An Open Letter to the Federal Reserve

Great article, via Fool.com:

An Open Letter to the Federal Reserve

By Matt Koppenheffer and Morgan Housel

Dear Ben Bernanke and distinguished members of the Federal Reserve:

We are writing today to formally solicit your help in obtaining approvals to start a new bank holding company, Money Unlimited. We of course understand that the approval process for a new bank is typically done through the FDIC, but as the Federal Reserve plays a crucial role in our business plan, we hope that you can expedite the process.

First, let us assure you that we will start from day one as a very well capitalized institution, with no need to raise outside capital. While actual cash is on the lower end of the spectrum, we both own stock portfolios that we plan to use as collateral for our banking operations. Our current holdings include Berkshire Hathaway (NYSE: BRK-B), Johnson & Johnson (NYSE: JNJ), Procter & Gamble (NYSE: PG), and Coca-Cola (NYSE: KO).

For the purposes of this application, we are choosing to mark these assets to model rather than to market. Our basic assumptions include 7% U.S. GDP growth, 12% global GDP growth, a 4% U.S. unemployment rate, rising corporate profitability, U.S. debt repudiation, and the end of cloudy days.

In addition, Matt owns a home in Las Vegas. Though this asset is currently considered "under water" based on market valuations, a house down the street just sold for slightly more than Zillow.com said it was worth. We extrapolated that gain into infinity and determined the housing bust is simply a figment of the media's imagination.

Now the good news: Without getting into the complexities, our models show our combined net worths at just over $1 billion, all of which we'll use as capital for Money Unlimited. We hired a 22-year-old right out of college who's pretty darn good with Excel. He assures us it's a conservative figure.

While neither of us has any "formal" banking experience, our time-tested business model more than compensates for this apparent shortfall. As with Goldman Sachs (NYSE: GS), which was recently made a bank holding company, we have no plans to engage in actual banking operations such as deposit-taking and lending. That stuff just sounds hard. Regulators are always all, "You need to lend money to people who can pay you back." We'd rather just avoid that whole sticky situation altogether.

Instead, we're going to leverage our borrowings from the Federal Reserve to create a massive, money-spewing trading operation.

It's quite simple, really. We're going to borrow money from the Federal Reserve at 0%, then lend it back out to the U.S. Treasury at 3%. The Treasury can then use that money for fantastic programs like Cash for Clunkers. If we leverage our $1 billion asset base 20-to-1, we'll pull in $600 million in year one without breaking a sweat.

Because we want to do what's right for the economy, we plan to keep operating expenses to a bare minimum and limit our bonuses to $20 million each for the first five years. By plowing the remaining money back into the bank -- and, of course, leveraging it at 20-times -- we'll be able to grow like a weed. Assuming you folks at the Federal Reserve continue to do your part by lending money at 0%, we expect to clear $120 billion in assets in five years flat.

And don't worry about us. We understand that hard work and tangible economic contributions need to be rewarded, so in the sixth year of operation we both plan to take $500 million bonuses and use company money to buy ourselves private jets.

Money Unlimited will offer other significant benefits to the economy as well. We'll compete against banking organizations such as Goldman Sachs, JPMorgan Chase (NYSE: JPM), and Citigroup (NYSE: C), who are no doubt engaging in similar practices. (Have you seen their earnings?) Plus, we'll allow other banks to buy credit defaults swaps against us. As any financial professional worth his salt can tell you, this "increases liquidity" and helps small businesses. We can't tell you exactly how that works, but salesmen who wear shiny cuff links and talk really fast tell us it's true.

But helping the economy isn't all we're about. As Goldman Sachs' CEO Lloyd Blankfein recently put it, this is "God's work," and we certainly don't disagree with that.

Before long, the founders of Money Unlimited expect our trading operations will become so large that we will be considered "too big to fail." While some may consider this a concern, we disagree. There should be more competition among "too big to fail" institutions so that the risk of a Chernobyl-type catastrophe in our financial system is spread more broadly.

