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Playing the bailout blame game

Local Commentary . The economy

Posted: October 20, 2008 8:41 p.m.
Updated: December 22, 2008 5:00 a.m.
 

The complicity of the Republican to enable a widely anticipated banking and investment collapse is just another Republican play to greed.

Not only were regulations insuring banking checks and balances removed, but predatory lending was embraced by Republicans as greedy home loan practices became the new standard of American lending.

The collapse of financial institutions may seem like a big surprise to John McCain, but experts, Barack Obama, and even the common folk had been warning for years that this crash was immanent.

In September, Washington Mutual share prices had fallen from a 52-week high of $36.47 per share to $2.01 as new home owners began to default on loans en masse.

Late in 2007, WaMu stopped buying "bundled home loans," anticipating that half a million loans would default when adjustable rates hit all at one time.

In November 2007, Citigroup was rescued with a $7.5 billion bailout by the Abu Dhabi. Also that November, Fannie Mae and Freddie Mac sold $13 billion in shares between them to stem the tide of expected defaults.

Even blogger "Misty" in September 2007 wrote on the Republicans for Obama Web site: "The estimated value of subprime adjustable-rate mortgage (ARM) resetting at higher interest rates is U.S. $400 billion for 2007 and $500 billion for 2008. Reset activity is expected to increase a monthly peak in March 2008 of nearly $100 billion before declining."

This begs that question: What should be government's role in managing capitalism? Should government promote "free trade" and let "the market correct itself," or should government curb greed from dominating business practices?

Democrats have long held that it is government oversight that must manage greed.

But when it comes to business, Republicans have historically supported greed over regulation. Yes, Republicans are all for the free market, except apparently when the fat cats cry for help.

Republicans are the first to condemn criminal acts with more punishment when it comes to violent offenses, but are silent when it comes to stopping predatory practices that lead to making a profit.

In 1929, shares of company ownership, in the form of stocks, were sold at values often many times above their true values. When true share values were exposed, the bottom dropped out of everything.

In 1929, virtually no regulation existed under the Republican Hoover administration, and Republicans argued that none was needed.

Of course, then, just as now, while the common citizen languished in debt, the fat cats were rescued. Finally, President Roosevelt and the Democrats passed the Glass-Steagall Act in 1933.

The act created barriers of affiliation between banking, securities, insurance and other firms. The act protected from the very lending practices that contributed to the Crash of 1929.

The Republican House and Senate in the 1999 pushed relentlessly for deregulation of the financial markets, allowing for bundling of loans, eliminating the check and balances and of separation of loan activities.

Despite Democratic opposition, Phil Gramm's Banking Deregulation Bill was passed, reversing Glass-Steagall. Voting with his party as usual, maverick John McCain weighed in in favor of this deregulation.
Immediately after deregulation in 1999, predatory lending practices re-emerged. Millions of new home owners were sold out in the name of greed.

But hold on ... President Bush blames the subprime lending market on foreigners and on you, the home buyer.

On Sept. 24, President Bush addressed the public with an urgent plea to rescue our economy. The speech argued to bail out wealthy CEOs and their large firms who would loose everything. He never mentioned the millions of home buyers who were sold adjustable-loan packages.

The president said: "First, how did our economy reach this point? Well, most economists agree that the problems we're witnessing today developed over a long period of time.

"For more than a decade, a massive amount of money flowed into the United States from investors abroad because our country is an attractive and secure place to do business."

"Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on."

The truth is that most economists agree that predatory lending in a free-for-all frenzy to buy, bundle and resell loans is the culprit. The Glass-Steagall Act, remedy to the Crash of 1929, would have prevented the Crash of 2008 as well.

In the last presidential debate, McCain said the crash was due to "the greed and excesses of Wall Street."
Sorry, John. The cause of the lending crisis is the deregulation that you voted to pass.

Greed always exists, and it is government's role to create a level playing field where both consumer and lender can benefit.

Vote against greed. Vote Democratic.

Jonathan Kraut is a Santa Clarita resident. His column reflects his own views, not necessarily those of The Signal. "Democratic Voices" appears Tuesdays in The Signal and rotates among several Democratic activists.

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