The $700 Billion Dollar Solution ???

Don't Know This Guy? You Will Soon.....

Welcome , as SC6 gets back for a post to discuss politics. Remember that? It's the thing we talk about in between the football and Trophy Club posts... This was one of those watershed weeks in history, where the Federal Government crapped their pants after some of the biggest and most storied financial institutions nearly went under.. Merrill Lynch, AIG, Washington Mutual, Bear Stearns, etc. all went south this year.

Congress and the Bush Administration all woke up, and decided that they needed to forget about the campaign, and maybe take some action. In a precedent setting move, Treasury Secretary Henry Paulson (aka, The Guy in the Pic Above) has asked Congress to provide $700 Billion (yes, with a B) to fix the problem. It's all a bit complicated, so we'll try to explain it in layman's terms for you. I'm good at explaining things like a six year old...

The 'Solution'

Congress will basically add $700 billion to the National Debt to buy off all of the debt of many of the major financial institutions books. Why? Because if the banks owe all of this money, they have to really tighten their credit parameters. If they didn't banks would almost stop lending money even to each other and most businesses. As far as loaning money to you, forget it - you'd have to put 20% down on your house like you used to have to. This will make it easier for banks to still do business. By the way, the debt ceiling will need to be raised from $10.6 B to $11.3 B - another new record. This will allow China and Japan to buy more of us...

Is it the cure for the problem? Absolutely not. This is merely a stopgap fix to let the banks continue to do business. What is the real solution? Let's discuss the real problem first.

'The Problem'

Like most problems, there are many causes. Corporate greed? Sure... Stupid customers? You bet. Overinflated housing prices? Absolutely. The corporate problem was caused by many of the people selling the high risk, high reward mortgages that are failing so much now. the producer of the note doesn't give a crap if it goes bad in three years - he gets his commission at the sale, so there is no regard for selling a long term product. I was luckier. When I bought my first house, the lady at People's Federal explained it simply. "Make your payments on time, and sometime in the next five years, get rid of this loan, and get a 30 yr fixed loan." Easy enough.

Inflated real estate prices has more to do with this thank you may think. In the Northeast, California, Florida, and even some areas in South Carolina (Hilton Head, Charleston, etc) , the selling price of homes were rising at 6-10% a year for a decade or more. The house my parents bought in 1957 for $7000 is now worth $400,000 - and it's a piece of shit in a crappy neighborhood. So, what does the consumer who just HAS to live in Long Island or Boston or Charleston do? They get a mortgage on a house they can't afford to start, with a low teaser rate, that in two years will add 3-4% (and hundreds of dollars a month) to the mortgage payment. Then they can default... And everyone loses. So ,what is the REAL SOLUTION ?

'The Real Solution'

No, i don't like the Federal Government having to jump in to salvage every stupid bank and consumer for being stupid. But, is there really any way to stop the bleeding for now. If banks stop loaning money, the economy WILL go down the shitter.... But they have to be smarter about it. Maybe after a couple decades , America has finally figured out that not everyone deserves credit for anything. The credit reins do need to be tightened up a bit. Banks need to say no some more, they need to be more watchful of the long-term effects of bad financial products, and consumers need to spend less, SAVE MORE, and be smarter and more educated of lending policies. Remember Title Loans or Payday Loans 30 years ago? Me neither...

Now some guys will say that the problem was caused by the devaluation of the dollar. I was listening to Ron Paul today, and he made no sense in trying to tie them together. While it is a problem that needs to be dealt with, this crisis was caused by other factors , not the declining dollar. Let's work on that one next week...

I hope this helps some of you guys understand what went on this week, and will help you avoid the pitfalls like this. I'm going to put my Economics diploma back on the wall now, and get ready for the $12 an hour I'm making now...... Class is dismissed.

.