Thank you for your time and we look forward to your help obtaining a speedy approval for Money Unlimited.

Sincerely,
Matt Koppenheffer and Morgan Housel

Affirmative Action Groups will destroy America

As we enter the worst financial crisis in 80 years, almost none of the root causes of the crisis are being addressed, while the election of Obama has underlined the immunity that the groups behind the crisis will continue to enjoy.

The primary causes of the financial crisis have been:

1) affirmative action policies to increase mortgages issued for low income individuals

These policies include the Community Reinvestment Act, affirmative action mandates by Fannie Mae and Freddie Mac, and HUD.

As this article in the City Journal -a leading urban-policy magazine- on the Community Reinvestment Act explains, these affirmative action policies arose out of the observation by civil rights activists that banks were not lending in low income communities, communities that were often predominantly black/hispanic:

source

The Act, which Jimmy Carter signed in 1977, grew out of the complaint that urban banks were "redlining" inner-city neighborhoods, refusing to lend to their residents while using their deposits to finance suburban expansion. CRA decreed that banks have "an affirmative obligation" to meet the credit needs of the communities in which they are chartered, and that federal banking regulators should assess how well they do that when considering their requests to merge or to open branches. Implicit in the bill's rationale was a belief that CRA was needed to counter racial discrimination in lending, an assumption that later seemed to gain support from a widely publicized 1990 Federal Reserve Bank of Boston finding that blacks and Hispanics suffered higher mortgage-denial rates than whites, even at similar income levels.

The reason behind these lending practices was later found to be fully explainable by credit-worthiness considerations, rather than any insidious racial discrimination:

A September 1999 study by Freddie Mac, for instance, confirmed what previous Federal Reserve and Federal Deposit Insurance Corporation studies had found: that African-Americans have disproportionate levels of credit problems, which explains why they have a harder time qualifying for mortgage money. As Freddie Mac found, blacks with incomes of $65,000 to $75,000 a year have on average worse credit records than whites making under $25,000.

The Federal Reserve Bank of Dallas had it right when it said —in a paper pointedly entitled "Red Lining or Red Herring?"— the CRA may not be needed in today's financial environment to ensure all segments of our economy enjoy access to credit." True, some household —those with a history of credit problems, for instance, or those buying homes in neighborhoods where re-selling them might be difficult— may not qualify for loans at all, and some may have to pay higher interest rates, in reflection of higher risk. But higher rates in such situations are balanced by lower house prices. This is not a conspiracy against the poor; it's how markets measure risk and work to make credit available.

Nonetheless, affirmative action activist groups seized on the political argument of discrimination, and with the aid of Clinton's 1995 provisions to the CRA, an industry was born around extorting banks into lending in low income communities:

The Clinton administration's get-tough regulatory regime mattered so crucially because bank deregulation had set off a wave of mega-mergers, including the acquisition of the Bank of America by NationsBank, BankBoston by Fleet Financial, and Bankers Trust by Deutsche Bank. Regulatory approval of such mergers depended, in part, on positive CRA ratings. "To avoid the possibility of a denied or delayed application," advises the NCRC in its deadpan tone, "lending institutions have an incentive to make formal agreements with community organizations." By intervening —even just threatening to intervene— in the CRA review process, left-wing nonprofit groups have been able to gain control over eye-popping pools of bank capital, which they in turn parcel out to individual low-income mortgage seekers. A radical group called ACORN Housing has a $760 million commitment from the Bank of New York; the Boston-based Neighborhood Assistance Corporation of America has a $3-billion agreement with the Bank of America; a coalition of groups headed by New Jersey Citizen Action has a five-year, $13-billion agreement with First Union Corporation. Similar deals operate in almost every major U.S. city. Observes Tom Callahnan, executive director of the Massachusetts Affordable Housing Alliance, which has $220 million in bank mortgage money to parcel out, "CRA is the backbone of everything we do."

