China May Be Testing Trump In North Korea

China figures strongly into the current North Korea crisis, but exactly how is a matter of dispute. President Trump seems to believe that China is the key to resolving the matter of North Korea’s nuclear weapons, but it is far from certain that China’s interests in the region align with our own.

Beyond the fact that Trump was overtly hostile and, at times, insulting to China during the presidential campaign, China is in the midst of a long campaign to expand its power in Asia and beyond. Chinese island-building in the South China Sea is common knowledge. Less known is how Chinese influence is growing in the Middle East, Africa and even the Americas.

As Chinese military and economic influence grows around the world, the inescapable conclusion is that China has dreams of replacing the US as the world’s dominant superpower. That being the case, it would be in China’s interest to make the US look bad in the confrontation with North Korea. If China can use North Korea to hasten the American decline in Asia, which began with the 1953 stalemate in Korea and continued with Vietnam and the Trump Administration’s decision to withdraw from the Trans Pacific Partnership, it would probably not hesitate to do so.

Aside from their aim of overtaking the United States, a secondary goal of the Chinese government could be to test President Trump. There is pattern of Chinese crises shortly after Republican presidents take office. In June 1989, five months after George H. W. Bush became president, violent repression of the Chinese democracy protests at Tiananmen Square led to soured relations between the two countries. In April 2001, three months into the presidency of George W. Bush, a Chinese fighter collided with a US Navy reconnaissance plane. The American plane made an emergency landing on Hainan Island and the crew was detained for 11 days by the Chinese government. Now, soon after President Trump took office, the North Koreans increased their missile testing. While these incidents were presumably not manufactured by China, they may well have used the events to test the mettle of the new occupants of the Oval Office.

What could be the Chinese endgame for the Korean crisis? After President Trump made trade concessions to China last spring for doing approximately nothing to help with the Korean situation, Beijing may believe that they can win additional concessions from the US if the crisis is allowed to get worse.

If President Trump backs down after having made resolving the North Korean issue a priority, the Chinese will win by default. The United States and President Trump will lose face and credibility around the world. With both President Trump and Kim Jong Un trying to outdo the other’s bellicose rhetoric, at the moment China is playing the role of the adult in the room.

If the US actually attacks North Korea, it would present a problem for China. China has a longstanding relationship with its patron government in Pyongyang. Animosity between the Chinese and the Koreans goes back centuries, but for the past 75 years, North Korea has been a loyal client of Communist China.

In 1950, when American and United Nations troops advanced too close to the Chinese border, China intervened with a massive attack that sent allied armies reeling. Those who doubt that China would do the same thing in 2017 need only consider the unofficial nickname of Korea, “a dagger aimed at the heart of China.” China cannot allow the US or its allies to occupy North Korea.

A US attack on North Korea would require a Chinese response and the Chinese have said as much in an editorial in the Chinese Global Times. The paper notes that “Beijing is not able to persuade Washington or Pyongyang to back down at this time,” but that “it needs to make clear… when their actions jeopardize China's interests, China will respond with a firm hand.”

The editorial says that if North Korea strikes first China will remain neutral. This may be a tacit assurance that the North will not attack without provocation. Then it issues a warning: “If the US and South Korea carry out strikes and try to overthrow the North Korean regime and change the political pattern of the Korean Peninsula, China will prevent them from doing so.”

Regardless of whether China is goading North Korea forward behind the scenes or Kim is acting on his own, the brinksmanship is a most dangerous game that could easily get out of hand and lead to a major conflict. Whatever President Trump does, on the Korean peninsula and elsewhere, the Chinese will undoubtedly be watching.

 Originally published on The Resurgent

What a Greek default could mean for you

 

The Greek government has been in a financial crisis for the past several years. There have been several attempts to restructure Greek debts and pass “austerity budgets” with draconian cuts to government spending, but the nation is edging ever closer to a default on its national debts. The situation has deteriorated to the point where Bloomberg estimates that there is a 98 percent chance that Greece will default within five years.

The fundamental problem is that Greece has spending much more than it earns in revenues. It has been making up the shortfall in revenues with loans, primarily from European banks. The problem for the European banks is similar to the U.S. banking crisis of 2008. In the U.S., the crisis was caused by the epidemic of mortgage defaults, which led to freezing of capital markets. Banks could not lend because no one knew the extent of the “toxic assets” in their holdings. They were forced to keep their cash on hand to cover possible defaults.

