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Many thanks to James Butkiewicz, University of Delaware for filling in some blanks…

Today’s bailout plan was tried once before… It didn’t work.. Known as the RFC a government entity, provided loans to failing banks…

The RFC was funded through the United States Treasury.  The Treasury provided $500 million of capital to the RFC, and the RFC was authorized to borrow an additional $1.5 billion from the Treasury.  The Treasury, in turn, sold bonds to the public to fund the RFC.  Over time, this borrowing authority was increased manyfold.  Subsequently, the RFC was authorized to sell securities directly to the public to obtain funds.  However, most RFC funding was obtained by borrowing from the Treasury.  During its years of existence, the RFC borrowed $51.3 billion from the Treasury, and $3.1 billion from the public.

Financial Data Leading Up to and Through the Great Depression

After 1933, bank assets and bank deposits both increased. However, banks changed their asset allocation dramatically during the recovery years. Prior to the depression, banks primarily made loans, and purchased some securities, such as U.S. Treasury securities. During the recovery years, banks primarily purchased securities, which involved less risk. Whether due to concerns over safety, or because potential borrowers had weakened financial positions due to the depression, bank lending did not recover, as indicated by the data in Table 1.

The relative decline in bank lending was a major concern for RFC officials and the New Dealers, who felt that lack of lending by banks was hindering economic recovery. The sentiment within the Roosevelt administration was that the problem was banks’ unwillingness to lend. They viewed the lending by the Commodity Credit Corporation and the Electric Home and Farm Authority, as well as reports from members of Congress, as evidence that there was unsatisfied business loan demand.

As I understand it, (and I am relieved to hear the the guaranteed bonus clauses for fund mangers has now been removed) today’s bailout will protect the lending institutions and keep them from failing…

Now I don’t know about you… but if had just escaped a narrow brush with debt…I would be skittish about returning to the firefight of high stakes finance…. I would be tight fisted with my cash…. and loan only to those to whom I was guaranteed to be paid back… Credit would be tight. Really tight.

That does little to boost us out of the Depression… One gentleman who grew up during the thirties shared this memory with me recently…

“It was as if my whole life the same buildings had always been empty in my small town.. I remember the same sign, on an easel in one storefront, that said “Sale….5 pounds for 5 cents… I never knew what it was for, but I walked by it on my way to school between fourth grade and my senior year. Of course, it yellowed and faded in the sun as the years went by. When I came back from the war, it was finally gone… No one wanted to move in. There was just no money back in those days….”

We are setting ourselves up for the same… I need to pick up a phone and say can you give me 20 million more, like last year so we can open 5 more units…” and the answer needs to be “sure”.

Anything less and our economy grinds to a halt.

The Duffy-Kavipsian Plan does a better job with moving us to that time and place… It needs to be stove-piped into this week’s discussion ASAP.

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The Man in the Blue Shirt, Bankrupted This Country

I wish to rebut the following statement Maria Evans made on one of my comments and to answer LiberalGeek’s question at the same time…..

Her statement: That means that the HR 5660 that was consolidated into HR4577 was in exactly the same form it was in when it was introduced with bi partisan co-sponsorship on 12/14.

The subtitle of this post should be: Where is 208?

The December 14th Bill missing Sec.208
Where is 208?

December 21 bill signed into law
Oh, There is 208!

In the original bill,  section 208 was left out… In the bill that made it into public law, section 208 was added. It seem ominous that the title of this missing piece is this:

SEC. 208. AMENDMENTS RELATING TO REGISTRATION AND DISCLOSURE ISSUES UNDER THE SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934.

Those acts passed in 1933 and 1934, were done so in order to prevent what is happening to our financial markets as we speak… Had these 75 year pieces of legislation been left alone, there is a great chance that we would not be struggling with a $800 billion dollar bailout of bad debts….

By changing these two laws, we have returned our markets to the way they were just before the market crash of 1929. Is it any wonder we are having the same worries…?

So here is how it goes down. Phil Gramm puts one piece of legislation on the floor of the house, where it is buried in committee. When the huge Omnibus Bill goes into conference he adds in that buried bill, which incidentally was never debated upon nor was it ever voted upon by either the full House or full Senate or even any committee…But that is not all.  The bill he adds, has clauses inserted into which have not been seen by any one in Congress…..

This is the mystery of Section 208…..

In full, this is what it says….

SEC. 208. AMENDMENTS RELATING TO REGISTRATION AND DISCLOSURE ISSUES UNDER THE SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934.