These activist groups are deeply entrenched in the political world of Washington, with the current president having a long history of working in the civil rights/ minority empowerment activism industry:

wikipedia

he also joined Davis, Miner, Barnhill & Galland, a twelve-attorney law firm specializing in civil rights litigation and neighborhood economic development, where he was an associate from 1993 to 1996, then of counsel from 1996 to 2004, with his law license becoming inactive in 2002.[28][44][45]

Obama was a founding member of the board of directors of Public Allies in 1992, resigning before his wife, Michelle, became the founding executive director of Public Allies Chicago in early 1993.[28][46] He served from 1994 to 2002 on the board of directors of the Woods Fund of Chicago, which in 1985 had been the first foundation to fund the Developing Communities Project

Obama even represented a group suing Citibank for discriminating against minority applicants in its lending practices in 1994:

source

Case Name
Buycks-Roberson v. Citibank Fed. Sav. Bank Fair Housing/Lending/Insurance
Docket / Court 94 C 4094 ( N.D. Ill. ) FH-IL-0011
State/Territory Illinois
Case Summary
Plaintiffs filed their class action lawsuit on July 6, 1994, alleging that Citibank had engaged in redlining practices in the Chicago metropolitan area in violation of the Equal Credit Opportunity Act (ECOA), 15 U.S.C. 1691; the Fair Housing Act, 42 U.S.C. 3601-3619; the Thirteenth Amendment to the U.S. Constitution; and 42 U.S.C. 1981, 1982. Plaintiffs alleged that the Defendant-bank rejected loan applications of minority applicants while approving loan applications filed by white applicants with similar financial characteristics and credit histories. Plaintiffs sought injunctive relief, actual damages, and punitive damages.

***

Barack H. Obama
Davis, Miner, Barnhill and Galland, P.C.

Fannie Mae and Freddie Mac are the other major affirmative programs contributing to America's economic problems. They are government sponsored enterprises that spend amounts lobbying politicians, particularly Democrats.

They are massive organizations that own or guarantee half of the $12 trillion worth of mortgages in the US. In 1999, under intense pressure from the Clinton administration, they began a program to increase home ownership in the minority and low income demographics, a program which precipitated the sub-prime mortgage bubble:

source

Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
Published: Thursday, September 30, 1999

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

The Democrats' intense dedication to these organizations meant that efforts to regulate their activities and impose responsible lending standards on them were blocked repeatedly, especially by black pro-affirmative-action Democrats in Congress:



How much has Fannie Mae cost the US? Besides the indirect costs like the losses from the financial crisis and the $700 billion bank bailout that the sub-prime mortgages spurred, there is also another $750 billion that the US has paid in the way of the Federal Reserve's purchase of Fannie/Freddie backed mortgages.

Given the Democratic party's history with these affirmative action groups, it's very likely that the Democrats will not confront the problems these groups cause in the economy, and will keep these policies inspired by affirmative action activism in place, as they continue to corrode America's economic competitiveness.

The Democrats will blame every thing else: deregulation in the financial industry, greed on Wall Street, predatory lending practices, etc, but will ignore the root cause, thus the economic problem will be go undiagnosed and untreated.


2) the Federal Reserve

The Federal Reserve's low interest, inflationary monetary policy led to the credit bubble that fed the housing bubble. Coupled with Fannie Mae and Freddie Mac's massive subsidization and securitization of mortgages, housing prices boomed leading to a speculatory spiral of increased borrowing and investment into housing, on the expectation of fast profits on small margins. Like all speculatory bubbles, it eventually came crashing down, taking down the entire financial sector with it.

This isn't the first bubble that the Federal Reserve has helped create, but it is the worst one, because the industry that the Fed's easy credit flowed into was created by affirmative action government mandate, rather than market forces like in the case of the dot com bubble.

In the case of the dot com bubble, there was real economic potential that was being speculated on, and massive new companies like Yahoo, Google and Ebay that arose in the bubble and survived its crash.

