Let’s Be Honest

I’m listening to the President as I write this.

When Obama said he inherited a nightmare, he wasn’t kidding.  When Little Boots took office, there was a budget surplus, by the time he left office the budget was in a 400,000,000,000 dollar a year deficit.  It happened because Little Boots embarked on 2 wars, added a huge spending program in Medicare part D and cut taxes. The deficit along with other problems I will point out triggered a recession that further devalued the dollar and pushed the debt up by 3 trillion dollars.

All of that is truth, fact, can’t argue it.

Many of you are probably like me and this stuff makes your head want to explode, but it really does have to be dealt with.

Allow me to try to simplify what happened that has wrecked our economy.

In 1977 Congress passed the Community Reinvestment Act, to make this short and sweet it mandated that banks make loans to people who weren’t qualified to take out loans.  It made it easier to buy a house.  At first it worked well but as we got into the 80s and 90s housing prices were skyrocketing and people, even middle class people were using this ease in credit to finance more house than they could afford, some using exotic mortgages, some of which even elevated the principle over the first ten years, the idea being that housing prices wouldn’t fall.

Fannie Mae and Freddie Mac, Bear Sterns, Shearson Lehman and others were heavily invested in these risky mortgages, and they were selling them back and forth with AIG insuring these mortgages against default.

Starting to see some names you recognize?

Read On…

Housing prices began to drop and the mortgages started defaulting and the holders of these mortgages became vulnerable.

It started with Bear Sterns. Wall Street decided that Bear Sterns held too much high risk debt, and confidence began to fail and Bear Sterns worth dropped to nothing in about a week. Bear Sterns was going to fail.

When the chairman of the Federal Reserve looked at Bear Stearns books he saw a looming problem.  If Bear Stearns failed it owed so much money to so many other institutions that some of them would fail, and they in turn would cause other failures to the point that our monetary system would have collapsed.

The US Government had to intervene. They guaranteed Morgan Chase 30 billion dollars to buy Bear Sterns, which was at this point, worthless.

But the problem wasn’t staved off….Lehman was next. The secretary of the Treasury Henry  Paulson was a hardcore free market capitalist and he had just bailed out Bear Stearns,  something he really hated. He told Lehman to find a buyer.  Lehman ignored him and when they came to Paulson for a bailout he said no, you can fail.

This meant now, that AIG was responsible for paying billions of dollars to Lehmans creditors, money that AIG didn’t have so now AIG needed (and got) a bailout.

Fed Chairman Ben Bernanke knew it wasnt over yet, as did Paulson. The next to go was going to be Merril Lynch they had the same high level of toxic assets (read subprime or risky loans) that Bear Stearns and Lehman had. By now credit had been frozen, nobody could get loans, not even good customers, that meant no capital to start/expand business and grow the economy.

The US Government desperately needed to thaw the credit freeze but Lynch was about to fail and that would have collapsed our economy overnight.  I’m talking complete collapse.  The amount of money we are talking here is beyond my comprehension. Lynch had to be bought.  Paulson knew how to make it happen.

Bank of America was financially rock solid and after a meeting with Paulson. Lynch’s CEO called Bank of America CEO and the net is that BofA bought out Lynch. That stopped the bleeding, economically speaking.

Now the U. S. desperately needed to thaw the credit, the CEOs of the countries 9 biggest banks were summoned to a meeting with Paulson where they were told that they were going to take money from the US government in exchange for an equity stake in the banks no if ands or buts it was going to happen.  Wells Fargo protested…it didnt need or want the governments money.  It had no choice.

In the end all 9 CEOs signed the deal and it was done.

Now when President Obama says that the banks could afford to pay a fee to the taxpayers who “bailed them out”, he is being disingenuous, remember these banks had NO CHOICE.

And let us be clear, Bank of America and the rest are not going to pay a fee, the people who bank with them are, thats me and you. So that fee is on us not on the banks.

So now here we are…Credit is thawed and the bleed has been stopped, but the economy isnt going anywhere.  For that to happen economists say we have to start spending money, creating jobs, buying things, but nobody has the money to spend on that massive level, nobody but the government.

But the government has a huge deficit, the national debt is at 10,000,000,000,000 (trillion) dollars and growing by about half a trillion dollars a year. If we don’t spend money the economy stays where it is, if we do spend money the debt goes higher as does the deficit. Where does this half a trillion dollars a year come from?  We borrow it, from China, Japan, Mexico and Oil rich countries in the middle east.  At some point we will reach our credit limit and a lot of people think its coming sooner rather than later.  These countries that loan to us are already starting to move assets to other currencies.  That’s a very, very bad sign for us.

Now you see the problem that Obama is facing.  The Republicans, smelling failure, aren’t in any mood to help him either, they welcome this failure, it is putting them back into power.

We have to spend a lot of money now, I get that, what will make the difference between success and failure will be what we spend it on.

Maybe I will expand on that soon.  But the bottom line is it has to be healthcare, because healthcare in the form of medicare and  medicaid and social security are where all of this country’s money is going to be going, if we don’t get those costs under control in 2040 we will have no money for anything else, not the military, not education, I mean nothing.