In Europe, the problem is several orders of magnitude larger. Instead of homeowners defaulting, the prospect is that entire nations will default on their loans. Greece is merely the first. Beyond Greece, there is also the possibility that Ireland, Portugal, Italy, and Spain will default. CNN Money notes that while Greece has over $400 billion in loans, the combined total for all five nations is $3.8 trillion.

Although most of the loans at risk are held by European banks, that does not mean that the United States is immune from the financial crisis. Nations around the world are interconnected through trade and a European financial crisis could easily spread across the Atlantic.

The panic of 2008 was set off when one company, Lehman Brothers, went bankrupt. Investors knew that the same systemic problems affected many other companies as well and reacted accordingly. Similarly, if Greece defaults, the ripples will be felt throughout the European and world economies. Dexia, a Belgian bank that failed and was nationalized in early October due to its large exposure to Greek and Italian debt, may be the Bear Stearns of the European crisis. Bear Stearns failed in March 2008 and was bought by J.P. Morgan Chase at a bargain-basement price in a deal orchestrated by the federal government.

American banks may not have many loans that are directly at risk in the crisis, but American companies do business in Europe. If the European economy crashes, it will affect the bottom line of American companies who have operations in Europe. European manufacturers would likely be caught in a credit crunch forcing a slowdown of operations and massive layoffs. Georgia companies such as Coca-Cola, Gulfstream Aerospace, Delta Air Lines, and UPS that are heavily involved in international business might be among the first American businesses to feel the effects of the crisis.

The crisis would quickly spread to the American Main Street as European investment evaporated and imports from Europe slow to a trickle. With the weak U.S. economy already verging on a double-dip recession, the crisis would likely spread quickly. Americans could soon be experiencing an economic crisis as bad or worse than the 2008 crash. Companies that depend on exports to Europe would quickly find their markets closed, leading to more layoffs and higher unemployment rates.

As in 2008, the effects would then ripple throughout the economy. As more workers lose their jobs, demand for goods and services would plummet, causing layoffs in other companies. The crisis would spread from country to country and company to company until many of the world’s economies were stricken.

In 2008, the federal government’s solution was TARP, the Troubled Asset Relief Program. TARP was essentially a bank bailout in which the federal government made loans and took equity stakes (purchased stock) in banks to provide an infusion of capital and liquidity. Although much criticized on both sides of the political spectrum, the original TARP did stem the crisis.

A program modeled on TARP for European banks and debtor countries might be a viable solution to the crisis. One potential problem is that Europe is 17 nations instead of one. A bailout deal must be approved by multiple national legislatures. As in the United States, bailouts of banks are not always popular in Europe and there may find significant political resistance to bailout plans.

A second problem is that the European Central Bank may not be up to the task. A Columbia University study cited in the Wall Street Journal suggests that the bank holds enough risky bonds that its own survival may be at stake. Instead of allowing the Greeks to write off as much as 50 percent of their debts, the ECB may elect to enact their own “quantitative easing” by printing money and allowing Greece to pay its debts with inflated euros.

A Greek default of some sort is almost guaranteed. Once the defaults start, no one knows for sure how fast and far it will spread, but given the weak economic situation in the United States, it is likely that European defaults would cause the American economy to slip back into recession. An old adage states that “when America sneezes, the world catches cold.” In this case, it is likely that a Greek sneeze will cause America to contract the Greek flu.

Read this article on Examiner.com:

http://www.examiner.com/conservative-in-atlanta/what-a-greek-default-could-mean-for-you

Greek Ruins

Greece is in crisis. Recent reports have shown rioting and told of the bombing deaths of Greek bank employees. For most Americans, the reports from Greece probably come as a shock. What happened to Greece and how did they get into this situation?

Greece certainly suffered from the global economic downturn that began in 2008, but its problems began long before that. In simple terms, Greece spent too much money. Like other social democracies, much of the money went to government salaries, pensions, and welfare state programs. By some estimates, government workers account for as much as 40% of the Greek economy [http://bit.ly/9dxUHB]. These government workers earn lavish salaries (they are paid for 14 months of work each year) and pensions. The Greek economy is also slowed by high levels of corruption, nepotism and tax evasion. Further, Greece also hosted the 2004 Olympic Games in Athens. The Olympics is always an expensive, and usually money-losing, proposition for the host country.

