Search:
Recent Posts
Categories
Archives
Understanding the bailout and how we got into this mess
It appears that most Americans (including congress) are having a hard time understanding the current credit crisis. As I was mowing my lawn last night I was trying to work some things out in my head to help explain the situation better to people I know. Here’s the simplest explanation I can give, but it still doesn’t cover everything:
- Joe and Jane Six-Pack, with a combined income of $60,000, decide they want to buy a $400,000 home.
- They show up at Mortgage Guys office. Joe and Jane lie and tell Mortgage Guy they can afford it. He doesn’t believe them but, hey, its 2005, everyone is doing it and the banks are taking the loans so he sticks them in a liars stated income loan.
- Joe and Jane end up in an interest only 3/1 ARM. Fifty to sixty percent of their take home pay goes to their mortgage. Mortgage Guy collects a $10,000 origination fee and takes another vacation.
- Fast forward three years, one layoff, and a second mortgage to pay for a boat and Joe and Jane aren’t doing to well. Its about to get worse. Their 3/1 ARM is about to adjust and the new payment will take about 150% of their current take home pay. Since Joe and Jane are already living on 110% of their take home income and can’t afford the adjustment, they decide to sell. The problem is they are now about $100,000 upside down on their mortgage. Joe and Jane can’t sell the house. Joe and Jane are screwed.
- Joe and Jane go bankrupt or get foreclosed on or both. Now the bank has the “asset” (as its being called by Paulson and the media).
- The banks go through the Joe and Jane scenario with about a million other Joe and Jane types and are now sitting on billions in bad liabilities that are sucking up their liquidity and causing them to go bankrupt.
- Mr. Banker runs to his cocktail buddy, Hank Paulson, and begs him for a “bailout”. Hank feels sorry for his friends on Wall Street because they’re fire selling their mansions and private jets. So he decides to give the bailout the old college try.
- Hank walks up the Hill and tries to sell Congress on the idea that Joe and Jane’s home should be bought by the government for the balance on the mortgage leaving the risk on the taxpayers. So with Joe and Jane’s mortgage it works like this: The government gives the $400,000 back to the bank making them “whole” on the original loan. The government then takes the bad “asset”, which is now worth $300,000, and either holds it until they can make back the $400,000 they paid for it or sell it off and let the taxpayer take the collective loss.
That’s how we got here. That’s how the bailout works. Make sense? I know it sucks bad.
Here are a couple of things to consider:
- The banks knew they were taking a big risk, but the money was so huge and they were so greedy that no one paused to think that this might be a bad idea. They gambled and lost. They now want their money back and they want you to cover their malfeasance. This is what we also call fascism.
- Do you really trust the government to administer a program whereby they take on $700 billion (some now say it could be well over a trillion) in liabilities and try to turn those liabilities into assets? They aren’t capable of doing it.
- Joe and Jane still lose. This bailout isn’t about Joe and Jane and it won’t help them one bit. The bankers gets back their money, breathe a big sigh of relief, high five each other, and yell out “close call!” They are back in business and fat as ever (mansions and planes included)!
Chuck Baldwin has been spot on with this crisis. He posted this article today and I highly encourage you to give it a thorough read:
At the time of this writing, the U.S. House and Senate are poised to pass a $700 billion bailout to Wall Street. At the behest of President George W. Bush, the U.S. taxpayers are going to be on the hook for what can only be referred to as the biggest fraud in U.S. history.
Virtually our entire financial system is based on an illusion. We spend more than we earn, we consume more than we produce, we borrow more than we save, and we cling to the fantasy that this can go on forever. The glue that holds this crumbling scheme together is a fiat currency known as the Federal Reserve Note, which was created out of thin air by an international banking cartel called the Federal Reserve.
According to Congressman Ron Paul, in the last three years, the Federal Reserve has created over $4 trillion in new money. The result of all this “money-out-of-thin-air” fraud is never-ending inflation. And the more prices rise, the more the dollar collapses. Folks, this is not sustainable.
