The American Spectator

Fannie and Freddie sought to protect their ongoing racket by hefty political contributions to key political angels. The top recipient of such contributions has been Senate Banking Committee chairman Chris Dodd. The second highest recipient has been Barack Obama.

p> Mark-to-Market Death Spirals br> As housing prices began to fall after the bubble burst, additional government regulations became deadly killers. Accounting regulations adopted after the Enron fiasco required financial companies to mark the value of their assets to market. This means that companies must value their assets on their balance sheets based on the latest market indicators of what their assets could presently be sold for. /p>

Under these rules, declining housing prices don’t just reduce the value of defaulting mortgages. They reduce the value of all mortgages, because the housing collateral protecting them is now worth less. More foreclosures and home auctions depress housing prices further, further reducing the value of all mortgage related securities.

The credit agencies seeing declining capital margins then downgrade credit ratings. Declining capital and credit ratings cause stock prices to decline. Financial institutions find that they must raise more capital to meet regulatory requirements. But the reduced credit ratings make this more difficult. Companies trying to sell assets to raise capital, particularly mortgage related securities, find this drives down the value of their securities further.

Panic sets in and no one wants to buy mortgage related securities, driving their value under mark-to-market regulations down toward zero. Balance sheets under mark-to-market suddenly start to show insolvency. This downward spiral shuts down lending to these companies, so they lose all liquidity (cash on hand) needed to keep company operations going. Stockholders realizing that they will be wiped out if the companies go into bankruptcy or get taken over by the government start panic selling, even when they know the underlying business of the company is fine.

This is how with only about 5% of mortgages in default, major companies with still solid underlying business operations, like Merrill Lynch, Bear Stearns, AIG, and even Lehman Brothers, find themselves suddenly bankrupt overnight. The companies would all have survived under the accounting rules followed for decades. But under the brilliant new mark-to-market regulations, increasingly widespread panic threatens the entire economy.

p> A Real Economic Recovery Plan br> Earlier this week, former House Speaker Newt Gingrich posted at AmericanSolutions.com, a real, comprehensive economic recovery plan that would, indeed, get America booming again. Candidates can spend the rest of the fall running on this platform: /p>

First, Gingrich writes, “the Federal Reserve should return to protecting the dollar against inflation.” Indeed, the Fed should closely follow the “price rule” for the conduct of monetary policy, which is what the Reagan supply-siders wanted in the 1980s, and got for a while. This means that the Fed would be guided in its monetary policy primarily by seeking to maintain stable prices for a basket of commodities including gold. This would eliminate inflation over time, and smooth out the roller coaster boom bust cycles we have suffered in recent years.

Second, Gingrich writes, “the Federal government should return to a fiscal policy of controlled spending.” Indeed, the new President next year should call for a package of $150 billion in spending cuts for the first year, which would be the equivalent relative to the size of the budget of the Reagan 1981 budget cuts.