Subprime
By: BJ Lawson
Back in August of last year, Barack Obama proposed a solution for the subprime crisis, perfectly following the “bubble script“. Nine months later, we’re still on schedule — right up to high-profile government prosecutions of Bear Stearns hedge fund managers and promises of perpetuating but “regulating” a corrupt system in Senator Dodd’s Housing Bill:
The bill calls for a new, independent regulator for Fannie Mae, Freddie Mac and the Federal Home Loan Banks that would have the authority to establish capital standards and “prudential management standards,” as well as to “restrict asset growth and capital distributions for undercapitalized institutions,” among other powers, according to a summary of the bill.
As our markets and economy continue sagging under the weight of our unwinding debt (= credit) bubble, and a weak currency continues to send energy and food costs surging, it should be clear that our monetary, banking, and economic systems are sick.
After my two prior blog posts on the banking and monetary systems, it should also be clear that the problems we face are innate feeatures of a deeply flawed system. Or, as we used to say in the software business, “that’s not a defect — it’s working as designed!”
Things are working so well, in fact, that our banking system itself is propped up by “borrowed reserves” — the Federal Reserve has traded its government bonds, which normally serve as the foundation for our monetary system (don’t ask), for a variety of sketchy “assets” that banks are finding impossible to value. In other words, banks are dodging the bullet of having to accurately value some of their assets based on mortgages, credit card debt, and other consumer loans by “borrowing” the Federal Reserve’s treasury debt and leaving their questionable assets as collateral. As a result, the non-borrowed reserves in our banking system are now negative:
Wow. That’s an odd looking chart. What does that mean?
Nothing, really. It means that we’re living in a grand illusion. Don’t worry, go shopping, and go Celtics. Everything will be just fine.
But what about the mortgage bubble, and subsequent bust?
Do you really want to know? NPR’s This American Life had a fantastic episode a few weeks ago that explains the processes, people, and pathologies involved. It’s a great illustration of our financial system’s inherent instability. If you don’t have time to listen to the entire episode, there is a wonderfully concise and illustrative online slideshow that explains the mortgage mess in colloquial terms (Warning: Rated R for language).
So what now? Will Senator Dodd and other august leaders in Washington be able to stop the Great Credit Unwind, restore stability to our financial markets, prevent foreclosures, and empty California’s tent cities?
Time will tell.
But wait, there’s more. In an Orwellian twist, today we learn that language was inserted into Dodd’s Senate Housing bill that would require small businesses and third party payment processors to report all electronic transactions to the federal government:
Hidden deep in Senator Christopher Dodd’s 630-page Senate housing legislation is a sweeping provision that affects the privacy and operation of nearly all of America’s small businesses. The provision, which was added by the bill’s managers without debate this week, would require the nation’s payment systems to track, aggregate, and report information on nearly every electronic transaction to the federal government.
What? Unconstitutional police state surveillance tactics in a housing “relief bill”? Is the government trying to feed us with one hand, while holding us down with the other?
It appears so.
Liberty is Priceless — support our Congressional campaign, and help us question the system that feeds our addiction and enslavement to perpetually-growing debt. Also, help us bring the Read the Bills Act and One Subject at a Time Act to fruition in Washington.
June 21st, 2008 at 9:28 am
Mr. Lawson,
While i hope to be able to support you this election b/c you are a Ron Paul Republican; i respectfully request that this issue be addressed with Senator Dodd directly. Like Dennis Kucinich, he claims to be a champion of liberty and the US Constitution. Sometimes we make mistakes while pusuing good intentions. Perhaps a reminder is in order of the pros and cons to liberties of the proposal should be directed to Mr. Dodd. Multi-lateral talks with many parties (Libertarian, Green, Independent, Constitution and more) will be required to put this nation back on course. In fact, our founding fathers never set up a party system. Democrats and Republicans both are well oiled machines backed by corporate money interests. The same interests of big money will be effected by both parties. While I agree this nation was founded as a republic and not a democracy, democracy is what is touted today in our schools; a rule of the majority who is steeped in ignorance due to a failed education system that teaches assimilation and submission; to only digest and regurgitate. However, the Republic is lost because those in Washington do not uphold the Constitution and the rule of law against the will of the ignorant majority. The FISA bill was passed that gives immunity to the corporations that broke the law and violated our right to privacy. George Bush and Cheney continue to execute war crimes, profit from oil and war, and rape this nation of its dignity, resources, and pride. Please keep this in mind when we send you to congress this season. Ralph Nader, Bob Barr, Chuck Colson, and Ron Paul are in solidarity on many crucial issues. We need all free and independent thinkers to come together regardless of partisan politics. Although you are on the Republican ticket, it is in GOD, the US Constitution, and its citizens it protects that your allegiance should rest, NOT the party.
Respectfully Yours,
Amin
June 21st, 2008 at 4:56 pm
Wow, that non-borrowed reserves chart is eye-opening! And thanks for pointing out the financial surveillance scam that was inserted in Dodd’s already tyrannical housing bill.
You’re not even in office yet, and already you’re holding these guys’ feet to the fire! Go get ‘em BJ!
June 22nd, 2008 at 4:05 am
Before I heard about this bill, I had assumed that Senator Dodd was just another run-of-the mill politician selling legislative favors to his contributors like any other. I had no idea that the man was such a committed enemy of the fourth amendment.
-jcr
June 22nd, 2008 at 4:08 am
Oh, and speaking of the bill of rights, it seems to me that if Senator Dodd’s heinous assault on our privacy is passed and signed into law, just about anyone who ever transacts business electronically would have standing to bring a federal lawsuit for the violation of the fourth and fifth amendments required by this bill.
-jcr
June 22nd, 2008 at 8:58 am
BJ,
This post is great. I will be sharing this with many others. By the way, fantastic interview the other week with the good people at DownsizeDC.org. You have a terrific eye for picking out important data and a great understanding of Austrian economics.
In regards to Senator Dodd, I saw him on CNBC the other week defending his ideas for a planned economy - taking “excess” profits from companies that make too much, new regulations in housing and the internet along with new taxes. With all their talk of regulation, you would think we might, at least, be able to trick them into regulating the Federal Reserve. But sadly, all they want is to regulate the people, not to hold the agencies they create accountable.
-TVR
June 26th, 2008 at 11:01 am
One additional element is that Dodd’s housing bill ends up being a bailout of Bank of America and Countrywide, which they bought up, and …… Dodd was given VIP status on his loans for two homes with Countrywide. Both of their PACs have made large contributions to Dodd. Imagine that.