Already, Bear Stearns was awarded a $29 billion bailout, followed quickly by the bailout of Freddie and Fannie that will cost the taxpayers up to $200 billion. Then the Fed announced the bailout of AIG to the tune of $85 billion. Mind you, AIG is an enormous global entity with assets totaling more than $1.1 trillion. Moreover, the Feds agreed to pump $180 billion into global money markets. And the Treasury Department promised $50 billion to insure the holdings of money market mutual funds for a year. Now, taxpayers are being asked to provide $700 billion to Wall Street. (I hope readers are aware that, not only will American banks be bailed out, but foreign banks will also be bailed out. Then again, at least half of the Federal Reserve is comprised of foreign banks, anyway.) In other words, the Federal Reserve is preparing to spend upwards of $1 trillion or more. Remember again, this is fiat money, meaning it is money printed out of thin air.
All of this began when the U.S. Congress abrogated its responsibility to maintain sound money principles on behalf of the American people (as required by the Constitution) and created the Federal Reserve. This took place in 1913. The President was Woodrow Wilson. (I strongly encourage readers to buy G. Edward Griffin’s book, The Creature from Jekyll Island.) Since then, the U.S. economy has suffered through one Great Depression and several recessions–all of which have been orchestrated by this international banking cartel. Now, we are facing total economic collapse.
But don’t worry: the international bankers will lose nothing–not even their bonuses. They will maintain their mansions, yachts, private jets, and Swiss bank accounts. No matter how bad it gets on Main Street, the banksters on Wall Street will still have the best of it–President Bush and the Congress will make sure of that. This is one thing Republicans and Democrats can agree on.
America’s founders were rightfully skeptical of granting too much power to bankers. Thomas Jefferson said, “If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.”
Jefferson also believed that “banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”
Daniel Webster warned, “Of all the contrivances for cheating the laboring classes of mankind, none has been more effectual than that which deludes them with paper money.”
Webster also said, “We are in danger of being overwhelmed with irredeemable paper, mere paper, representing not gold nor silver; no, Sir, representing nothing but broken promises, bad faith, bankrupt corporations, cheated creditors, and a ruined people.”
Our first and greatest President George Washington said, “Paper money has had the effect in your State [Rhode Island] that it ever will have, to ruin commerce–oppress the honest, and open the door to every species of fraud and injustice.”
If George W. Bush, John McCain, or Barack Obama had any honesty and integrity, they would approach the current banking malady in much the same way that President Andrew Jackson did. In discussing the Bank Renewal bill with a delegation of bankers in 1832, Jackson said, “Gentlemen, I have had men watching you for a long time, and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.”
What President Andrew Jackson said to the bankers in 1832 is exactly what an American President should say to these criminal international bankers today. But what George Bush, John McCain, and Barack Obama want to do is provide amnesty for the international bankers, just as they want to provide amnesty for illegal aliens. I say, No amnesty for Wall Street, and no amnesty for illegal aliens, either. Instead of sending these banksters on extended vacations to the Bahamas with millions of taxpayer dollars in their pockets, we should be sending them straight to jail!
The only way to fix this economic mess that the international bankers have created is to return America to sound money principles, as prescribed in the U.S. Constitution. This means dismantling the Federal Reserve and the Internal Revenue Service, overturning the 16th Amendment and the personal income tax, and returning the American monetary system to hard assets: gold and silver. Anything short of this will only delay and worsen the inevitable collapse that has already begun.
I think ,you started wrong and skipped the reason why they got the loan,. and what ever happen to Raines, Barney Frank, and Dodd?
I guess they have nothing to do with it.
With all the analyst that we have, and none of them there to answer the question without using platituds.
Leo.
Left by Leo on 10/02/2008We just beefed up the banks, secured bad loans and the market still goes down. What does that mean? What is going to happen to the American family when their $10K debt per credit card becomes due? Seems we are headed into fateful disaster. When you you predict things will turn around?
Left by Richard Wood on 10/07/2008Another problem is China, they own our debt, they produce our products and under sell us on the international market. So what is the future with China? They use soft diplomacy to get what they want around the world, and we sit and watch??