Prediction of the financial meltdown

In 1999, Senator Dorgan (Democrat -North Dakota) predicted that because Congress repealed a certain law, within a decade we will see massive taxpayer bailouts. See story here. According to the readers of the Motley Fool, a website dedicated to investing, repeal of this law is the single greatest cause of the financial collapse of 2008. Which law was repealed in 1999 that is being blamed for the financial meltdown? The Glass- Steagall Act.

The Glass-Steagall Act was passed in 1933 as a result of the Great Depression. It prohibited commercial banks, like the ones that average people use to store their money, from engaging in the investment business, like derivatives. See here. The banks didn't like those restrictions and over a period of about 20 years, the banking industry was able to weaken and finally repeal the Act. See timeline here.

There has been discussions recently about what new laws need to be in place to prevent another financial meltdown. For example. on the PBS news show Newshour, the experts discussed what new regulations need to happen. See here. While I disagree with what they say about limiting executive pay, I do agree that we need to re-impose the wall between commercial and investment banking. The reason for this is that while there are greater returns in investment banking, there are also greater risks. And it seems to be in human nature to be greedy and put the savings of others (commercial bank accounts) in risky investments.

From the savings and loan crisis to the Great Depression to Mr. Law creating the first stock bubble, a wholly unregulated financial system seems to lead to individuals acting on their greedy impulses to the extent that they bring the whole system down. Unrestrained greed brought the financial system down in the 1930s and unrestrained greed did the same in 2008. As Senator Dorgan said in 1999, that which is true in 1930 is true in 2010. We need to either re-enact Glass-Steagall or eliminate greed from all bankers and investors. Enacting the law is the obvious choice.

On a final note, here is a NPR marketplace article on whether banks have learned or changed anything from the financial crisis. Interesting article to listen to.

March 18, 2010- I need to take back what I said in this blog. I wrote Senator Bennett's office and asked them about the Glass-Steagal Act. They indicated that even if the act had been in effect, it would not have prevented the financial meltdown because 1) Investment banks such as Bear Stearns were not covered in the Act and 2)the toxic assets that hurt the commercial banks likewise were not prohibited by the Glass-Steagal Act. Both of these factors are, in my opinion, what brought us the financial crisis along with unrestrained greed. So it really wouldn't have made a difference even if the Glass-Steagall Act had been in place.

Ascent of Money

I am watching part 2 of the PBS documentary- The Ascent of Money. They talk about an interesting Scotsman named John Law. He fled Scotland because of a murder conviction and went to Holland, saw how they did finance, and then traveled to France and set up a financial system there. He established a company that held the colony rights to Louisiana and became rich selling shares in that company. Unfortunately, he spread false information on how easy it would be to form a colony in the swamplands of the South. And when word came back on how 80% of the colonists died in the first year, the stock lost 90% of its value, and John Law fled the country. This all happened back in the early 1700's. How little has changed since then!

The President talks to Students

Some conservatives don't want Obama talking directly to school children tomorrow, Sept. 8th. See here . Today, even after the text of the President's speech was released, I heard the commentator on the Glenn Beck show still argue against it.

Here is the text that President Obama is going to deliver to the students tomorrow. I don't understand the big controversy. I actually like it. He tells kids to try their best at school, don't make excuses for failing, and that success takes hard work. What's not to like? I see Obama as trying to use his influence to inspire schoolchildren to do their best and be responsible. I wish more people would say that.

Actually, Presidents H.W. Bush and Ronald Reagan gave speeches to schoolchildren nationwide.

Here is President Bush's speech. He also preached self-responsibility. I don't think it's as inspiring as Obama's, but it's good.

Here is President Reagan's speech. He gave it near the end of his term of office. In it he praises the Founding Fathers and sets forth his view on the role of government.

I'm afraid that the conservative commentators missed the boat on this one. They might have legimately been afraid of what was in the speech, but after it was released, apologies from them to Obama were due. But I didn't see that happening. And look at the history of Presidents making speeches to schoolchildren. It's not new. That just shows me that conservative commentators are just looking for the quick political hit and don't care about putting events in context. Shame on them.

