The American Spectator

We can fix our economy right now if we would just sharply increase taxes on employers, savers, investors, big business, small business, anyone who would start a business, and workers who make too much money. We need more power and authority for the wise, selfless, government bureaucrats in Washington who really understand our economy and how to fix it. Then, acting only in the public interest for the good of all peoples, without any influence from special interests or politics, they can impose new regulatory burdens on the stupid, greedy, corrupt businesses that actually hire the workers and pay them their wages.

We also need more money and power for Washington to increase federal spending by an additional trillion plus dollars. Then, we can give $50 billion each year to the UN to fight a global war on poverty. As a nation of hopeful peoples, we could then also spend so much more here at home for child care, health care, welfare, education, state and local government spending, new green energy based on love rather than greed, and retooled cars designed for the social good, all run by the government and those same wise, all-knowing, non-political, government bureaucrats in Washington.

This is the Barack Obama economic recovery plan. He got it from the same people who developed the Hugo Chavez economic plan for Venezuela. Honest.

p> The Root of the Problem: Government br> The financial panic gripping America right now, and threatening to throw the entire economy into a serious tailspin, was not caused by corruption on Wall Street, deregulation, free market economic philosophy, the 1999 repeal of the outdated, 1930s Glass-Steagall Act, or any of the other far left talking points advanced by the Obama campaign. /p>

The root of the problem began with bad, mismanaged monetary policy by the Fed. Earlier this decade, the Fed overexpanded money and credit, reflected in historically low interest rates for far too long. This began a classic boom and bust business cycle, concentrated mostly in the housing bubble that crested with ridiculously high housing prices a couple of years ago. When that bubble burst, housing prices began to tumble.

This would have caused a mild downturn. But other bad government policies have greatly exacerbated the problem. These started with the Community Reinvestment Act (CRA), adopted during the Carter Administration, but greatly expanded during the Clinton years. CRA regulations demanded that financial institutions provide mortgages to lower income borrowers they thought were too risky, in unstable neighborhoods that they thought exposed their loans to too much risk. Barack Obama’s friends at ACORN became major abusers of the CRA, using it to label financial organizations as racist and to block needed regulatory approvals, until ACORN was bought off with money and loans for its favored allies.

This was the beginning of government policies to expand mortgages on easier and easier terms to lower income borrowers, demanding less and less in terms of down payments, documented incomes, and positive credit histories. These practices eventually grew into the subprime mortgage market, where money started to flow even to dubious borrowers with questionable backgrounds.

But it was the federally established and backed Fannie Mae and Freddie Mac that spread the subprime mortgage risk throughout the financial world. Fannie and Freddie issued securities, which the market took as effectively government guaranteed, to raise money to buy mortgages from banks and other financial institutions. They then sold shares in pools of such mortgages to other financial institutions and investors, in America and around the world.

When Fannie and Freddie started selling shares in pools of subprime mortgages, they were spreading serious, unrecognized risk throughout the financial system. With their implicit government guarantee, they were able to borrow huge amounts to fuel an explosion in subprime mortgage lending, and to pump up the housing bubble overall to even greater extremes. They even began buying and stockpiling shares in subprime mortgage pools sold by others, which greatly encouraged even more subprime lending. As AEI economist Kevin Hassett noted on Monday at Bloomberg.com, “As of last June, Fannie alone owned or guaranteed more than $388 billion in high-risk mortgage investments.” This was the tip of the iceberg of trillions in increasingly dubious mortgage related securities.

The growing problem was not unnoticed. Hassett quotes Alan Greenspan warning in 2005 that if Fannie and Freddie “continue to grow, continue to have the low capital they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest risk adversion, they potentially create ever-growing potential systemic risk down the road….We are placing the total financial system of the future at a substantial risk.”

Senator John McCain was one of three co-sponsors of a 2005 bill to address this budding crisis by establishing strict new regulatory controls over the government-sponsored enterprises Fannie Mae and Freddie Mac. The bill squeaked through the Senate Banking Committee, but Democrats such as Chris Dodd, Hillary Clinton and Barack Obama in the Senate, and Barney Frank in the House, unified to kill the bill. Hassett writes, “If the bill had become law, then the world today would be different. In 2005, 2006, and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable financial institutions. Without [Fannie’s and Freddie’s] checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.”

It was government backed Fannie and Freddie that came to be plagued with outright corruption. Clinton turned it into a feeding trough for Democrat cronies, led by Fannie Chief Franklin Raines, Clinton’s former budget director. Fannie Mae actually tampered with its own accounting books to show profits that would allow Raines to gain huge incentive bonuses under his contract. Raines amassed $90 million in personal compensation and bonuses from a government-sponsored enterprise.