In the past, when Greece or other countries ran up high levels of debt, they would simply print more of the national currency. This would devalue the currency, the drachma in this case, and cause inflation. The government would then pay its debts in cheaper drachmas and repeat the cycle.

This changed in 2001 when Greece joined the euro zone and adopted the euro as its national currency. The more stable euro allowed Greece to finance its spending with lower interest rates and the country ran deficits to pay for its expensive public sector workers.

It wasn’t long before Greece began to have problems. Rules for the European Union specify that member nations are not permitted to run deficits larger than 3% of GDP (gross domestic product) [http://bit.ly/9Xxgsb ]. However, in 2004 it was revealed that Greece’s deficits had not been below 3% of GDP since before 1999. How did they manage to join the EU with larger deficits? They lied [http://bit.ly/cEXepN].

At that point, Greek voters ousted the socialists and installed a right-wing government in an attempt to restore fiscal sanity. The new government raised taxes on alcohol and tobacco, as well as increasing the VAT (value added tax) and, for a time, the Greek economy appeared to improve [http://bit.ly/cEXepN].

The next bill began to come due in 2008 with the crash of the global economy. As with most of the rest of the world, the Greek economy entered a recession. As the economy shrank, the deficit increased as a percentage of GDP. To make matters worse, the national debt had also increased by approximately 100 billion euros since 2004. The socialists returned to power in 2009 and announced sharp cuts to government spending to combat the crisis [http://bit.ly/5IkjZA].

It wasn’t enough. Greek bond ratings were revised downward and the Greek deficit for 2009, which had been estimated at 6%, was revealed to be as high as 13.6% as history repeated itself and Greek financial reports to the EU turned out to be less than accurate [http://huff.to/9euNoD]. Greek bonds soon reached junk bond status.

The Greek government imposed an austerity package of spending cuts and higher taxes on the nation. As a result, government union workers and anarchists opposed to multinational corporations began rioting in the streets. Three bank employees were killed when their bank was firebombed by rioters.

At this point, it appears that other European nations and the International Monetary Fund (IMF) will have to bail out Greece to prevent a national bankruptcy. According to the most recent reports, the EU and the IMF plan to loan Greece an additional $145 billion, of which $39 billion will be supplied by the IMF [ http://bit.ly/9sLtRM]. Some of the IMF money will be supplied by the United States.

Part of the danger of the Greek debt crisis is that it could spread to other parts of the EU and from there to the world. Other EU nations such as Spain, Portugal, and Italy also have debt crises, although not to the extent of the Greeks. Greek debt is worth approximately $400 billion and a default could cause a domino effect on banks, companies, and nations around the world [http://bit.ly/9Xxgsb]. Additionally, the crisis is already shaking investor confidence in the euro, causing its value, as well as stock markets around the world, to decline.

Many analysts are also pointing out that Greece might be a “canary in the coal mine” for many other western nations. The recession has caused many nations to run up deficits as they attempt to stimulate their national economies. Around the world, countries are finding that they can no longer afford expensive social programs and lavish salaries for public workers. As European research institute GaveKal noted, “If Greece was the birthplace of democracy, the question now is whether it will be the graveyard of social democracy” [http://bit.ly/9aVNzu].

The total Greek debt is now estimated to be at approximately 125% GDP [http://bit.ly/cD5ghY]. That means that Greece owes more than it can produce in one and one-fourth years. The Greek deficit is currently estimated at 13.6% GDP.

How does that contrast with the United States? The US debt is at 87.3% GDP and will soon reach 90%, the point at which the debt’s drag on the economy will increase markedly [http://bit.ly/c7EuJM]. The US is not far behind Greece in budget deficits. The federal budget deficit for 2009 was 9.9% [http://bit.ly/4riOem]. Given the spending habits of the current administration and congress, the US deficit and debt are both likely to continue increasing. As the numbers of federal employees increase, along with increasing federal pay rates and generous government pensions, the US is headed down the Greek road.