Health Care Reform and Questions

I have read Obama's Press Conference on his plans for Health Care. He makes some points that I agree with such as the present situation with health care is untenable. Under current law and projections, medicare and medicaid will bankrupt the Federal budget. I agree that everybody should have health care, rich and poor. We do need to find out what is driving the cost of health care. But I am leary of a solution that involves a huge change and lots of money and influence from the federal government. Obama himself said that many people are cynical of government because they haven't seen a lot of laws out of Washington that help them. Well count me a cynic because I am not convinced of his plan. Here are my reasons-

1. It is not in the power of the federal government to provide health care. Here is the list of the powers of congress according to the Constitution. I don't see health care for the general public.

2. Even if you do think that the federal government should be involved in health care, I want to see some results first. Why not implement the reforms in Washington, DC first or at the Veterans Administration hospitals, or even in how they pay for medicare and medicaid? Congress has full authority over DC according to that same section in the Constitution, let's start there and see what happens in two years. Surely we can wait two years before making such sweeping changes.

3. The health care cost-savings are not there. I am always skeptical of politicians who say that a government program will pay for itself or not cost too much. Obama himself talked about how much money is spent on medicare, medicaid, and prescription drugs. I don't trust savings that haven't appeared yet. I don't think anybody would give me a loan based on what I would save in the future. I need to see some actual savings first. Here is a Wall street article that raises questions about how much savings there could be in the system. studies done. (Thanks to my friend, Matt)

4. Massachessetts- what happened to there health care reform plan? And is it similar to the federal plan? And why has nobody talked about it?

5. No reform/tort reform for malpractice insurance? Shouldn't that be on the table?

These are some of the concerns that I have about the federal health care reform plan.

I.O.U.S.A.

I recently watched a video about the financial future of the Federal Government. It is called I.O.U.S.A. and is well worth the 30 minutes it takes to watch it. I like it because it is non-partisan, talks to intelligent people, puts things in historical perspective, and encourages a plan of action at the end. In short, it has it all.
The film focuses on four topics-

1)how the federal government needs to reign in entitlement spending,

2) we need to become a saver nation again,

3)the trade deficit matters, and

4)we need leadership.

I would highly recommend it to everyone. It takes complex ideas and presents them in an easy-to-understand format. At the end of watching it, I felt smarter. And I also felt vindicated by the video because I have been an advocate of social security reform for a while. This is what I said in March of 2005 on my previous blog- antityranny.blogspot

The attitude of the younger generation provides an opportunity to phase out social security. This will free up money and shift responsibility for retirement from the government to individuals and families. The 6% that workers now contribute will create a giant pool of money. That money could go to a variety of purposes. Maybe that money will become a new source of investment capital. Maybe people will go out and spend it on worthless consumer electronics. Maybe people will store it under the couch. I don't know. But I do know that right now I don't believe that social security will be around for me and if I can get that 6% of my paycheck right now, I am more than happy to take care of my own retirement, thank you.

Rules in times of Crisis

You don't have to look far to see trials and troubles in our nation. The troubles range from financial crisis to unemployement to people losing their homes. And according to the cycles of history, as discussed in the book- The Fourth Turning, this is only the runup to an upcoming severe crisis on the order of WWII or the Civil War. So I was happy to listen to a great and optimistic talk given by a man named Oliver DeMille. He was one of the keynote speakers at an education convention that I attended. He listed some rules for making it through and thriving through this next rough patch of history.

Here are the main points of the talk. If you want to listen to it in its entirety, you may purchase it here for $4.00. Dr. DeMille summarized his points from a book, Our Home by C.E. Sargent. (Available on google books for free) Evidently, Sargent was a civil war veteran and summarized what he learned from life in that book.

