*This is a good overview of the Wall Street crisis by Bishop John Spong, Retired Episcopal Bishop of the Diocese of Newark, NJ.* ** ** *The Drama on Wall Street By Bishop John Spong*
President Ronald Reagan was fond of saying that the ten most frightening words in the English language are "I'm from the government and I'm here to help you." However, these words sound really strange in the light of Wall Street's panicked plea for the government to come to its rescue and to the rescue of the economy that is about to sink, perhaps has already sunk, under the pressure of *the enormous greed and gross mismanagement *that has occurred primarily in the housing market. This request for government help came at the initiative of *free market Republican George W. Bush, working through his Secretary of the Treasury Henry Paulson, the former head of Goldman Sachs*, which has until recently been the crown jewel in the diadem of American capitalism. The proposed plan, disastrously called a "bailout," has the effect of *nationalizing the American financial establishment in general and the American banking industry in particular.* This was an almost unheard of, not yet even imagined, event in American history. *There was no time *for critics to raise the question of how the economy got into this chaotic mess. The crisis was too immediate. Some things, however, were obvious. *The Republicans,* *as the party of business*, have always resented and resisted any federal regulation of business, and especially the banking industry, as "needless governmental intervention designed to strangle the entrepreneurial spirit." On the other side of the aisle, *the Democrats, as the party of the working people,* have always mistrusted big business and its unwillingness to be regulated as tactics designed "*to make the rich richer and to squeeze the common man or woman in a selfish pursuit of wealth." *That is the unspoken but *real polarity* that provides the tension in our political system. *The truth is probably somewhere in the middle.* *Human nature *being what it is, *business must have regulation* lest *self interest overwhelm morality.* *Excessive regulation*, however, will strangle the goose that lays the golden egg. The regulatory functions are therefore *generally loosened* during Republication administrations and are *generally tightened*in Democratic regimes. That alone probably speaks to the necessity of having no party remain in power too long. The present crisis seems to have had its origin in *Newt Gingrich's "Contract with America" in 1994.* *By nationalizing the off-year congressional elections for the first time in American history with a platform of promises on which all Republican candidates ran*, the Gingrich revolution swept into power and began to implement its program. Removing regulatory controls on American business was an item on its agenda. *Later in 1999 Senator Phil Gramm of Texas, a former economics professor,* achieved the deregulation of banks that allowed subprime mortgages *with no down payments.* The Democrats pushed to make capital *available to the poor*. The banking industry discovered that *they could sell their high risk loans* to other even less regulated entities *around the world*. So it was that the virus of greed entered the world's economy. This plan worked for years as the housing market skyrocketed and housing inflation became the quickest path for Americans to increase their own net worth. *Markets do not, however, always go up*. "Irrational exuberance" finally runs its course, economies do shrink and the moment of truth inevitably arrives. The housing bubble finally exploded and its debris began to spread over all financial markets. Wall Street now refers to it as "*toxic waste."* Many factors assisted in the popping of this housing bubble. *First,* by deliberate government action, *the dollar was allowed to decline.* This * lowered* the price of exports and *raised* the price of imports, which helped America's trade deficit. Most people did not notice unless they traveled abroad. There were, however, other unanticipated results. The price of oil was *pegged to the American dollar,* so as it declined the cost of a barrel of oil skyrocketed until $4 a gallon for gasoline became the norm. This increase in the cost of energy for all Americans squeezed other family expenditures and began a tightening of the belt syndrome. Credit also began to be reined in, and with it the housing market slipped more. Suddenly people recognized that the value of their homes had declined to the place that their monthly mortgage payments did nothing to increase their financial stake. *Their equity disappeared*. They could no longer sell their home for the price that they owed on their mortgage. *So people stopped paying on their loans, and when the mortgage went into default they simply walked away. * Then the fact that the banks had sold these mortgages to other financial entities around the world came into play. Someone in India or China actually held a piece of your mortgage and they began to demand that their debt be made good. A ripple effect set in. More unsold houses were placed on the market. *Prices plummeted further.