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Do we really want to socialize our financial system? [Part 1]

Written by Right Side News

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vincent.jpgSeptemeber 25, 2008
By Vincent Gioia

Do we really want to socialize our financial system; because that's what we will be doing if tax payers bail out Fannie Mae, Freddie Mac, AIG, the auto industry and who knows what else?

No one can name one thing government has done that has been successful; and even those things government should handle, like the military, they don't do as well as they should because of anti-Americans in congress. Why then should we trust the government to spend $750 billion to supposedly "prevent financial collapse?"

Sometimes the cure is worse than the disease and this is one such case; better to let the country take the medicine and work things out without more government interference. We only have the people who caused whatever problems we have in the first place who say we are in a crisis and our world will end if we don't spend more money. If our country could weather harsh winters during the 1700's to become a free nation, and two world wars, we can handle whatever is in store for us after the government's created financial situation we face today.

If you don't believe the government is responsible, think back to the time in the late 1970s when we had a booming economy, massive economic development and national pride until the worst President that the United States that has ever had: Jimmy Carter, took over. Carter got Congress to pass the Community Redevelopment Act that was meant to promote minority home ownership. Bill Clinton then used this law from the first days he was in office so that he could declare how he was the champion of the poor and of minorities and how it was he who was able to provide them with "affordable housing." Do you know what "affordable housing" is? "Affordable housing is when people who can't afford it buy a house and you and I pay for it."

Clinton put the force of the government behind his plan so as to "encourage" lenders to "help" the "less fortunate" to obtain "affordable housing." What that really means is that Clinton resurrected the Community Redevelopment Act and made it clear to lenders that they had to make "affordable loans" "available" to basically anyone who was not of white Anglo heritage who wanted one. Lenders did not want to turn anyone down because if they did they would be subjected to the full brunt of the US government penal code as enforced by the relevant agencies. You could be investigated for anything from "unfair" loan practices to racism and discrimination. The Administration was in a position to levy hefty fines and other penalties on those who did not share the Administration's enthusiasm for such high risk lending. Threatening lawsuits, Clinton's Federal Reserve demanded that banks treat welfare payments and unemployment benefits as valid income sources to qualify for a mortgage.

In 1999, Los Angeles Times reporter Ron Brownstein hailed the Clinton administration's affirmative action lending policies as one of the "hidden success stories" of the Clinton administration, saying that "black and Latino homeownership has surged to the highest level ever recorded."

But Investors Business Daily noted correctly:

"The untold story in this whole national crisis is that President Clinton put on steroids the Community Reinvestment Act*, a well-intended Carter-era law designed to encourage minority homeownership. And in so doing, he helped create the market for the risky sub prime loans that he and Democrats now decry as not only greedy but ‘predatory.' ... And it was the Clinton administration that mismanaged the quasi-governmental agencies that over the decades have come to manage the real estate market in America. As soon as Clinton crony Franklin Delano Raines took the helm in 1999 at Fannie Mae, for example, he used it as his personal piggy bank, looting it for a total of almost $100 million in compensation by the time he left in early 2005 under an ethical cloud.

Other Clinton cronies, including Janet Reno aide Jamie Gorelick, padded their pockets to the tune of another $75 million. Raines was accused of overstating earnings and shifting losses so he and other senior executives could earn big bonuses. In the end, Fannie had to pay a record $400 million civil fine for SEC and other violations, while also agreeing as part of a settlement to make changes in its accounting procedures and ways of managing risk."

Even as Fannie was fined for mismanagement, the Clinton administration was pushing Fannie Mae and Freddie Mac to buy more mortgages from low-income households.

Alan Greenspan, Chairman of the Federal Reserve Bank, also played a part in the developing financial problem. By lowering the Fed fund's rate to 1%, the chairman encouraged lenders to make risky loans and tens of millions of Americans refinanced their mortgages as well. Greenspan also encouraged borrowers to go for adjustable rate mortgages (ARMs) which ultimately caused many borrowers to put themselves in a position to default when the interest rate would rise, as everyone knew it eventually would. Couple that with a considerable drop in home prices and you have a recipe for eventual disaster.

Economists around the country all said at the time that the Democrats were forcing mortgage lenders to issue loans that would fail the moment the housing market slowed and "deadbeat borrowers" couldn't get out of their loans by selling their houses. A decade later the housing bubble burst and mortgages taken by insufficiently funded borrowers as predicted collapsed. "Democrats set an affirmative action time-bomb and now it's gone off."

When President Bush took office White House chief economist, N. Gregory Mankiw, warned that the government's "implicit subsidy" of Fannie Mae and Freddie Mac, combined with loans to unqualified borrowers, was creating a huge risk for the entire financial system. But true to form Democrats like Rep. Barney Frank denounced Mankiw, saying he had no "concern about housing" and The New York Times reported that Fannie Mae and Freddie Mac were "under heavy assault by the Republicans."

Those who think the government is the answer to all ills will not accept that Clinton era political strategy was subject to the law of unintended consequences. Obama and Democrats think still more regulation and huge sums of money along with interference with market forces will solve the problem their policies helped create. However pushing the country into more government control of our economy and nationalizing businesses is a giant step toward socialism and should not be tolerated or accepted.

George Washington wrote in 1799 to James Welch, "To contract new debts is not the way to pay for old ones." Thomas Jefferson warned Samuel Kercheval in 1816, "To preserve [the] independence [of the people], we must not let our rulers load us with perpetual debt." How far we have come from the wise advice of our founders.

I agree with Senator Jim Bunning, R-Kentucky:

"The free market for all intents and purposes is dead in America. The action proposed today by the Treasury Department will take away the free market and institute socialism in America."

And from the Los Angeles Times Blog:

"Mutual fund pioneer John Bogle said the U.S. government appears ‘punch drunk' in its stumbling efforts to rescue the financial system. ‘We're playing a game of casino capitalism, interfering with the way the market isn't working,' Historian Allan Meltzer called the bailout plan ‘social democracy at its worst.' He told Bloomberg News, ‘If they remove financial losses from the financial institution,' the government should ensure that ‘the financial company will still owe the money,' he said. ‘Civilized countries like Chile do that.'"

The problem with Fannie Mae and Freddie Mac is that they were socialist from the start. They are so-called government-sponsored enterprises, or GSEs, publicly chartered but stockholder owned. The GSE's are run as private corporations, with an army of lobbyists to advance their interests, but with ‘implicit' federal backing.

In true socialist fashion the government with tax payer's money now wants to nationalize a huge segment of our economy; it's not right and we shouldn't let them.

If we want the government to assist the country about this in some way, it shouldn't be by driving us further toward socialism; there are other things we can do to help our economy survive the trouble it put us in and I will make some suggestions in my next blog.

Let's not be like the proverbial frog in the boiling water that doesn't realize what's happening until he's doomed.
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Related: Part II
Vincent Gioia is a retired patent attorney living in Palm Desert, California. His articles may be read at www.vincentgioia.com and he may be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it. .

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