The Binary Circumstance

Politicians and talking heads on TV are working very hard to convince the public that there is an imminent threat of financial meltdown if the government doesn’t pass some form of bailout which will transfer non-performing, toxic assets from banks and other businesses to the taxpayers.

If you are puzzled as to why so many on both sides of the aisle, especially the Democrats, are working so hard to get the legislation through, you only need to read the DealBook Blog at the New York Times.

The Center for Responsive Politics, a Washington nonprofit group that studies money and politics, reports that on average, lawmakers who voted in favor of the bailout bill have received 51 percent more in campaign contributions from sources in the finance, insurance and real estate industries — or FIRE industries, for short — over their congressional careers than those who opposed the emergency legislation.

The legislation is of vital interest to Wall Street firms and banks, many of which would like to use the program to offload noxious mortgage-related assets.

The FIRE industries — or, more specifically, individuals and political action committees associated with them — have been the top source of campaign contributions in federal politics, the group said, giving more than $2 billion to federal candidates and political parties since 1989.

This year, sources from the FIRE industries have been particularly busy, doling out millions to candidates that are facing tough reelections.

In this election cycle, the 140 House Democrats who voted for the bailout bill collected 78 percent more from the FIRE industries than the Democrats who opposed it. Over their careers, they collected 88 percent more, the data show.

On the Republican side, the gap was smaller. Republicans in the House that voted yes on the bailout bill got an average of 23 percent more in contributions from the FIRE industries in this election cycle than House Republicans who voted against it. In the long run, they got 53 percent more.

Isn’t it amazing to see so many Democrats siding with Bush?

Like they say, follow the trail of the money.

President Bush along with others in his administration have told us repeatedly as the housing bubble burst and the credit crisis swept around the globe that the American economy was sound. Now he’s singing a different tune and the name of that tune is “700 Billion Dollar Bailout.”

Now Bush says the U.S. is in the midst of a serious financial crisis.

In his speech last night he said very little about the causes of the current credit problems which are largely due to government monetary policy and their cozy relationship with Wall Street. Bush did mention Fannie Mae and Freddie Mac but made them sound as if they were the victims of the mortgage meltdown rather than one of the main causes.

Bush said:

See, in today’s mortgage industry, home loans are often packaged together, and converted into financial products called “mortgage-backed securities.” These securities were sold to investors around the world. Many investors assumed these securities were trustworthy, and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac. Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.

While he acknowledged that they helped fuel the market for questionable investments, he inaccurately described their role. They are the creators of mortgage-based securities, not the buyers. They buy loans and package them into securities that are sold all around the world and they guarantee the loans and the principle. When borrowers began to default, Fannie and Freddie had huge liabilities which is why the government took them over to keep them from failing.

The government takeover of both companies put the taxpayers on the hook for the loan guarantees.

Wikipedia describes their role:

Fannie Mae (and Freddie Mac) buy loans from mortgage originators, such as banks and non-bank mortgage firms. It repackages the loans, as mortgage backed securities, and sells them on the secondary mortgage market, with a guarantee that the interest and principal will be paid, whether or not the original borrower pays. Also, Fannie Mae may hold the purchased mortgages for its own portfolio. By purchasing the mortgages, Fannie Mae and Freddie Mac provide banks and other financial institutions with fresh money to make new loans. This gives the United States housing and credit markets flexibility and liquidity.[6]

If he doesn’t understand the cause of the problem, can Bush and Co. be trusted to fix it?

We must not forget how we got conned into the war in Iraq with a lot of fear-mongering. Remember how little it was supposed to cost and quickly that problem was supposed to be fixed?

Ron Paul is the only person who seems to understand that we can’t escape our current financial problems by borrowing and printing more money. That’s what created the problem in the first place.

The latest proposed bailout, which politicians are trying to scare us into accepting just like they did with the Iraq war, is like giving more credit cards to a person who has already maxed out all the cards he currently has even though he can’t afford the payments. And since he’s not making enough money to pay off his debts, let’s also give him a printing press so he can print all the money he wants as well.

“We do not support government bailouts of private institutions. Government interference in the markets exacerbates problems in the marketplace and causes the free market to take longer to correct itself,” - Republican Party Platform, 2008.

Source: www.andrewsulivan.com