Monday, July 7, 2014
How the Bush Administration Created the Financial Crisis and Panic of 2008
How the Bush Administration Created the Financial Crisis and Panic of 2008 The Bush Administration Probably Takes the Blame Lex Loeb Contributor Network . The standard theory for the financial crisis and meltdown of 2008 is that it was all caused by a housing bubble. That theory later in 2008 became what George Soros called the "unwinding of a super bubble, which included commodities and financial derivatives of many sorts. It was easy to see there was definitely a housing boom in the USA but to the extent it was a bubble seemed likely but the longer it went on the more normal absurdly high real estate prices seemed sustainable.. At the end of 2008 many parts of the US , including Portland, Oregon still had escalating real estate prices. That was not what happened in the great depression. Hardly anywhere on earth was not affected by a major deflationary price decline pressure during the great depression years. Prices did hit bottom in the great depression and did come up from there but everything everywhere fell to the bottom before re-inflating . The housing boom was fine and well or if you prefer the bubble was safely in it's expansion mode. The bubble was business as usual. It was being financed largely by foreign capital comprised of US dollars held by foreigners. The financial banks of wall street found that they could take foreign dollars and repatriate them giving foreigners a better return on their us dollar trade credit reserves by offering higher interest rates. In order to sustain the higher interest rates they borrowed these funds at what they presumed were lower rates than they could reinvest the fund themselves for in order to profit from the financial differential. Some wall street investment banks went way out on a ledge with the higher returns derived from the home real estate market. It was easy money while it lasted but later proved to be gambling on a house made of playing cards. The Bush Administration did not create the housing bubble but they did not mind fostering it. The federal reserve and treasury injected easy money from the beginning. I remember when interest rates for mortgages first fell. The first things real estate agents did was go out and buy as much property for themselves and clients. In Oregon the entire inventory of properties on the market instantly became vacation second homes when the easy money came online. Home real estate prices were on the rise everywhere. Banks relaxed standards requiring a high loan to value ratio diluting the real collateral for loans at their own future risk. Other banks were more interested in generating points and fees to initiate loans and then would just sell the loans they initiated to Freddie Mac and Fannie Mae for repackaging where later wall street investment banks cleverly hypothicated them into derivative sub structures. The way to think of what was happening is that turning packages of loans into derivatives is like making condominiums out of an apartment building. The original owner of a residential apartment building might have paid $500000 for the whole building in the pearl district 10 years ago when it was an industrial area only and suddenly he is getting $250,000 to a million dollars for a slightly enhanced unit. The original owner of the building can retain ownership of the land underlying the building or even lease it for 99 years to condo owners that buy into the concept of owning a condominium . That is what wall street investment banks were doing with every sort of derivative. It was lucrative and seemed sensible. It provided services for people and foreign interests who wanted higher interest rates on lots of mortgages and not just one or two. Pooling seems to eliminate some risk just the same way diversifying investments does. The business was good. It was incredible. The Bush administration was about to inadvertently put a stick in the spokes of this fast moving bicycle. What the Bush Administration did was it started buying into the fiction that the US was shipping too many good jobs overseas. The employment rate was one of the best in the world hovering around 95 percent employment rate. So the idea that jobs were leaving the country was a bit absurd to begin with. The Bush administration was concerned about China's success and it's positive trade accounts balance against the US. Foolishly the Chinese were saving US dollars subject to US inflation instead of investing those excess dollars back in China or buying immediate US export goods and services. The Bush administration with secretary of the treasury Paulson at the helm decided that the way to solve the non-existent problem of Chinese having too many US dollars from trade was to try forcing the Chinese to allow their currency units to rise against the US dollar. The theory was that that would cause the Chinese to spend more of their surplus US dollars on US exports and make the US competitive with Chinese labor rates. That idea was utter nonsense. The US has always had higher labor rates than the rest of the world. Back when the intercontinental railroads were built, Irishmen and Chinese workers had to be imported to make it happen. Forcing the Chinese to let the value of their currency float was not