(a) AMENDMENTS TO THE SECURITIES ACT OF 1933-

(1) TREATMENT OF SECURITY FUTURES PRODUCTS- Section 2(a) of the Securities Act of 1933 (15 U.S.C. 77b(a)) is amended–

(A) in paragraph (1), by inserting `security future,’ after `treasury stock,’;

(B) in paragraph (3), by adding at the end the following: `Any offer or sale of a security futures product by or on behalf of the issuer of the securities underlying the security futures product, an affiliate of the issuer, or an underwriter, shall constitute a contract for sale of, sale of, offer for sale, or offer to sell the underlying securities.’;

(C) by adding at the end the following:

`(16) The terms `security future’, `narrow-based security index’, and `security futures product’ have the same meanings as provided in section 3(a)(55) of the Securities Exchange Act of 1934.’.

(2) EXEMPTION FROM REGISTRATION- Section 3(a) of the Securities Act of 1933 (15 U.S.C. 77c(a)) is amended by adding at the end the following:

`(14) Any security futures product that is–

`(A) cleared by a clearing agency registered under section 17A of the Securities Exchange Act of 1934 or exempt from registration under subsection (b)(7) of such section 17A; and

`(B) traded on a national securities exchange or a national securities association registered pursuant to section 15A(a) of the Securities Exchange Act of 1934.’.

(3) CONFORMING AMENDMENT- Section 12(a)(2) of the Securities Act of 1933 (15 U.S.C. 77l(a)(2)) is amended by striking `paragraph (2)’ and inserting `paragraphs (2) and (14)’.

(b) AMENDMENTS TO THE SECURITIES EXCHANGE ACT OF 1934-

(1) EXEMPTION FROM REGISTRATION- Section 12(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(a)) is amended by adding at the end the following: `The provisions of this subsection shall not apply in respect of a security futures product traded on a national securities exchange.’.

(2) EXEMPTIONS FROM REPORTING REQUIREMENT- Section 12(g)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(g)(5)) is amended by adding at the end the following: `For purposes of this subsection, a security futures product shall not be considered a class of equity security of the issuer of the securities underlying the security futures product.’.

(3) TRANSACTIONS BY CORPORATE INSIDERS- Section 16 of the Securities Exchange Act of 1934 (15 U.S.C. 78p) is amended by adding at the end the following:

`(f) TREATMENT OF TRANSACTIONS IN SECURITY FUTURES PRODUCTS- The provisions of this section shall apply to ownership of and transactions in security futures products.’.

There was no warning…

…a security futures product shall not be considered a class of equity security of the issuer of the securities underlying the security futures product.

Because it is not considered a class of equity, laws regarding equity security, do not apply…

for some reason the section 208 was left out of the original bill. One is left to speculate that perhaps it was over fear that someone would ardently object to its passage, had the full extent of the Commodities Modernization Act been fully vetted……

I know…. some people out there are in love with Phil Gramm.. To them, he can do no wrong….XOXOXO… smooch, smooch, smooch….But despite what these people think, sometimes facts don’t lie… Sometimes the truth hurts.. Sometimes you just have to bend over, grab your ankles, and payout $800 billion dollars………

Oh, and did I forget to mention that Phil Gramm was McCain’s former economic adviser, and will be first in line to become the Secretary of Treasury if McCain gets elected? Yeah, Phil Gramm. He’s the same one who called Americans worried about their investments…. a bunch of pathetic whiners….. He is also McCain’s good friend.

Anyone who supports John McCain will ultimately be supporting another raid on our treasury by Phil Gramm, if this $800 billion dollar boon-doogle succeeds in giving some equity back to investment firms and Phil Gramm becomes the Secretary of the Treasury……. It’s a far worse prospect than who gets on the Supreme Court…..

The person who singlehandedly caused the financial meltdown, will be the next Secretary of Treasury, under John McCain……If we couldn’t afford him the first time…. how do you expect to pay for him the second?

Am I right?  Are most bloggers within this group of Delawareans, history buffs?

I’ll confess to it (without torture…)

And here is what amazed me… As I worried about yesterday’s plummeting Dow Jones average, and the loss of dollars that go with it…. people were walking around as if nothing was happening…

I am assuming I was interested because i knew what history had done to nations who found themselves in the same predicament….  The Great Depression.