People over-estimated the speed at which the internet market would grow, and invested in many companies that were not viable businesses, but not all of the speculation was groundless, and many of the money invested did return value.

The beginning of the housing bubble and the concurrent sub-prime crisis meanwhile can be attributed almost solely to government intervention, motivated by affirmative action policies. The market fundamentals didn't justify vast amounts of wealth being poured into the construction of new houses. There was no explosive economic opportunity being bet on the way the dot com bubble bet on internet technology.

Furthermore, the scale of the intervention of the government in the housing industry made the housing bubble much larger than the dot com bubble. While speculation on intrinsic financial value spurred the dot com bubble, expectations of government giants Freddie and Fannie continuing to pour money into the housing market and push up prices drove speculators to invest far larger sums with more confidence than they did in tech companies.

When the NASDAQ crashed, about $5 trillion dollars was wiped out. The sub-prime crisis on the other hand has already wiped $8 trillion from just the US economy, and the losses and decline are widely expected to continue, with some predictions of a looming ARM (adjustable-rate mortgage) crisis that could parallel the subprime crisis in scale.

Neither political party discusses what role the Federal Reserve's low interest rate policy may have had in creating the bubble, and very little is said about how government intervention in the housing sector may have started the speculatory rise in prices.

Some criticism of Fannie/Freddie has been levied by major Republican politicians, but it has been limited to criticizing the Democrats for their role in blocking efforts to regulate Fannie/Fannie. The only solution offered by the Republican leadership has been to reduce the scope of Fannie/Fannie, rather than dealing with the fundamental problem and abolishing affirmative action policies in housing altogether.

This is not surprising as the Republicans are responsible for pushing for affirmative action policies in housing as well (e.g. Bush's 'ownership society'), and thus can't attack the principle of government intervention in housing without admitting that they too contributed to the problem.


3) neocon foreign policies

The loyal opposition, the Republicans, have been discredited due to their partnership with the Likudnik Israeli right and their Christian Zionist allies. With people afraid of what the AIPAC allied McCain might do if he were elected, many fiscal conservatives actually favored Obama over McCain, despite their disdain for Democratic economic policies.

The Republican elite have allied with the likes of Pastor Hagee, head of "Christians United for Israel", a darling of the Israel lobby, and an advocate of war against Iran. Likewise, Joseph Lieberman became a close ally of McCain's during his campaign, and was one of the leading advocates of war against Iran.

Meanwhile, McCain's advisor, Randy Scheunemann, was a former lobbyist for the Georgian government, and an advocate of bringing Georgia into NATO. As Pat Buchanan points out, had Georgia been a NATO member in its recent conflict with Russia, the US may have had to go to nuclear war with Russia:

source

Who is Randy Scheunemann?

He is the principal foreign policy adviser to John McCain and potential successor to Henry Kissinger and Zbigniew Brzezinski as national security adviser to the president of the United States.

But Randy Scheunemann has another identity, another role.
He is a dual loyalist, a foreign agent whose assignment is to get America committed to spilling the blood of her sons for client regimes who have made this moral mercenary a rich man.

From January 2007 to March 2008, the McCain campaign paid Scheunemann $70,000—pocket change compared to the $290,000 his Orion Strategies banked in those same 15 months from the Georgian regime of Mikheil Saakashvili.
What were Mikheil's marching orders to Tbilisi's man in Washington? Get Georgia a NATO war guarantee. Get America committed to fight Russia, if necessary, on behalf of Georgia.

Scheunemann came close to succeeding.

Had he done so, U.S. soldiers and Marines from Idaho and West Virginia would be killing Russians in the Caucasus, and dying to protect Scheunemann’s client, who launched this idiotic war the night of Aug. 7. That people like Scheunemann hire themselves out to put American lives on the line for their clients is a classic corruption of American democracy.