1. Embrace the new and now.
2. Spend evenings and Sundays with family.
3. Don't try to fit in with what others deem to be cool. Do your own thing.
4. Write out and follow your individual rules for life.
5. Raise your children to be adults, not bigger children.
6. Find meaning in trials and struggles. Be grateful.
7. Focus on the widows, orphans, grandparents, children, sick, unhappy.
8. Marriage is the central focus of life.
9. Initiative education and (10)entrepreneurship thinking is what is needed, not job skills or get rich quick schemes. Be willing to do the hard work of building an organization or business from scratch.
11. Produce wealth because there is a need for it.
12. Creativity and Inventiveness
13. Resilency-never give up, stay optimistic
14. Ambition in making sure that the right ideas win out.

AIG Bonuses

I don't think it is right for Congress to go back and try to tax money after the fact that you have already earned. There is a concept that the Constitution outlawed called an ex post facto law. That means that you can't create a law and punish someone for an act that was done before it was legal. And collecting 90% of someone's pay after the act seems to be punishing them.

In addition, this is a bill of attainder or a bill targeted at a group of people. A bill of attainder is illegal under the Constitution. (see Article I, Section 9, Clause 3) If Congress can target a specific group of people to tax, what is to keep them from picking another unlucky or unpopular group down the road? See this article under problems with the bill.

But wait, you may say, they are using our taxpayer money to give out these bonuses! Shouldn't we have a say in how they spend that money? Yes, you do have a say, a say at the voting booth. Your congressional Representatives and Senators represent you and they didn't see fit to put a restriction on bonuses up front. Besides, according to a government official that is in charge of making sure the money from the stimulus package gets spent how it is supposed to said that about 7% or 55 BILLION dollars will end up in fraud. So don't worry, we will have much better scandals and frauds to entertain us and make us furious and pass bills about. Those bonuses are small potatoes. They are just the warm-up of what is coming down the line.

I believe the real solution is to help America live within its means, let businesses go bankrupt, help your neighbors and move forward with hope and determination that we will pull through this. And not turn to the government to spend more money that it does not have.

History gives us many examples of government. My children are learning about two different eras, the middle ages and modern history. My son comes home with tales of lords, serfs and Vikings. He runs around fighting, warring on the unexpected peasants, defending lords and laughing hardly at the treasures he pretends to take. Many of the discussions are centered on the wrong of these actions, helping him understand how the rights of these people were not protected. In contrast, my daughter is learning about the American Revolution.
Throughout history governments have risen and fallen but during the time of the revolution there had never been a group of people who wanted to understand and protect rights of the people not the government. Who discussed and wanted understand the role of government. I was discussing our rights with my children while driving to school. Why did the people of that time decide to write the Bill of Rights? Good question for a nine year old. We talked about the King of England and the fairness of his actions as a ruler of the American Colonies. At last, we concluded with Patrick Henry’s quote, “Give me LIBERTY or give me death.” Feeling satisfied with our debate, we arrived at school and parted ways.
As the day went on I continued to think about our conversation, liberty, the rights of the people, these ideas keep returning to my thoughts. My readings, lately, have centered on the writings, ideals and forms of government the founding fathers would have access to at the time of the break from England. What a monumental task lay before them. What would you want if you could form the government that would protect and lead you?
Personally, I don’t think I would change the constitution. I have inalienable rights; these rights are in place to protect me from the government. The role of the government is not to provide life, liberty and health insurance but to provide for the common defense. Defense against the common cold is not what I think the founding fathers had in mind. My freedom is not being protected now; slowly these rights are being eroded by big government. As the haves and have-nots continue to battle a quiet war, our way of life is changing.
Who will stand and defend the people, Give us LIBERTY! “The Constitution is not an instrument for the government to restrain the people; it is an instrument for the people to restrain the government – lest it come to dominate our lives and interests. – Patrick Henry”. We should not make ourselves depended on the government, again serfs to a new lord. Maybe we will be lucky and the Vikings will relieve us of this treasure.
We too can stand and say to the tyrants of today, we do not want what you offer.

Sarah C.

Further readings:
Common Sense Thomas Paine
Treatises of Government John Locke
Writings of Hume