Update: 3/30/13 – Wow, this article was written a long time ago, but political and economic shifts tend to play out over decades, so from that perspective, it’s not that old. Anyway, this story came across my Facebook newsfeed today. And I thought it was relevant, to this, one of my first blog posts, New Study Confirms Economy was Destroyed by Democratic Policies by Examiner.com.
If Congress had not required through law that Freddie Mac and Fannie Mae securitize loans to people who did not qualify**, the sub prime crisis, “ground-zero” of the whole thing, would have never begun. But even so, Sub Prime was only 1% of the mortgage market. It was not big enough to cause an entire Financial meltdown. What caused this brush fire to spread into a full blown conflagration of epic proportions was a simple but profoundly stupid regulation written in 1992 called the “Mark to Market” rule. Simply put, over the last 6 months banks and other financial institutions have had to write down enormous amounts of assets to below par, even when those assets are being held to maturity, and still performing. What determines the “market price”? Buyers of course. But since the loans, the assets have been packaged with other financial instruments, including the common and preferred shares of the intitutions themselves, they become mixed together under a dark cloud of “will the Fed, Treasury, or FDIC declare them insolvent and wipe out their shareholder equity overnite?” What buyer will step into that market? And so since there is no “buyer” for the securities, the “market price” of the assets becomes determined to be pennies on the dollar. Enter “Mark to Market,” a standard that has no basis in FASB or GAAP accounting. In GAAP accounting a profit or loss on an asset is only taken when a transaction takes place. No transactions have taken place because the market is frozen with fear. Even if there was a “fair” market value placed on these assets, the banks would not necessarily be willing to sell them. It’s their business to hold them to maturity and to make interest as an income. That’s how banks make money.
So it merely becomes a vicious cycle: Regulatory agencies force financial institutions to mark down assets that can’t be sold because of the fear driven into the potential buyer by the cloud of the Regulatory agencies themselves.
There is no financial crisis. There was no lack of regulation. What we have is a regulatory crisis. The source of this problem which is ruining and has the potential to ruin the lives of millions, is the government itself.
Why was was this financial crisis a hoax? Because the establishment knows how to take advantage of the wild swings. You know the old say, “Buy when there’s blood in the streets”? Creating “blood in the streets” is an opportunity for them, at the expense of the people. What can we do about it? Become educated, let our voices be heard, register to vote, and support representatives who represent the people and not “special interests” who are the agents of the Establishment.
(*Update 2-22-09) – I’ve noticed today that many analysts are confirming part of my theory. Santelli, Mike Holland, David Malpass, among others have said repeatedly today that private investors who were for a while buying these ‘toxic’ assets at 27-30 cents on the dollar, pulled back when the shadow of the Government stepped in.
**The Community Reinvestment Act