U.S. backing for his campaign to retrieve his lost provinces is what Saakashvili paid Scheunemann to produce. But why should Americans fight Russians to force 70,000 South Ossetians back into the custody of a regime they detest? Why not let the South Ossetians decide their own future in free elections?
Not only is the folly of the Bush interventionist policy on display in the Caucasus, so, too, is its manifest incoherence.

Defense Secretary Robert Gates says we have sought for 45 years to stay out of a shooting war with Russia and we are not going to get into one now. President Bush assured us there will be no U.S. military response to the Russian move into Georgia.

That is a recognition of, and a bowing to, reality—namely, that Russia’s control of South Ossetia and Abkhazia and occupation of a strip of Georgia cannot be a casus belli for the United States. We may deplore it, but it cannot justify war with Russia.

If that be true, and it transparently is, what are McCain, Barack Obama, Bush, and German Chancellor Angela Merkel doing committing the United States and Germany to bringing Georgia into NATO? For that would commit us to war for a cause we have already conceded, by our paralysis, does not justify a war.
Not only did Scheunemann's two-man lobbying firm receive $730,000 since 2001 to get Georgia a NATO war guarantee, he was paid by Romania and Latvia to do the same. And he succeeded.

Latvia, a tiny Baltic republic annexed by Joseph Stalin in June 1940 during his pact with Adolf Hitler, was set free at the end of the Cold War. Yet hundreds of thousands of Russians had been moved into Latvia by Stalin, and as Riga served as a base of the Baltic Sea fleet, many Russian naval officers retired there.

The children and grandchildren of these Russians are Latvian citizens. They are a cause of constant tension with ethnic Letts and of strife with Moscow, which has assumed the role of protector of Russians left behind in the "near abroad" when the Soviet Union broke apart.

Thanks to the lobbying of Scheunemann and friends, Latvia has been brought into NATO and given a U.S. war guarantee. If Russia intervenes to halt some nasty ethnic violence in Riga, the United States is committed to come in and drive the Russians out.

With these dynamics at play, the reign of affirmative action groups that leech off the economy seems like a good alternative to a Republican administration. That is the sorry choice America has had to make.

The only bright side to all of this is that with the election of Obama, one of the three root causes of the financial crisis may possibly be addressed; the neocon policy of foreign interventionism. The hope is that the Obama administration can bring peace to the middle east thereby reducing the power of the pro-war Israeli right and its influence over Republican foreign policy.

This would allow the Republicans, with the influence of the Ron Paul core, to re-emerge as a credible party that addresses domestic fiscal policy, rather than one that risks a nuclear war for countries on the other side of the planet.

Rep. Alan Grayson challenges Fed Inspector General on Trillion Dollar loans

Fed pledges another secret $7.4 Trillion

Bloomberg

Fed Pledges Top $7.4 Trillion to Ease Frozen Credit (Update1)

By Mark Pittman and Bob Ivry

Nov. 24 (Bloomberg) -- The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.

“Whether it’s lending or spending, it’s tax dollars that are going out the window and we end up holding collateral we don’t know anything about,” said Congressman Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee. “The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones.”

Too Big to Fail

Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government’s rescue effort.

The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.

William Poole, former president of the Federal Reserve Bank of St. Louis, said the two programs are unlikely to lose money. The bigger risk comes from rescuing companies perceived as “too big to fail,” he said.

The government committed $29 billion to help engineer the takeover in March of Bear Stearns Cos. by New York-based JPMorgan Chase & Co. and $122.8 billion in addition to TARP allocations to bail out New York-based American International Group Inc., once the world’s largest insurer. Yesterday, Citigroup Inc. received $306 billion of government guarantees for troubled mortgages and toxic assets. The Treasury Department also will inject $20 billion into the bank after its stock fell 60 percent last week.

“No question there is some credit risk there,” Poole said.

Exposure

Congressman Darrell Issa, a California Republican on the Financial Services Committee, said risk is lurking in the programs that Poole thinks are safe.

