Sunday, September 21, 2008

If They Knew It Was Going to Happen

By Alan Caruba

The September 29 cover of Business Week asks, “Is It Safe Yet? Inside, it has a page titled, “Lessons Not Learned.”

In brief, caption-sized text, it begins with 1982’s savings and loan deregulation, moves on to the promotion of “junk bonds” billed as “a new way to finance business”, notes the 1986 savings and loan crisis when many S&Ls failed, then onto the collapse of the junk bond market.

At that point, you might have thought that some rational response would occur, but in 1991 the first Bush administration wanted to repeal the Glass-Steagall Act that separated commercial from investment banking. The restriction would be eliminated during the Clinton administration.

By 1994, Long-Term Capital Management, a hedge fund with two Nobel Prize-winners on its board claimed it had discovered market models that drastically limited risk. By 1998 it received a $3.6 billion federally engineered bailout. The firm shut down.

In 1999, the dot-com frenzy began as all kinds of Internet-based business promised huge earnings, but within a year that bubble burst. In 2000 Enron, the energy-trading company went belly up and its vast fraud brought down Arthur Anderson, until then a respected accounting firm.

In 2004 Alan Greenspan, the Chairman of the Federal Reserve, a former advocate of tougher regulations, praised adjustable-rate mortgages and refinancing for ordinary homeowners. By 2006 a full-fledged housing bubble, the result of bundling millions of risky loans and reselling them to investors, was under way.

Welcome to 2008 and the worst financial mess since the days of the Great Depression. This time the Federal Reserve stepped in to save the investment firm Bear Stearns, but barely a month later decided to let Lehman Brothers sink as the full scope of the sub-prime mortgage loan debacle became clear. The government seized Fannie Mae and Freddie Mac, created to back up loans with the full credit of the U.S. when it turns out they were massively mismanaged.

It also rescued AIG, an international insurance firm. We are now waiting as Congress struggles to come up with yet another bailout plan after apparently having learned nothing from the thousands of hours of hearings held over the past twenty years.

The American taxpayer will have to pay out billions to avoid a worldwide crash because the U.S. dollar is the bedrock against which all other currencies measure themselves. Presumably, it was the job of the Federal Reserve to protect the value of the dollar, but just as apparently, it has not, except in crisis mode.

Now a lot of Wall Street “experts”, along with the news community that is supposed to be the “watch dogs” that warn us against repeating the errors of the past, are joined by tut-tutting politicians who were perfecting happy to take campaign money from all of these financial geniuses.

If Business Week can trace the breakdown of the various restraints that had been put in place to avoid another Depression and do so on a single page, the question that must be asked is why none of those involved, particularly government agencies, did nothing to put on the brakes to avoid this latest crisis?

The least the average taxpayer with a savings and a checking account could have expected was that they would be protected. Now it is their money, taken from the public treasury, that will be used to buy up all that worthless paper. The homes, though, still have value and, presumably through foreclosure and re-sale in time it will be returned to the treasury.

In the meantime, the U.S. will take on another trillion dollars in debt on top of the debt it already has thanks to entitlement programs that are going broke, programs that throw billions at exploring outer space while highway funds are tapped out, millions in “earmarked” projects added to bills to fund our military and other vital aspects of our nation.

We have huge federal departments devoted to energy and education that could be eliminated without being missed. In the 1970s, the former was supposed to insure our energy security when it was created. Do you feel secure when Congress won’t allow drilling or mining and the cost of building a single refinery or nuclear plant is in the billions? As for education, you won’t find that word in the U.S. Constitution no matter how hard you look. The Department of Education has utterly ruined our once excellent educational system.

Don’t even talk to me about the billions we waste keeping the United Nations functioning in order to attack our national interests along with the prospect of real democracy and human rights anywhere in the world. Then there’s all that foreign aid we provide to the black hole of nations that never seem to use it for projects that would help their people.

None of this is a secret. None of the factors leading to the present financial meltdown were unknown.

What is largely unknown is the blank check the proposed Treasury Department bailout legislation contains. I quote:

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

If you think you still live in a nation with the rule of law, the protections of the U.S. Constitution, and the oversight of Congress, this section of the proposal ends all that.

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