* Those who had regularly drawn equity from their homes to support a standard of living beyond their means discovered that not only was the cash cow gone, but the lending institutions wanted more capital. When it was not forthcoming, foreclosure set in. In time so much *repossessed housing* got to the market that prices sank even more and mortgages carried on the books of financial institutions *as assets became liabilities*. Bank profits declined and a crisis unfurled. First, Countrywide Finance, America's largest mortgage business, went under and Bank of America picked up the pieces at fire sale prices. Next Bear Stearns went into bankruptcy and was absorbed by J. P. Morgan-Chase in a deal orchestrated by the federal government. Next Fannie Mae and Freddie Mac, government subsidized mortgage lenders both had to be taken over by the government. Then Lehman Brothers, an investment banking business, was allowed to collapse, with its various pieces being cannibalized by others. AIG, the world's largest insurance company was bailed out by government intervention and we witnessed the Secretary of the Treasury firing the CEO of a major company. In rapid succession Merrill Lynch was bought by Bank of America, Washington Mutual failed and its assets were taken over by J.P. Morgan Chase, the stock in Wachovia Bank dropped so low that Citibank swooped in, in buzzard-like fashion, to scoop up any remaining value, only to be muscled out by Wells Fargo, and finally Morgan Stanley and Goldman Sachs announced that they would become full service banks and allow themselves to be governed by banking regulations. That was the last straw, and so Wall Street overcame its opposition to government regulations and literally begged the government to bail them out with a $700 billion infusion of taxpayer capital. This was not the railroad industry or the telephone company that was being "nationalized," *this was the very heart of American capitalism being nationalized at its own request!* Karl Marx could never have predicted so stunning a conclusion. The free market wing of the Republican Party turned down the bailout proposal on the first vote. In response, the Dow sank 777 points in one day. The free market mentality blinked. A few cosmetic, but insignificant, things were added to the defeated bill to give the free market champions cover and it finally passed. Wall Street cheered the fact that the financial future of this nation had been saved by a government takeover! Other shoes then began to drop as *new revelations showed levels of greed and market manipulation beyond anyone's imagination.* Capitalism had been deeply wounded, but the culprit was not some left wing conspiracy, it was the greed of the capitalists themselves. After a drop in the Dow of 40% the bottom has not yet been found. Some results, however, are clear, among them are the following: 1. The party is over, at least for a while, for Wall Street greed. CEO contracts that allowed them to drive their companies into bankruptcy while escaping with golden parachutes and enormous year end bonuses will be a thing of the past. Year end bonuses and golden parachutes will in the future be harder to get and will be subjected to increased tax rates. 2. Regulation of banking and financial institutions is now back in vogue, driven by public demand, and it will be tighter than usual. 3. This crisis will probably elect Barack Obama president. Senator McCain has looked particularly inept during the crisis. Announcing that the economy was fundamentally strong just days before the financial collapse, he looked like Herbert Hoover. Trying to cover that mistake he claimed that what he meant was that the "American workers are fundamentally sound." Even when this mantra got repeated by surrogates like Governor Mitt Romney and Mayor Rudy Giuliani, this spin stretched credibility beyond the breaking point. Then Senator McCain "suspended" his campaign to fly into Washington to "rescue" the plan that was then actually voted down by two thirds of the members of his own party. Later attempts to spin that were about as believable as his "soundness of the American workers" idea. All Senator Obama had to do was to appear competent and he became a winner by comparison. He managed that quite well. The potential collapse of Wall Street was suddenly *high drama on Main Street*. It was also scary economics. It proved, if ever there was much doubt, that *the real issue in politics is not ideology, but power.* People will do anything and promise anything to be elected. As disillusioning as it is, *Republicans are now the party of big deficits, big government spending projects, no balanced budget in sight for at least half a century and now business bailouts by the federal government. If one lives long enough, one sees everything. * *cnu.pne* --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "Thatha_Patty" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [EMAIL PROTECTED] For more options, visit this group at http://groups.google.com/group/thatha_patty?hl=en -~----------~----~----~----~------~----~------~--~---