“The thing that people don’t understand is it’s not how likely that the exposure becomes a reality, but what if it does?” Issa said. “There’s no transparency to it so who’s to say they’re right?”

The worst financial crisis in two generations has erased $23 trillion, or 38 percent, of the value of the world’s companies and brought down three of the biggest Wall Street firms.

The Dow Jones Industrial Average through Friday is down 38 percent since the beginning of the year and 43 percent from its peak on Oct. 9, 2007. The S&P 500 fell 45 percent from the beginning of the year through Friday and 49 percent from its peak on Oct. 9, 2007. The Nikkei 225 Index has fallen 46 percent from the beginning of the year through Friday and 57 percent from its most recent peak of 18,261.98 on July 9, 2007. Goldman Sachs Group Inc. is down 78 percent, to $53.31, on Friday from its peak of $247.92 on Oct. 31, 2007, and 75 percent this year.

‘Snookered’


Regulators hope the rescue will contain the damage and keep banks providing the credit that is the lifeblood of the U.S. economy.

Most of the spending programs are run out of the New York Fed, whose president, Timothy Geithner, is said to be President- elect Barack Obama’s choice to be Treasury Secretary.

The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages.

“It’s unprecedented,” said Bob Eisenbeis, chief monetary economist at Vineland, New Jersey-based Cumberland Advisors Inc. and an economist for the Atlanta Fed for 10 years until January. “The backlash has begun already. Congress is taking a lot of hits from their constituents because they got snookered on the TARP big time. There’s a lot of supposedly smart people who look to be totally incompetent and it’s all going to fall on the taxpayer.”

New Deal

President Franklin D. Roosevelt’s New Deal of the 1930s, when almost 10,000 banks failed and there was no mechanism to bolster them with cash, is the only rival to the government’s current response. The savings and loan bailout of the 1990s cost $209.5 billion in inflation-adjusted numbers, of which $173 billion came from taxpayers, according to a July 1996 report by the U.S. General Accounting Office.

The 1979 U.S. government bailout of Chrysler consisted of bond guarantees, adjusted for inflation, of $4.2 billion, according to a Heritage Foundation report.

The commitment of public money is appropriate to the peril, said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. and a former economist at the New York Fed. U.S. financial firms have taken writedowns and losses of $666.1 billion since the beginning of 2007, according to Bloomberg data.

“This is the worst capital markets crisis in modern history,” Harris said. “So you have the biggest intervention in modern history.”

Federal Lawsuit

Bloomberg has requested details of Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral.

Collateral is an asset pledged to a lender in the event a loan payment isn’t made.

“Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting,” Bernanke said Nov. 18 to the House Financial Services Committee. “We think that’s counterproductive.”

The Fed should account for the collateral it takes in exchange for loans to banks, said Paul Kasriel, chief economist at Chicago-based Northern Trust Co. and a former research economist at the Federal Reserve Bank of Chicago.

“There is a lack of transparency here and, given that the Fed is taking on a huge amount of credit risk now, it would seem to me as a taxpayer there should be more transparency,” Kasriel said.

$4.4 Trillion

Bernanke’s Fed is responsible for $4.4 trillion of pledges, or 60 percent of the total commitment of $7.4 trillion, based on data compiled by Bloomberg concerning U.S. bailout steps started a year ago.

“Too often the public is focused on the wrong piece of that number, the $700 billion that Congress approved,” said J.D. Foster, a former staff member of the Council of Economic Advisers who is now a senior fellow at the Heritage Foundation in Washington. “The other areas are quite a bit larger.”

The Fed’s rescue attempts began last December with the creation of the Term Auction Facility to allow lending to dealers for collateral. After Bear Stearns’s collapse in March, the central bank started making direct loans to securities firms at the same discount rate it charges commercial banks, which take customer deposits.

In the three years before the crisis, such average weekly borrowing by banks was $48 million, according to the central bank. Last week it was $91.5 billion.

