Lady Liberty Sodomized by Congress

If you're a regular reader you know that one of my biggest issues with the filthy, unwashed masses in America is their desire to point the finger at an individual when bad things happen. This desire, which is only human nature, leads to an inordinate amount of blame being put on the President for all the ills of our country.

This has been an issue dating back to long before I was born. In some cases, such as Reagan, it even worked the other way. But with Bush, the problem has been magnified because of how incredibly inept he and his administration has been in all areas. But the point still stands that core legislative action is managed by Congress. As I've said before, Congress is singularly to blame for all that ails us, and we carry the burden of knowing that we had/have the power to change it, and have done nothing.

I have been doing a lot of research on the current financial crisis. Below is my summary of events that I believe are the major contributors to what has become a ridiculous situation. Unfortunately I can't really laugh at it, because I'm at a solid level 4 when it comes to our current political state. Please note, for brevity, I am going to gloss over a lot of the detail of the financial events of the last 100 years. My goal however is to demonstrate how the dominoes were lined up by Congress. Also, many of my links take you to Wikipedia, which can sometimes be a suspect source of information. I've tried to avoid referring to information without a credible citation. Please take everything you read on the Internet (except this blog) with a large grain of salt. If you find anything inaccurate in my information, please let me know.

I'm sure I'm not doing the topic justice and that there are probably volumes of books covering it, but this is cathartic for me. The light bulb went on for me last night, and I hope it does for you as well.

1913 - The Federal Reserve Act is passed (by Congress), thereby creating the Federal Reserve Bank. A public/private organization tasked with stabilizing the monetary system in the US. Among many other things, this created a federally-back currency supported by a central reserve of assets (e.g. gold).

1929 - The stock market crashes. I'm not going to get into the reasons behind the crash as they are well documented and/or up for debate. One of them, the pending signing of the Smoot-Hawley Tariff Act by Hoover was implicated as a main reason for Black Tuesday. The good news, Congress was not stepping outside it's authority with Smoot-Hawley as the Constitution clearly states one of the powers of Congress being, "To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes." An interesting note that even though the government was within their constitutional bounds, this act had profound ramifications in the private sector. The two will be forever intertwined.

1933 - The Glass-Steagall Act is passed (by Congress), creating a series of regulations over the financial institutions. These regulations were in direct response to the problems during and after the crash of 1929. Two key components of this act were the required separation of savings and loans, investment banks, and insurance companies. The goal of this separation, based on post-crash investigations, was to ensure that deposit money in banks was not used as part of risky investments. This was good regulation, because it was relatively easy to provide oversight. Combined with the creation of the Federal Deposit Insurance Company (FDIC), Congress felt it had erected solid barriers to prevent another crash like 1929. This was just one component of FDR's New Deal, which of course, was only possible because Congress supported it.

1938 - Fannie Mae was created as part of FDR's Second New Deal. It was designed to purchase and secure secondary loans as part of the US mortgage market.

1944 - The Bretton Woods Agreements are signed by most of the 44 Allied nations of World War II. This agreement established the International Monetary Fund, part of the World Bank, and a global currency standard based on the US dollar. As part of the agreement the US agreed to fix the price of gold at $35/ounce (re-standardizing some countries on gold via the dollar). This allowed the Allied economies to grow despite the shortage of post-war gold. The US dollar had become the reserve currency for much of the world.

1968 - Fannie Mae is privatized as a Government Sponsored Enterprise (GSE).

1971 - Due to shrinking gold supplies caused by the cost of the Vietnam war, and a growing trade deficit, Nixon broke the Bretton Woods Agreement and stopped exchanging US dollars for gold. As most countries were using dollars as their reserve currency (based on an understanding that it was as good as gold) international currencies were left to float in the ebbs and tides of the sea called the United States Federal Reserve. As the US economy goes, so goes the world. While I don't agree with all of it, here is an interesting paper on the pros of not being on the gold standard.

Do you all see where this is going? Keep reading, because this is where it really gets interesting.

