Sunday, October 5, 2008

The Credit Crunch

My nephew sent me an article in the NY Times about Fannie Mae. The reason he sent the article was because he works for Fannie Mae. This is the quasi-government corporation that specialized in buying and selling bundles of mortgages with a guaranteed buy back on risky mortgages. Sounds like a deal too good to be true.

The article goes on to discuss the tremendous pressure Congress exerted on FM back in the Clinton era and since to expand their portfolio to take in riskier and riskier stocks. Large financial firms got in on the deal by buying bundled securities directly from lenders and bypassing FM. The competitive pressure and Congressional pressure grew to enormous proportions. In addition FM was guilty of using tactics to prod Congressmen into exerting pressure. The senior executives of FM were also awash in riches and the races was on. The loser is the consumer and other high flying companies.

Frankly I think the government should reach back at least 5 years and require CEO's to give up their golden parachutes. I think that the market should not be propped up but allowed to sink to a sustainable level. Home prices are out of whack now because of the rampant rush to sell a mortgage. Home flipping became a speculative market that was like a pyramid scheme, eventually someone was going to be left holding the over valued property. Why should we bail them out?

Colleges in the U.S. with tremendous endowment funds raise their tuition at will. College student debt is enormous with young people coming into the labor market owing tens of thousands of dollars for their education. Credit card debt is over extended. Our economy is propped up by debt which is hard to value. A home mortgage is secured by real estate, a college loan and credit card debt is unsecured. When will that devil come to bite us.

The democrats are basically to blame with their loosen the purse strings attitude in the 1980's. I believe that Congress will reflect a backlash against the Republican party, Much in part to the religious right and their "my way or the highway" mentality. My fear is that we will have a powerful democratic congress with a liberal democratic president and the door will be open to all kinds of excesses. I do not trust Obama, I believe he has an agenda that is not necessarily in the best interest of all Americans. At least with government gridlock the harm that will be done by the expediency of our legislative and executive branch is blunted. If we end up with a democratic congress and a democratic president we shall indeed be on a slippery slope.

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