when they were not even close.
Wall Street saw all the money moving around and wanted in. Their lobbying efforts finally paid off when Congress rescinded the 1930's Glass-Seagle Act. This was a provision that prevented Investment Banks from buying insurance companies and commercial banks among other things. This measure, by Congress, gave the green light for Members of Wall Street to grow “too big to fail”.
The problem was that Wall Street was investing lots in the AAA paper from the real-estate sector.
The government was not done yet, through the SEC they waived the leverage cap rule for the largest financial institutions on Wall Street. Originally they could borrow 12-1. If they had 1 billion in assets they could borrow 12 billion. What a deal!
As if that was not good enough once waived by the SEC they leveraged 20, 30 and even 40 times their asset value. Giant bets were made. But that was OK, because they took insurance out on those outrageous bets. This insurance sold by AIG and others was called Credit Default swaps.
The government waived the up-tick rule, a rule regulating a firm's ability to short sell its own stock.
When these American Dream Home Loans began to default the stage was set for one of the biggest melt downs in our history. All preventable, it never had to happen. The Government simply could not leave the Free Market System alone.
Wall Street exploited the situation like never before. Paying off rating agencies for the AAA ratings, selling subprime mortgage backed CDO's and other financial products with the fraudulent rating. Selling credit default swaps (insurance) on these subprime mortgage groups. AIG called these CDS's "Free Money" because they thought they would never have to pay out on them.
The market collapsed and Wall Street was left trying to figure out what just happened.
Once again the Government intervenes. OK, so they set the stage for this giant catastrophe and now they want to fix it?
The Federal Reserve and the US Treasury start wheeling and dealing. Deciding who they wanted to win and who they wanted to lose. They closed companies down and sold them for ridiculously low amounts to their friends and they told companies who they should partner with. There is way more to this story. Basically The Fed and Treasury love playing GOD over the stock market.
So the government swoops in to save the day. Providing hundreds of billions to their friends on Wall Street while paving a little highway so you can see, with your own 2 eyes, what a wonderful job they are doing for you.
The government succeeded in creating a situation where millions of Americans lost their retirement savings, lost their jobs and burying all of us in an ocean of debt.
Now, even though their own experts tell them that their spending is unsustainable they give federal employees a pay raise, put billions of dollars worth of earmarks in the budget and then vote to increase the national debt limit so they can borrow more money to pay for it.
I am completely dedicated to the free market system. This does not mean No Regulation. The financial sector basically has a license to steal so we definitely need realistic, well thought out regulations but not regulations that allow Government to interfere with the natural balance of an honest free market. You need basic rules to discourage theft and fraud.
Look, when companies fail the competition will pick up the pieces, others will come along and replace them with new money and new innovation. Bailouts negatively disrupted the natural balance of the free market. Bailouts reward bad behavior while punishing those who have done things right.
When time gets tuff the sole job of Congress should be to find ways to reduce the burden on all taxpayers, not escalate spending, forcing even more taxes and at the same time devaluing the dollar.
It truly will not be easy to repair the damage and put us on a positive course but I believe our seniors, our children, our grandchildren and our Country deserve that we try.
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