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Recipe For Disaster

     Start with an ideology: "Everyone should own their own home." Encourage banks to give everyone a loan. Don't let banks discriminate against people because of race, religion, or poor financial risk.

Fannie & Freddie

     Bankers are smart. They don't want to get stuck with bad loans. They lobby congress to create Fannie May and Freddie Mac so they can sell off their troubled loans and allow them to close an increasing number of risky loans for the closing fees.

Change Banking Rules

     Fannie and Freddie get into deep troubles so they lobby congress to allow investment banks to accept home mortgages. This again spreads the risk so no particular bankers gets stuck with "Too Much?" risk.

     Investment banks packaged the loans in such a manner no one knows the exact risk or the original borrower. These packages were resold to banks, insurance companies, and banks overseas, etc.

     The market becomes saturated with a never ending glut of these suspicious packages of unknown risk and the market for these packages dries up  --  ie. -- no buyers.

Mark - to - Market

     Congress in all it's wisdom recognizes that banks and insurance companies need investments of value to cover future obligations so congress insists on changing the accounting rules to "mark-to-market" because the evaluation of the investments held are of unknown risk and not currently marketable.

     Immediate results. Banks stop loaning money to anyone because they are prohibited by law. That's the immediate effect of the change in accounting
practices despite the fact that the vast majority of the investments are performing. There just isn't a market for them any more.

     Fall out:  No loans for anyone. Business grind to a halt! People are put out of work! Repayment plans are interrupted. Home loan defaults skyrocket.

     Credit meltdown -- Bank failures  --  Insurance defaults  -- Business leaves
the country.

Who Forsaw the Future

     You ask, "Didn't any one see it coming?"

     The Secretary of the Treasury laid it all out to both the House and Senate
Finance Committees informing them of the causes and probable outcomes one
year before the meltdown. But the chairmen of these committees, both being advocates of the "Every one should own their own home" policy couldn't bring themselves to allow change to what was being done. After all, being advocates and not problem solvers, they had a cause to pursue and shouldn't accept responsibility for any unforeseen untoward outcomes.

The Blame Game

     To this day neither one accepts responsibility for their part in preventing a
timely solution to the housing bubble meltdown. I guess they're just to close to
Fannie and Freddie to see what might have been beneficial for the whole country.

      
      I'm Karl Kinkel
      Longsgap Services LLC
      www.longsgap.com

PS  Mark to Market accounting was used during the first eight years of the FDR administration.  The depression didn't end until after it was abandon.


    
Sometime during the FDR administration, investment banks were forbidden to be involved in private residential lending in order to insure the solvency of the private banking industry.

    
FDR launched the NRA. Most of it was declared unconstitutional. FDR packed the court by adding two additional supreme court justices to get his way. Still nothing worked well enough to get us out of the depression until the war in Europe erupted. And the current administration is looking for ideas from FDR's administration. Will we never learn from history?
    
     Dear Lord, save us from ourselves. Amen.



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Karl Kinkel
Longsgap Services LLC
5262 Elk Creek Pkwy
Independence, VA  24348
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