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The system needs to be bucked

Right About Now

Posted: October 2, 2008 10:18 p.m.
Updated: December 4, 2008 5:00 a.m.
 

So, what is your 510(k) or IRA worth?  90 percent of its value from last month?  60 percent?  I never wanted to retire, anyway.  The thought of wasting my time on hobbies, enjoying grandchildren, trips on cruise ships, rebuilding classic cars and going to baseball games is abhorrent.  I’d rather be working.
Yeah, right. And the Cubs are going to win the series.

The truth is this: We have been betrayed by a financial system that was rotten to the core and no one had the vision or leadership to prevent the meltdown.

What? An arch-conservative, Ronald Reagan Republican like me putting aside partisan politics for a moment to discuss the economic disaster that is upon us? Yes. Both Democrats and Republicans are to blame for this mess. The manner in which the two interacted has created a “perfect storm” that we must now weather.

The roots go back to the economic policies of Reagan. During the terrible economic crisis of the Carter years, inflation was rapidly gaining speed (11.8 percent in January 1981). Upon his election, Reagan brought in Paul Volcker and Alan Greenspan, who used a novel concept called “monetary policy” to kill inflation.

The idea was simple. Drive up the Federal Reserve Bank interest rate such that people could not loan money. This had the effect of slowing the economy but also stopped people from spending money either. If money is not being spent, less dollars are chasing available goods. This put negative pressure on prices and stopped runaway inflation.

The Fed was praised as heroic and people believed that monetary policy would be our safeguard. Other reforms were also implemented. Limits and restrictions were removed from markets allowing capitalism to operate more freely. While initially good, creative minds were at work to use the system to create wealth in ways that had nothing to do with providing goods and services, which is the core of true capitalism.

This led directly to the buying and selling of packaged loans as well as insurance on those packages that were not governed or controlled in any way. Essentially, this was a completely unregulated market without a “cop” to police it. For example, rating agencies gave ludicrous “AAA” and “AA” ratings on packages that already had high levels of in-default and foreclosure-ready loans.  Dishonesty and deception were rampant. 

The Democrats were not clean either.  Back in 1994, the number of high-risk mortgage loans to high-risk borrowers was 5 percent. Under pressure from the Clinton administration, the number rapidly rose to 9 percent in 1996, to 13 percent in 1999, and 20 percent in 2006.  Fannie Mae (and eventually Freddie Mac) were leaders in what became known as the sub-prime lending crisis.

Democrats believed “everyone was entitled to own a home.”  This was reflected in the pressure to loan money to unqualified borrowers and to set up mortgage programs that were not fiscally responsible. While it is good for everyone to have the American Dream, not everyone is capable of paying for it and should not be allowed to borrow money that they have no way of paying back.

What are the answers?

First, we must allow financial institutions to reap the rewards of their poor lending practices. Let them fail. Other banks with better lending practices will take their place. 

Secondly, there must be no bail-out of homeowners in default. The unfairness of penalizing responsible homeowners who pay their mortgages on time monthly by making them bail out irresponsible parties is unfathomable. 

Thirdly, we must pursue both criminally and civilly those lenders who falsified loan documentation and made misleading claims to homeowners.

Finally, the federal government must set up an organized market with clear rules regarding the trading of derivatives (loan packages) and insurance policies. 

Now, the most important question; who can best lead us out of the mess? John McCain is a proven leader that knows how to get things done. He is also a maverick who can “buck the system” when necessary.

And this system desperately needs bucking.

Steve Lunetta is a Santa Clarita resident. His column reflects his own views, not necessarily those of The Signal.

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