Lehman Failure

The failure of a second securities firm, Lehman Brothers Holdings Inc., in September, led to the creation of the Commercial Paper Funding Facility and the Money Market Investor Funding Facility, or MMIFF. The two programs, which have pledged $2.3 trillion, are designed to restore calm in the money markets, which deal in certificates of deposit, commercial paper and Treasury bills.

“Money markets seized up after Lehman failed,” said Neal Soss, chief economist at Credit Suisse Group in New York and a former aide to Fed chief Paul Volcker. “Lehman failing made a lot of subsequent actions necessary.”

The FDIC, chaired by Sheila Bair, is contributing 20 percent of total rescue commitments. The FDIC’s $1.4 trillion in guarantees will amount to a bank subsidy of as much as $54 billion over three years, or $18 billion a year, because borrowers will pay a lower interest rate than they would on the open market, according to Raghu Sundurum and Viral Acharya of New York University and the London Business School.

Bank Subsidy

Congress and the Treasury have ponied up $892 billion in TARP and other funding, or 12 percent.

The Federal Housing Administration, overseen by Department of Housing and Urban Development Secretary Steven Preston, was given the authority to guarantee $300 billion of mortgages, or about 4 percent of the total commitment, with its Hope for Homeowners program, designed to keep distressed borrowers from foreclosure.

Most of the federal guarantees reduce interest rates on loans to banks and securities firms, which would create a subsidy of at least $6.6 billion annually for the financial industry, according to data compiled by Bloomberg comparing rates charged by the Fed against market interest currently paid by banks.

Not included in the calculation of pledged funds is an FDIC proposal to prevent foreclosures by guaranteeing modifications on $444 billion in mortgages at an expected cost of $24.4 billion to be paid from the TARP, according to FDIC spokesman David Barr. The Treasury Department hasn’t approved the program.

Automakers

Bernanke and Paulson, former chief executive officer of Goldman Sachs, have also promised as much as $200 billion to shore up nationalized mortgage finance companies Fannie Mae and Freddie Mac. The FDIC arranged for $139 billion in loan guarantees for General Electric Co.’s finance unit.

The tally doesn’t include money to General Motors Corp., Ford Motor Co. and Chrysler LLC. Obama has said he favors financial assistance to keep them from collapse.

Paulson told the House Financial Services Committee Nov. 18 that the $250 billion already allocated to banks through the TARP is an investment, not an expenditure.

“I think it would be extraordinarily unusual if the government did not get that money back and more,” Paulson said.

‘We Haircut It’

In his Nov. 18 testimony, Bernanke told the House Financial Services Committee that the central bank wouldn’t lose money.

“We take collateral, we haircut it, it is a short-term loan, it is very safe, we have never lost a penny in these various lending programs,” he said.

A haircut refers to the practice of lending less money than the collateral’s current market value.

Requiring the Fed to disclose loan recipients might set off panic, said David Tobin, principal of New York-based loan-sale consultants and investment bank Mission Capital Advisors LLC.

“If you mark to market today, the banking system is bankrupt,” Tobin said. “So what do you do? You try to keep it going as best you can.”

“Mark to market” means adjusting the value of an asset, such as a mortgage-backed security, to reflect current prices.

Some of the bailout assistance could come from tax breaks in the future. The Treasury Department changed the tax code on Sept. 30 to allow banks to expand the deductions on the losses banks they were buying, according to Robert Willens, a former Lehman Brothers tax and accounting analyst who teaches at Columbia University Business School in New York.

‘Wells Fargo Notice’

Wells Fargo & Co., which is buying Charlotte, North Carolina-based Wachovia Corp., will be able to deduct $22 billion, Willens said. Adding in other banks, the code change will cost $29 billion, he said.

“The rule is now popularly known among tax lawyers as the ‘Wells Fargo Notice,’” Willens said.

The regulation was changed to make it easier for healthy banks to buy troubled ones, said Treasury Department spokesman Andrew DeSouza.

