Wednesday, September 24, 2008

Crying “Wolf” Over Wall Street’s Credit Crunch

by Tom Hinton

As President Bush addressed the American public last night on America’s latest crisis -- our nation’s economic credit crunch -- I couldn’t help but recall what Marcellus said in William Shakespeare’s play Hamlet. “Something is rotten in the state of Denmark.” Certainly something is terribly rotten in the United States when a crisis of this magnitude mushrooms overnight and requires a $700 Billion solution. What in the world is going on with our national leaders?

Americans are being told by the president that our national economy -- the same economy that just last week was “fundamentally sound” according to Senator John McCain -- is facing a near-Depression disaster due to a meltdown of the credit markets which resulted in the failure of three major Wall Street banks that controlled hundreds of billions of dollars in devalued mortgages and other questionable loan derivates. The Bush Administration’s solution is simple. Congress should hand over $700 Billion to Secretary of the Treasury Henry Paulson, a thirty-year veteran of Goldman Sachs, one of the two remaining giant Wall Street firms that are teetering on the brink of collapse due to poor investment decisions,

There’s no denying we have a serious problem. But, the question that must be resolved by Congress before it hands over $700 Billion to Secretary Paulson to dole out as he sees fit is this: Is this Wall Street’s problem or is it Main Street’s problem? If the answer is Main Street, we have a serious crisis and Congress needs to take immediate action. However, if the answer is Wall Street, perhaps Congress needs to take a deep breath and try to understand the ramifications of the problem before endorsing the Bush Administration’s two-page, $700 Billion bailout solution.

American Consumers are very skeptical of the Bush Administration’s solution for ailing Wall Street financial companies. So far, consumers don’t like what they’re hearing. According to a Bloomberg/Los Angeles Times poll, Americans say Congress should reject the Bush Plan. By a margin of 55 percent to 31 percent, Americans say it's not the government's responsibility to bail out banking companies with taxpayer dollars, even if their collapse could damage the economy. Furthermore, Americans are now blaming Wall Street and President George W. Bush for the credit crisis.

The debate is running so hot that political analysts are suggesting that any member of Congress who supports the Bush Bailout is in jeopardy of losing their seat in the November 4th election. This is causing both Democrats and Republicans to take pause and reconsider their options -- and they should! The right solution has not yet been found.

If the problem is a potential failure of major Wall Street banks, which are holding hundreds of billions of dollars in depreciating loans such as mortgages, a different solution will be required so that consumers can still access money for various loans such as auto loans, mortgage loans, college tuition loans, and so forth. Small businesses will also need money in the form of loans to purchase inventory, make payroll, and capitalize their businesses. These are important issues that the Bush Administration and Congress must evaluate. To allow a credit freeze to occur among the major banks could have serious negative consequences for Main Street.

But, having said that, the bigger issue is what will happen to Main Street if Congress does not act and the remaining Wall Street banks fail or face a fire sale? This is the dominant issue that concerns consumers because most of their money is deposited in local banks and credit unions not in Goldman Sachs and other vulnerable Wall Street financial institutions. It’s the Main Street banks and credit unions that control the 90-day revolving loans of their small business clients. It’s the Main Street banks and credit unions that will reject new loans and demand higher cash deposits if credit is tight. But, this is not yet happening. In fact, some of the large banks are eager to make loans at below-market rates. So, given the doom-and-gloom messages coming from the Bush Administration, someone in Congress needs to call a time-out and ask for a replay. What is really happening here?

Is this a case of Wall Street and the Bush Administration crying “wolf” in an effort to bailout their long-time supporters and cronies? Or, is this a serious financial crisis that could paralyze the global economy? Many consumers don’t care what happens to the Wall Street firms. Perhaps, this is being narrow-minded on their part, but consumers are more concerned about keeping their jobs, paying their bills, and avoiding foreclosure.

Certainly, the one area that must be addressed immediately by Congress is the troubling number of home foreclosures. I believe this is the number one problem in the American economy because so many industries are linked to home ownership. According to government figures, there are nearly 10,000 home foreclosures taking place every day. This is a very serious problem that Congress must fix in the next thirty days because home ownership is the bedrock of America’s middle class. It is also the primary source for most local and state taxes. To allow millions of homeowners to be foreclosed on due to rigged sub-prime loans and a series of complex financial equations that baffle most economists is unfair and will undermine the American economy faster than any other single economic problem.

I recommend three steps to help solve our current economic crisis. First, Congress needs to immediately freeze all home foreclosure actions for one year and create a new agency, The Homeowners Resolution Trust Corporation (HRTC), which would purchase all troubled mortgages and renegotiate those loans with homeowners through local lenders and banks. By creating a one-year moratorium on foreclosures, the federal government can buy time to sort through all the troubled home loans, arrange for refinancing on those mortgages that can be salvaged, and retain the deeds of trust as a means to protect taxpayers from getting fleeced. This would give threatened homeowners some breathing room to resolve their financial problems. It would also allow local and state governments to recoup back taxes that homeowners have failed to pay. Finally, it would pump money into hundreds of local economies through local banks and credit unions that agreed to sell their troubled mortgages back to the HRTC and close their books on those mortgage loans. This step would give local banks more lending capital to revitalize local communities and small businesses. The HRTC would create federal standards and guidelines to ensure only valid mortgages are re-purchased by the HRTC from certified banks, credit unions, and other lenders.

Secondly, the federal government should tighten the requirements used by Freddie Mac and Fanny Mae for buying federally guaranteed mortgage loans. Just thirty years ago, prospective homebuyers had to meet very clear criteria before they could buy their dream home. We need to return to those days of fair and reasonable guidelines to ensure stability in the home purchasing process..

Thirdly, Congress should reinstitute stiff regulations and severe criminal penalties -- including prison time and hefty fines -- for those corporate officers and directors who violate SEC laws and try to fleece shareholders and taxpayers. The era of Anything Goes on Wall Street needs to end! Tough laws and enforcement by federal agencies can eliminate the shady dealers who are peddling under-valued derivatives and sub-prime loan schemes.

Those unscrupulous people who perpetrated this financial ponzi scheme on Wall Street would like us to believe that consumers, who purchased their homes on good faith and credit, are to blame for the current economic mess. But, Americans know better. The real culprits are the very people who are now crying ‘wolf’ and lobbying Congress -- and the American taxpayers -- to bail them out. You’ll see their ads in major newspapers and on the television networks. Beware of them. There are three culprits who got us into this pickle and now want us to bail them out. They include state and federal regulators who allowed banks to shift billions of dollars of questionable credit off their balance sheets and into the hands of unsophisticated foreign investors who were lied to. They also include hedge-fund managers and pension-fund managers who purchased sophisticated high-yield debt instruments they didn't understand and now cry mea culpa. Finally, we can blame the over-educated economists and bankers who fabricated mathematical equations and promoted their flawed lending models that enticed unsuspecting banks to purchase those high-yield debt instruments.

There’s no question that there is a hungry wolf out there. But, Congress should act cautiously as it attempts to sort through this economic mess. Certainly, we must avoid a credit meltdown. But, if Main Street can still function without burdening the American taxpayer with $700 Billion of Wall Street debt, perhaps logic and reasoning dictates we save Main Street and leave the bulls and the bears to the wolves.

About the Author. Thomas Hinton is president of the American Consumer Council, a non-profit consumer education organization with 85,000 members. He can be reached at:

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