The Meltdown and the Bailout – What Happened, and What Should Be Done

My precocious 17-year-old granddaughter Hannah emailed me the other day with a few questions. I imagine that many, if not most, of us share her puzzlement:

What exactly is going on with the economy? Why is this happening? What are the options to fixing it? What is being done? What do both candidates propose? Are there similarities in their plans of action?

In response to Hannah's questions, I sent her this quick and dirty explanation:

Basically, the mess was caused, both directly and indirectly, by government meddling going back over many years. The only way that such entities as Fannie Mae and Freddie Mac could ever have gotten so powerful was with the help of corrupt politicians being paid off by the crooks who ran them.

It's interesting to note, by the way, that three of the principal crooks responsible for the Fannie Mae mess, Franklin Raines, Jim Johnson, and Jamie Gorelick, are principal advisers to Barack Obama. Also, one of his big, wealthy backers is Penny Pritzker, who was as responsible as any person alive for the whole idea of extending home mortgage loans to individuals who were not qualified to receive them – the so-called sub-prime mortgages.

Electing him in hopes of cleaning up the financial mess is truly a case of putting the fox in charge of the henhouse.

Also worth noting is the fact that back in 2005, John McCain was warning of the looming disaster of Fannie Mae and Freddie Mac. He was a principal member of a group of senators and congressmen trying to pass some meaningful reform legislation which would have improved the congressional oversight of Fannie Mae and Freddie Mac, and might well have averted the meltdown. Needless to add, the Democrats would not allow the legislation to be passed. They were very happy with the way in which Fannie and Freddie were being run (into the ground!).

All of the rest of the problems pretty well trace back to the Fannie and Freddie mess. For instance, Lehman Brothers was massively invested in securities backed by bundles of the now-worthless sub-prime mortgages, as was Bear, Stearns before them. AIG got involved as the insurer backing the transactions – in other words, as the mortgages went bad, the insurer became responsible for paying them off, but as the losses continued to mount, they were no longer able to cover them all. It was just like fire insurance – if you have a policy and your house burns down, the insurance company becomes responsible for paying off the damage claim.

Hope this helps clarify things a bit.

along with some supporting links:

This superb blog post by Ace: "How They Built the Bomb;"

This column by talk show host and former real estate lawyer Neal Boortz: "The Rest of the Meltdown Story;"

A well-reasoned and thorough discussion by National Review Online's Jim Manzi: "Welcome to History;"

An excellent and passionate discussion by talk show host and attorney Mark Levin during his 9/19 show: (17 Mb MP3 file – runs 1:14, but well worth your time);

A wise and eloquent column by Conrad Black, the former international newspaper magnate who is presently an inmate of a Federal prison as a result of his conviction for white-collar crimes: "Moral of the Story;"

A characteristically brilliant, thorough, and detailed plan of action from Newt Gingrich: "Get the Politicians Out of the Economy: Recipe for Sound Economic Growth;"

Finally, a comprehensive and lucidly written account of what happened and why by Ph.D. economist Kevin Hassett of the American Enterprise Institute: "How the Democrats Created the Financial Crisis."

It's a complicated situation, but by no means one which is beyond the understanding of the average intelligent person. (Readers of this blog automatically qualify.) Those of us who care about our country's future have a duty to learn all we can about the financial meltdown, apply our God-given intelligence, life experience, and innate common sense to the problem, and form our own opinions about what should – and should not – be done.

After I sent these links to Hannah, it occurred to me that maybe others might find them useful, too, so here they are.



Hat tip: Townhall.com

UPDATED AND BUMPED: On his radio show this afternoon, financial guru Dave Ramsey has been doing all he can to promote the ideas of First Trust's Chief Economist Brian Wesbury on how to deal with the financial meltdown. He's urging all of us to check out this plan for ourselves, then contact our senators and representatives as soon as possible. Dave is thoroughly sold on Brian Wesbury's plan, and after reading it, I can see why.

His idea, prosaically called "Here’s A Plan to Avoid a New RTC," makes far more sense than anything coming out of Washington. Briefly, he proposes that the government temporarily suspend the overly inflexible "mark-to-market" rules which have been the immediate cause of the meltdown. That simple change, coupled with a program of government insurance for the sub-prime mortgages at the heart of the problem, sounds to me as though it is far more likely to fix the problem than the administration's $700 billion proposal at a small fraction of the cost to the taxpayer, and without pushing our country along the road to socialism.

Read it for yourself and draw your own conclusions. Then, if you agree with Dave Ramsey that Brian Wesbury's plan makes sense, get hold of your elected representatives and tell them so – in strong and unmistakable terms. Not only our futures, but those of our children, grandchildren, and great-grandchildren, hang in the balance.

Yes, it really is that important.