House Financial Services Committee Chairman Barney Frank said he was angry that banks used the money for acquisitions.

“The only purpose for this money is to lend,” said Frank, a Massachusetts Democrat. “It’s not for dividends, it’s not for purchases of new banks, it’s not for bonuses. There better be a showing of increased lending roughly in the amount of the capital infusions” or Congress may not approve the second half of the TARP money.

Warren Buffett's dad and Ron Paul

Warren Buffett's dad was libertarian Congressman Howard Buffett, who believed in the same things Ron Paul did.

Here is the wikipedia article about him:

Howard Buffet

Howard Homan Buffett (August 13, 1903 – April 30, 1964) was an Omaha, Nebraska businessman and four-term Republican United States Representative.

Buffett attended public schools and graduated from the University of Nebraska in Lincoln, Nebraska in 1925. While a student, Buffett was a brother of the Alpha Sigma Phi Fraternity. Entering the investment business, Buffett also served on the Omaha board of education from 1939 to 1942. In 1942 he ran for the U.S. House of Representatives in the Nebraska district in which Omaha was located, winning the Republican nomination in the primary and then the subsequent general election; he was reelected twice. In 1948 he was again the Republican nominee for another term but was defeated for reelection; however he was again the Republican nominee for the office again in 1950 and won the office back. In 1952 Buffett decided against seeking another term and returned to his investment business Buffett-Falk & Co. in Omaha, in which he worked until shortly before his death.^[1]

Buffett is remembered for his highly libertarian stance, having maintained a friendship with Murray Rothbard for a number of years. A vocal critic of the Truman Doctrine and the Korean War, speaking on the floor of Congress, he said of military interventionism that,

Even if it were desirable, America is not strong enough to police the world by military force. If that attempt is made, the blessings of liberty will be replaced by coercion and tyranny at home. Our Christian ideals cannot be exported to other lands by dollars and guns.^[2]

Although his son Warren Buffett has criticized investing in gold feeling that investing in businesses does more social good, his father, Howard Buffett, was a proponent of the Gold Standard. ^[3]

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Warren Buffett adopted a different set of beliefs from his father, and recently was criticized by Ron Paul for his advocacy of the government bailout plan for Wall Street:

Part 1:

Part 2:

Obama shows glimmer of true leadership

The situation in the halls of political power has been dire since 1913, the year the federal reserve act and the federal income tax were enacted. Since then, the size of government has steadily increased, and politicians have increasingly relied on interventionist big government rhetoric to buy votes.

Obama, as a Democrat -who have traditionally been greater advocates of big government than Republicans- has taken big government political positions that are a sad example of the kind that have done so much to harm America.

In a recent speech though, I noticed a glimmer of wisdom -a glimmer of wisdom which ignited a hope in me that maybe, just maybe, his eyes may open to the truth of what ails the economy, and he will undergo a political metamorphosis to become a defender of limited government ideals. The speech where I saw this potential was the one he made about the mortgage crisis, and the changes he thinks are needed:



He repeated many common big government positions, such as advocating another federal stimulus package, bailing out home owners who are facing mortgage problems and touting the importance of giving more federal support for state health and education programs, etc, but he also touched on the problem of the investors of semi-privatized institutions like Fanny Mae socializing the risk of their business ventures by relying on government bail-outs when things go sour.

Criticizing the big Wall Street investors is a positive step, and maybe, just maybe, it's an indication that he has the courage to stand up to a corporate-political establishment that uses big government programs as a private piggy bank, and that he will see that the only way to fight for the true interests of America and stop this kind of opportunistic exploitation of public funds by powerful interests is by cutting back on these big government programs.

His tone too gave me hope that perhaps he was coming around to seeing the truth. It was somber, as if it was donning on him that there was an inherent contradiction between his advocacy for bailing out homeowners and his criticism of bailing out investors of semi-privatized companies like Fanny Mae.

I'm probably being way too optimistic, but I welcome any move towards sobriety among the political leadership.