going to save any problems. What it did instead was more like having one cut off ones left arm with one's right arm because The Chinese economy is coupled very nicely with the American economy. The US dollar started to decline precipitously worldwide. It was intentionally sparked by the Bush Administration in a mercantilism attempt to right the wrongs of trade deficits. What it really was doing was cheating foreigners out of their hard earned yet unspent trade credits. There was no time for foreign interests to move their money out of US dollars and not loose money. They could take losses and buy US goods and services but there was little developed markets at home to do so. They could buy American companies but suddenly it seemed foolish to invest in something paying dividends in a wrecked currency. The Bush Administration did intentionally help wreck the dollar. Instead of getting better jobs and immediately higher exports they caused one of the most significant financial crises and panics in recent memory. Immediately as the dollar fell the price of oil sky rocketed as did other commodities. There had been inflation over the years that was just catching up with the decline of the dollar and then there was speculation that caused the prices to overshoot inflation water marks. The financial investment banks of wall street would soon be seeing the flow of expatriated us dollar trade credits leaving the bank. The capital supporting the comfortable real estate boom or bubble was being called home by it's owners and securities valued in dollars had less and less market appeal . The packaged high interest mortgages started looking like crap. President Bush proved anything but a free trade believer when he let his administrative officials play the US Dollar devaluation game. The full faith and credit of the US government looked like crap to foreigners and it would not be too long later that we had Fannie Mae and Freddie mac going belly up. It is the full faith and credit of the us government that seemed to make mortgage pool securities of these quasi public agencies viable. The great unwinding of the financial system continues as I write this. The biggest threats to the financial system probably come from government problem solvers. The worst yet to come may be idiotic carbon tariffs and dump nut tax credits for "alternative energy development" the fact remains that it is better for the USA to buy foreign energy if it is cheaper than producing our own. Free Trade is the best way to maximize wealth . The national energy policy nuts and the environmental global warming kooks may be about to create the worst world wide depression since the great depression because their solutions to a problem are just as dumb as the Bush administration problem solving. It is funny how after year and years of the drug war and prohibiting few people in government realize that they are actually fostering the continued war because by taking product off the market constantly the market compensates by rewarding drug producers and distributors with obscene profits. This is why Milton Friedman said that the US war on drugs is hopelessly doomed to failure and is immoral. If government provides market conditions that make for huge incentives and then goes out to criminalize those incentives at the same time. It is immoral. Seeing that happen in the drug war is bad enough but here comes the carbon hysteria due to unproved global warming nonsense. That is a recipe for disaster. One becomes a criminal for using too much energy. Already Al Gore is criticized for living in palatial size homes he owns. That is just the beginning since the policy makers want to tax energy companies to the hilt which will result in energy prices substantially higher than ever seen before. The same people prevent nuclear power development and geothermal development because those means are also considered by them to be harmful to the environment. This could even result in a world wide war and genocide because the idiots are making energy resources scarce that are really plentiful. I remember how the idiots burned the world ivory supplies thinking that would prevent elephant poaching. It did the opposite of intentions. they should have flooded the market in stead of burring the rare supplies. Here we go again and again. The Bush Administration decided it wanted to change the financial system and of course it did result in a financial panic and crisis. They tried to screw our foreign creditors and it came back to hit us without even as much as a trade war. The Bush policy of weakening the dollar is the policy called for by big US Labor unions so just be aware it could have been much worse. The govenment is working over time now to try to get the housing ball rolling and inflating again. Idiotically they are rewarding those who can't afford to live in homes that they put almost no money down into with a free pass. The better way to go is to let the price of real estate fall until it get bought up by those with real capital. People who cant afford to live in their own homes should not be given free homes but should be allowed to rent rentals. The government is now bailing out financial organizations that should be allowed to fail. Of course the Bush administration feels guilty but the tax payers should not. .