1995 - Fannie Mae and Freddie Mac began receiving affordable housing credit for buying sub-prime securities.

1999 - The beginning of the end. The Gramm-Leach-Bliley Act was passed (by Congress), eliminating most of the final vestiges of the Glass-Steagall Act of 1933. This Act removed the barriers between savings and loan banks, investment banks, and insurance companies.....humm. This now allowed savings and loans banks, you know those ones that give out mortgages, to provide investment services. So things like selling their mortgages as mortgage securities and potentially risking federally insured deposit money in whatever investments they desired were now possible. Here is where it gets really interesting. This bill initially passed 54-44 in the Senate. After going to committee, and in a "bi-partisan" showing, the amended bill passed 90-8 in the Senate and 362-57 in the House. Does this vote flipping sound familiar? So what exactly got the Democrats to so favorably vote for an obvious Republican-led deregulation of the financial system? What else could it be but more entitlements. Apparently, Republicans promised to make revisions to and support the Community Reinvestment Act, which they did. This Act was designed to stop "redlining" and force banks to provide loans to potentially unqualified applicants. And who signed all of these into law? Not Bush...no this was Clinton, although to be fair given the 2/3rds voting in both houses a veto would have just delayed the inevitable.

So in one vast, sweeping show of bi-partisanship Congress doubled up on Lady Liberty like Charlie Sheen and Elliott Spitzer at a Playboy Mansion party. On one side they tore down the barriers preventing savings and loan banks from speculating their assets in investments and on the other they pressured banks to provide loans and mortgages to low income, unqualified borrowers. (Read that last sentence one more time and let it sink in.) That's like telling your teenage son that you've taken the lock off the liquor cabinet because you trust him but then giving him advise that the best way to get laid is to get a girl drunk. Now hindsight is 20-20, but what the hell did they think was going to happen?

While mortgages covered by CRA compliant banks may not have been as risky as the subsequent sum-prime mortgages, it was the beginning of the "everyone has a right to a house" movement. They chummed the water, and the mortgage lending sharks started feeding. More mortgages to more unqualified buyers, and guess who bought most of these...

2000 - Based on HUD research, regulations were created to ensure high-risk loans did not count against Fannie Mae and Freddie Mac's target goals for affordable housing. Good.

2004 - This "ban" on high-risk loans for the GSEs was lifted. This enabled Fanny and Freddie to begin buying all types of mortgages in an effort meet their Congressionally-imposed goals. The Office of Federal Housing Enterprise Oversight (OFHEO) attempted to call attention to the risks at the GSEs and were met with disdain from members of Congress who support the GSE and CRA agenda. Bad.

2007 - Federal Reserve injects $80+ billion in the economy in an attempt to stabilize the system.

2008 - I'm not even going to try to recap all the thing that have happened this year. But here are the highlights:

• Federal Housing Finance Agency puts Fanny Mae and Freddy Mac into conservatorship assuming $5.3 billion dollars in mortgage debt
• Federal Reserve provides a "rescue package" to AIG for $85 billion resulting in the Fed owning 80% of the "bank".
• The Federal Reserve pumps $630 billion dollars into the world economy with no Congressional approval....because they're the Fed and Congress abdicated that power long ago.
• Congress passes the Emergency Economic Stabilization Act of 2008, providing the Secretary of the Treasury authority to purchase "up to $700 billion at one time," and $130 billion in classic Congressional pork.

Yes you read that right, "at one time". So the Secretary of the Treasury can continue to buy as much bad debt as they want, as long as we're not carrying more than $700 billion at one time. It's an all-you-can-eat buffet with a weight limit on the table. It'll be well over $2 trillion dollars (where's Dr. Evil when you need him) before it's all done.

I'm not sure exactly where this timeline leads us, but I'm fairly certain it's going to get a lot more ugly. The $700+ billion from the EESA hasn't even hit the system yet. What exactly will happen when $2 trillion new American dollars hit a global economy based on the dollar? Wow, that is one scary question. Grab your ankles and get ready for the ride. This is going to be the biggest E ticket in our history.