Perhaps they were the wise ones… For the end did not come today… Had four giants fallen, the end would have come… Lehman brothers declared bankruptcy and Bank of America bought Merrill Lynch… In line are Morgan Stanley, and AIG, both are expected to fall next…

The great crash in 1929 was also not a one day affair… I was surprised to learn this…

Three phrases—Black Thursday, Black Monday, and Black Tuesday—are used to describe this collapse of stock values. All three are appropriate, for the crash was not a one-day affair. The initial crash occurred on Black Thursday (October 24, 1929), but it was the catastrophic downturn of Black Monday and Tuesday (October 28 and October 29, 1929) that precipitated widespread panic and the onset of unprecedented and long-lasting consequences for the United States. The collapse continued for a month.

The collapse continued for a month..

We have just experienced the first day… As more financial institutions fall, and we realize that there is no one else to catch them, we return to 1929.

Deposit levels are low…  FDIC insurance levels are equally low….

All we can do now is hope that no one will withdraw their money, but instead will opt to keep it in a bank to stabilize the economy…

“Not”… race you to the bank……  first three in,….win……..”

Driving home while listening to WDEL a commercial came on about a local brokerage firm, and the whole point of this commercial was to convince the listener that the market had bottomed out and it was time to invest…..

It went through a list of problems as to why people would not want to give them their money….

Record breaking cost of fuel.
Plummeting housing market
The falling dollar
The high price of food

At that point I lost interest at what they were saying for something had suddenly occurred to me.

In chronological order…. going backwards…..this is how our current crises happened.

The high price of food
Record breaking cost of fuel
The falling dollar
The plummeting Housing Market..

Each line, or event, was caused mostly by the event or line directly underneath it.

For example the high price of food is tied to the high cost of energy required to get that food to market….as well as the decrease of our food supply as large amounts of food jumped from the ground into our cars.

The high price of fuel is predominantly a result of the falling dollar. For example if a barrel is profitable at $66 dollars on the world market, and our dollar has fallen 50% of its value last year….. our cost of gasoline to us is $132 dollars a barrel.

The falling dollar is a result of the rest of the world’s acknowledgment of the huge pile of unsecured debt hanging over our heads. As seen on Martin Luther King weekend of this year, there is little confidence in America’s ability to provide security. Our dollar is garbage, and will remain so as long as major companies like Bear Stearns can fold overnight…….

So all our woes come down to the housing debacle. Back when the upcoming housing crises was first discovered, and the exact extent of how much unsecured debt’s ink was drying on the paper of most of our investment houses, became known……the dollar fell, which raised up the price of fuel, which in turn pumped up the cost of everything, including the provision of food “for our families.”

So how did this bubble based on housing costs ever get started? Simply because of one piece of legislation that got slipped into a late night omnibus bill (by one Senator Phil Gramm(R) Tex) which deregulated leveraged securities. With no regulation requiring anyone to monitor these massive (billions of dollars) transactions, large amounts (in billions) of loans were leveraged without any adequate collateral to back them up……

In other words, exactly the same sequence of events occurring within the 1929 stock market which eventually led to the Great Depression, occurred again because of this one piece of legislation sneaked in by Phil Gramm. Again, far from the eyes of government regulators, our entire economy was traded several times over on the sham, and huge transactional profits were pocketed:…..very, very large transactional profits, all done over packages worth 1% of their traded value…..

By the way, in case you did not know………Phil Gramm is McCain’s number one principal economic adviser….

In other words, the single one man responsible for all of our economic woes, is currently advising the Republican candidate for U. S. President…..who himself has admitted that he knows little about economics…..

Has any party ever picked a bigger loser?

Think about it.

Now…. listen to this. One of the central planks in Obama’s economic package, paraphrased by David Anderson, goes something like this….

We don’t need to make radical change, but if you just rolled it (required leverage amount) back to 20% then we would still have liquidity in the market and no additional government interference with investors.

Every Libertarian and Federalist should support such free thinking …………..I’m telling you …Obama is not your typical Democrat, just as Reagan was not your typical Nelson Rockefeller Republican……..

But in contrast, the relationship between Gramm and McCain, especially when one considers Gramm’s pivotal role in bringing our country to its knees,……..bears additional scrutiny…..

There is scrambling by all parties to shift the blame of “who is responsible” for the collapse of our financial institutions.

Republican operatives who just returned to Congress this week, had to tighten their reins over their membership which had just spent their Easter Break mingling among their constituents. Republicans, after hearing first hand from real voters, truly fear they are to be wiped off the face of the planet by November 5th.

And for once, they may be right.

For today, Americans of every economic strata feel betrayed, and naturally possess the anger that goes along with it. Ask any of those holding Bear Stearns stock just how happy they are with Republicans right now.

