Friday, April 15, 2016

Bush and Paulson

The Bush administration seemed oblivious to the looming financial problems. Bush, along with his predecessors thought getting low-income people into their own home was a good idea. He arranged for $600 billion to be made available to first time home buyers, with up to $100,000 available to each first-time buyer of a new home. This put another six million families into homes they could not afford.

All for profit companies are going to try and make a profit – this includes commercial corporations, banks, insurance companies and stock markets. Profit is their purpose for existence. They do not stop trying for success just because the government changes the rules. The government’s job is oversight to assure the business are run fairly and do not take advantage of consumers. Oversight was completely ignored for over thirty years for what sounds like noble goals – i.e., getting low income people into their own home.

A disaster was set-up and now the time had come to pay the piper. The government was forcing banks and mortgage companies to make loans to people that could not afford them. Banking intuitions and stock trading companies were merging and bad mortgage loans had crept into most stock portfolios throughout the world. In order to avoid losses bad loans were bundled in with good stocks to make saleable packages and they sold them. These packages were called Credit-Default Swap (CDS) derivatives and there was no transparency in that market.

Henry (Hank) M. Paulson, Jr. was the Bush Secretary of the Treasury. He recognized there were problems early in his tenure and tried to manage the situation. By 2007 it was too late. When Bear-Stearns was on the verge of collapse, the Chinese stepped in and bailed out the company. Paulson was trying to make a similar deal to save Lehman Brothers, but his attempt to get Bank of America or Barclays’s of London to step up and bail out Lehman fell through. The collapse was on the way and unstoppable at that late date. Paulson wrote a book about his efforts to save the world economy called “On the Brink: Inside the Race to Stop the Global Financial System.”

Ben Bernanke and the Federal Reserve, in an unprecedented move, went into action to help a Democrat president by issuing money and cutting the prime lending rate to near zero. The Fed continues with this practice through Janet Yellen. They have killed the bond market and caused stock prices to soar without the value normally associated with growth. A stock market crash is imminent, because most stocks are over-valued. The Fed does not know how to recover from their foolhardy efforts to help the economy.   

The world economy collapsed, yet companies too big to fail still exist. Nothing has been fixed. Obama through HUD is still forcing banks to make loans to people that cannot afford them. The only thing preventing another crash is that we have not recovered from the last one. The table is still set for disaster. As soon as we get a president that will actually grow the economy, it will not grow for long unless some of the problems are addressed.

The Bush administration seemed oblivious to the problem. They may not have caused it, but they should have recognized it. They may have been aware, but the public was certainly kept in the dark. Wishful thinking is not an effective strategy. One thing a Republican presidency always gives us is a scapegoat.

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