31490cookie-checkLet’s Be Honest

Let’s Be Honest

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9 Responses

  1. Yeah, you’re right, JimmyD – he left out the role of derivatives in this history.

    The fact is that lenders were so hot to package new mortgage derivatives that they went way beyond giving loans to first-time home buyers who couldn’t afford down payments – they started giving loans to people whose income and even credit reports they didn’t bother to check. If you could fill out the paperwork, these banks wanted you to have a mortgage. They weren’t forced to do this. They wanted to give you a mortgage, which, through the magic of fraudulent accounting and crooked ratings institutions, became mortgage derivatives that could be sold with AAA ratings…until the mortgagees whose income the lenders didn’t even check, began to go belly up.

  2. As long as Congress is more concerned with getting reelected than doing what is needed none of this will ever get fixed.

  3. You can put a number on the healthcare issue. $40,000. What does that represent? The annual cost of health insurance and out of pocket medical expenses for your basic family of four in ten years.

    Now, when I say that to people – especially people who get health insurance through work and make $20 co-pays at the doctor – they tell me I’m crazy. But here are real world figures. I am self-employed. As a result, I purchase high deductible health insurance for myself and my family on the open market. In 2000, we paid $10,581 for health care – $6228 in premiums for a policy with a $5,000 annual deductible and $4,353 in out of pocket expenses.

    In 2009, we paid $19,101 – $12,196 in health insurance premiums and $6,905 in out of pocket expenses. This is not a Cadillac policy – we have a $15,000 annual deductible. By the way – no one in my family has any illnesses. My wife and I both take one prescription, and we both get $4 a month generics, so you’re talking $100 in prescriptions. The rest is routine medical care – annual physicals for me, my wife and daughter; two visits a year to the dentist; eye checkups and new glasses; the occasional visit for bronchitis, the flu. Routine stuff. Want to know what it costs to visit the doctor if you’re not making a $20 co-pay? About $200 if there are no Minit Clinics in your area.

    Basically, you’re talking a double in ten years, or an 8% a year increase in costs. Double the above, and the average family purchasing a high deductible health plan on the open market, will pay over $38,000 a year by 2019 in routine health care costs. God forbid your kid breaks her arm and you have to go to the emergency room for an X-ray, as happened to my kid a couple of years ago. That was nearly $3,000.

    Now, the average cost of a corporate-provided health insurance plan today is $12,319 per employee – not per family – and the average out of pocket expense is $3,200, per person, not per family. Those are not liberal talking points: They come from Hewitt Associates, a benefits management company that provides benefit management services to Fortune 500 companies. That’s an average of $15,519 per year per employee – so, in ten years, you’re looking at a $31,000 a year cost per employee to corporate America. Not per family.

    The Republican response, as stated in the WSJ yesterday, is a plan to give every family a $5,200 tax deduction to purchase “affordable health insurance.”

    So, instead, of spending $19,100 this year, I would have spent $13,900. For a policy with a $15,000 annual deductible. And no one has any illnesses. Now, I make a good living. But the average family income in America is about $52,000. Tell me how many average families do you know that can spend nearly 30% of their income on health care when most families already spend 26 to 30% of their incomes on housing? You’ve now consumed 60% of the pretax income before you’ve put food in the fridge, gas in the car, or clothes on your back.

    The math does not work. Well, maybe porn math.

  4. Oh Boy Mikey just going with rightwing untrue talking points. A small percentage of mortgages that failed where under CRA. Actually what caused this was the right starting around Reagan want every deregulated.Then Phil Gramm added the final nail in the coffin in 2000 that numbnuts clinton signed into law. If you watched the hearings they had recently,there was testimony that wall street paid more money to mortgage brokers and companies for risky loans because there was a bigger payout on them for wall street.

    and old phils work. you may remember phil he said we are a nation of whiners.He caused the meltdown of the economy because he finished deregulating this scumbags.

  5. I do understand the derivatives, I kinda lumped them into the high risk debt…there’s lots of them too, from risky ARMS to 40 year mortgages to escalating principle mortgages….and ya these companies were repackaging them and reselling them…everyone was betting on one thing…that the house would be worth more, that the housing market wouldnt crash

    Then it did.

  6. thanks man my motivation was that novbody I talked to had even a basic understanding of the problem, so I thought is there a way to explain it simply, because people need to understand this, this is a huge axe hanging over all of our heads and the tiny thread holding the axe is healthcare…that one breaks and we are fucked….

    This isnt republican or democrat…it was caused by both and it needs to start getting fixed

  7. Ya know, this may be a simple-minded idea, but WTF, I’m a simple guy.

    Lady H and I are both self-employed, have been for many years. Our businesses are feeling the crunch like everyone else. We’re hanging in there, but money isn’t as plentiful as it has been previously. So what have we done? Simple. We don’t eat out as much. We don’t travel as much, even places like Dayton that we really wanted to go. We’re more careful about what we spend. We prioritize.

    Has no one thought to explain this to congress. I have to believe there are ways to cut spending, “tighten our belts” so to speak.

    We have very well paid government agencies that are involved in things that are totally useless. If the U.S. was a business, wouldn’t we want a businessman running it? Cutting the fat out would ease the tax burden and deficit immensely. Easing the tax burden on businesses and individuals would encourage expansion, which would ease unempoyment, which would encourage spending.

    Granted this wouldn’t solve the entire problem. Healthcare is certainly an issue that needs to be dealt with. BUT, in my simple life, I would start with reducing what I spend. Decide what I really need and what I just want. Do what I have to do to survive financially while I work on the other problems.

    Oh, and while we’re “cutting the fat”, I can think of about 535 “public servants” that I’d like to see drawnig unemployment checks.

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