We all know that emotions are scurrilous things. They occur even when there is little factual evidence to support them. So it has been, with the blame being placed on Republicans for placing our once great prized economy on the auction block……Just fuzzy associations but as of yet there have been no direct links, provable in a court of law, that puts Republican philosophy in the Defendant’s chair.

Until now.

Those of us who have ever been betrayed, remember well those moments when the scales fall from our eyes, and our denial can no longer continue its walk on air. I could not believe my ears as I listened to this radio interview with Michael Greenberger when he spoke on NPR. The conversation is 39 minutes, but it provides a smoking gun that hinges Bear Stearns failure and subsequent bailout, onto the very backs of the Republican party itself……

Michael Greenberger, in a voice that is a good mimic of Peter Coyote, the voice over in almost every campaign ad or television documentary, describes in plain language exactly what went down. He should know. For during the Clinton years…..(those golden years)…he served as Director of the Division of Trading and Markets at the Commodity Futures Trading Commission. In that capacity, he was responsible for supervising exchange traded futures and derivatives. He also served on the Steering Committee of the President’s Working Group on Financial Markets, and as a member of the International Organization of Securities Commissions’ Hedge Fund Task Force.. One can hear sadness in his voice as he describes, step by step, the dismantling of all the security devices which were once placed to insure what just happened, would never happen.

To understand what derivatives are and how they caused the current crises, one needs to understand that these OTC derivative markets are nothing more than “bets”. One bets that the housing market will continue to rise, or bets that it won’t, when buying into these plans. The underlying assumption being that the market would rise, so even if a homeowner were to default, his home would have increased its value more than enough to pay for the loan is what pushed this bubble farther than it would under its own power…….But if the markets fell, there was no bottom, since there was no underlying collateral to be gathered in its place. Once again we entered the realm of the 1920’s, where one could buy stock for 10% down. Back then we learned our lesson because of the Great Depression, and said “never again”. We regulated both the banks, and financial markets. And up until this administration, we regulated the OTC markets as well.

But then, late one December night, while America’s attention was fixed on the Supreme Court decision affecting the outcome of the 2000 election, a 262 page rider (Commodity Futures Modernization Act (“CFMA”)) was surreptitiously slipped into an 11,000 page Omnibus bill just as Congress was to leave on Christmas break, written in language that only a corporate lawyer could decipher, by one Senator Phil Gramm. (R-Tx). Not only did this rider wipe out all Federal oversight of this very speculative market, but it subsequently wiped out each and every state and local ordinance that up to that point, had regulated this commodity.

So started this shadow market. Instead of buying stocks and bonds, banks could place bets. The equivalent would be instead of buying a sports team, and investing in all the paraphernalia required that could subsequently pump money back into the economy, one could simply bet on them, and make much more money that way. Just as the sports betting economy, even though iit is huge, is totally below the economic radar, so was this market in dreivitives. There was no one overseeing it, thanks to Phil Graham.

As banks and major institutions began utilizing this new market, they came to the conclusion that they should place those very valuable assets on their books. So what is happening now, is nothing more than removing those questionable assets…..off the books. Since there was never any regulation, and since banks wanted to keep their financial pages attractive, there was no law that said losses had to be counted, and so they weren’t. Thus, even though this problem begin to turn sour years ago, no one except those whose position itself depended on their keeping that information quiet, even had a clue.

Basically what happened with Bear Stearns, was that one day, the bookie’s collector showed up at the door. “Uh…We’re here to collect.” Bear Stearns could hide it no longer.

Not all financiers fell like Bear Stearns. Some, like Goldman and Sachs to their credit, realized the housing market was about to deflate, and switched. They begin betting the other way; they bet the market would fall, and when it did, they weathered the financial storm better than most.

Essentially our great economy that has been hailed by the Bush administration as proving the wisdom of cutting taxes, has instead been driven by individuals huddled over their computers……staring at screens and making bets. Instead of building factories, extending the manufacturing base, driving new technologies, hiring and training real people, creating products that can be bought and sold, our economy is driven by a very few people…..making bets……
Our fortunes are being made…….or ruined…..by people making bets.

And this was accomplished by the sneaky tactic of one Republican, on the floor of the Senate in December of 2000., with no disclosure, no debate, and no reckoning.

That one person……Phil Graham (R-Tx) is currently serving as the Republican contender John McCain’s financial adviser. As we all know, John McCain by his own admission, does not know economics as well as he should. If he did, he most certainly would not have the single one person responsible for America’s economic fall from grace……..as his most trusted senior adviser…….

The Republican party is entirely to blame for our current economic problems. They shoulder the blame alone for creating this shadow economy that may still yet……………………..destroy us all.