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Postre: US: on the Financial Crisis and Bailout (Bienvenido Macario, Philippines) (John Eipper, USA, 09/25/08 2:16 pm)
Bienvenido Macario writes:
From Ben Bernanke's testimony before the Joint Congressional
Committees on the Economy yesterday (09-24-08), this is what I gathered:
The artificially extended boom in real estate around 2002 was
brought about by government's mandate to provide credit focusing on
those who need it, not those who are qualified, in an attempt to
democratize the housing industry and defy market's laws. (Legislate
our way to prosperity.)
Sarbanes-Oxely Act of 202 forced Additional investments into the real
estate and mortgage industries after Congress mandated that investors
must be insulated from the natural risks in the financial markets, in
an unrealistic response to the Enron disaster.
Sarbanes-Oxley Act also initiated the capital flight to the
overseas market, where businesses not do not have to spend the $2
million SOX compliance cost. Worse, the SOX Act of 2002 failed to
alert the government, investors and the public of the impending
collapse of Bear Stearns, Fannie Mae, Freddie Mac, AIG, IndyMac,
Countrywide and a host of other small companies. SOX failed to do the
job it was created.
What happened with SOX is similar to the government establishing price
control on prime commodities. Instead of bringing the price of
commodities to a desired level, the goods disappeared and went
underground with the price almost doubling.
The amplification of the government intervention is the problem, not
the bailout itself. Demands for heavy regulation and more oversight
are not necessary. What is needed is better, cleaner and more
efficient regulation by reforming regulation when the market has
We have to remember that the accounting irregularies in Fannie Mae and
Freddie Mac on the one hand and Enron on the other are one and the same.
But Enron executives were jailed while Fannie Mae and Freddie Mac
executives retired with millions of dollars in exit packages. What
new regulation and oversight is needed here?
As Tor Guimaraes and Jody Brennan both noticed, lenders and borrowers
both made their respective misrepresentations, but I wonder how many
borrowers were prosecuted.
1) Markets need to have the confidence that the problem will be
attacked with sufficient force (hence $700 billion, which I believe is
the same amount of US oil imports and thus neutralizing the adverse
effects of oil-price fluctuations and speculations during the bailout
2) Close and continuous oversight might be the solution to lawmakers'
3.) The issue is whether the small amount would be enough to address
market confidence. (There are $14 trillion in outstanding residential
and commercial mortgages. $700 billion is just 5% of the outstanding
mortgages. I believe the $700 billion is more than enough to bail out
the economy, provided politics is kept to a minimum and subject to a
SEEFITS review of the details that will follow the "principle in
agreement" on the bailout now pending in Congress. It's amazing how
the word "politics" and "corruption" could be interchangeable.
Final comment: If the overseas aspect of this financial crisis is not
contained by reforming, replacing or rivaling the World Bank, IMF and
the UN, we'd be lucky to enjoy three years of recovery from this
crisis before we are plunged to a deeper and more desperate downturn.
If this crisis happened between elections, it would have been
crystal-clear to our leaders in Congress, the government, the private
sector, investors, the media and the public that it was the collective
fault of the World Bank, IMF and the UN that brought the crisis deep
into this level. Even as recently as Dec. 14, 2007, the World Bank
continued to seek funds for debt forgiveness and in fact secured $16
billion in cash for the purpose. The California State budget deficit
did not add up to $16 B until Feb. 20, 2008.
For information about the World Association of International Studies
(WAIS), and its online publication, the World Affairs Report, read its
homepage by simply double-clicking on: http://wais.stanford.edu/
John Eipper, Editor-in-Chief, Adrian College, MI 49221 USA