The US does enjoy several advantages over Greece. One is that US debt ratings are still good enough to garner low interest rates. There have been indications, however, that the US is in danger of being downgraded to a riskier status. Additionally, the US controls its own money supply. Unlike Greece, the US can print more money to pay its debts, although this would result in inflation (devalued and cheaper dollars).

The situation is different for many of the states, however. California, one of the leading basket case economies in the US, bears a striking resemblance to Greece. California is plagued by expensive government employee wages and pensions as well as costly social services. Government employee unions resist attempts to cut spending. Nevertheless, in 2009 California passed its own “austerity package” of tax hikes and spending cuts after it was forced to resort to paying state debts with IOUs. Like Greece, California also cannot manipulate its money supply since it uses the dollar. California’s 2010 budget shortfall was 56% of its total budget [http://bit.ly/5GfiaO]. If the situation does not improve, California may ultimately face the stark choice of begging for a federal bailout or a state bankruptcy.

In our own state of Georgia, we have also been hit hard by the economy. Georgia faces a budget deficit and shortfall as well. Georgia’s estimated budget shortfall for 2010 is 26% of the general budget. The state government is enacting deep budget cuts in education, transportation and health care.

Faced with a huge financial crisis, the states are adopting the Greek method of austerity measures while also relying on assistance from the federal government. In contrast, the federal government continues to grow and spend at a rate that dwarfs historical precedent. Ultimately, the bills will also come due to the federal government and the nation will face the painful realization that nothing is for free, including government services.

Sources:
1 http://www.stanforddaily.com/2010/04/30/a-greek-tragedy/
2 http://www.guardian.co.uk/business/2010/may/05/greece-debt-crisis-timeline
3 http://ec.europa.eu/news/economy/090324_1_en.htm
4 http://www.guardian.co.uk/world/2009/dec/14/greece-unveils-reforms-to-public-finances
5 http://www.huffingtonpost.com/2010/04/22/greek-debt-crisis-gets-wo_n_547604.html
6 http://online.wsj.com/article/SB10001424052748704866204575224421086866944.html
7 http://ec.europa.eu/news/economy/090324_1_en.htm
8 http://www.detnews.com/article/20100510/OPINION01/5100306/1008/Editorial--Greece-debt-a-warning-to-U.S.
9 http://www.data360.org/dsg.aspx?Data_Set_Group_Id=409
10 http://www.nytimes.com/2010/03/16/business/global/16rating.html
11 http://www.nytimes.com/2009/06/22/us/22calif.html?_r=1&pagewanted=all
12 http://www.statehealthfacts.org/comparemapreport.jsp?rep=49&cat=1
13 http://www.wsws.org/articles/2010/mar2010/geor-m09.shtml
14 http://online.wsj.com/article/SB10001424052748703648304575212490148430912.html


Chicago IL
May 10, 2010

Arabs and Israelis I: The Suez Crisis

Note: This is the first in a series of Part II of my synopsis of modern Israeli history. To read Part I detailing how the modern nation of Israel came to be, go to my blog:

http://captainkudzu.blogspot.com/2008/06/brief-history-of-modern-state-of-israel.html


At the conclusion of Israel’s War for Independence, the new state of Israel signed armistice agreements with Egypt, Jordan, Syria and Lebanon. Iraq was the only Arab nation that did not sign an armistice. Instead the Iraqis withdrew their forces and turned the territory that they controlled over to the Jordanians. The defeat at the hands of the Israelis is great humiliation for the governments of the Arab nations.

At the end of the hostilities on January 7, 1949, Israel had captured an additional 5,000 square kilometers over territory allotted to it by the United Nations partition. The city of Jerusalem remained divided with Trans Jordan controlling the eastern part of the city. Nevertheless, the Israelis made Jerusalem their new capitol and moved government offices to their part of the city. On May 11, 1949, Israel became a member of the United Nations.

At this point, Jewish immigrants from around the world began to converge on Israel. Between 1948 and 1951, the Jewish population of Israel doubled as over 600,000 new Israelis arrived, many from Arab countries. The influx helped to get the economy of the new nation onto its feet. In 1950, Israel passed the Law of Return, which guarantees the right of Jews around the world to immigrate to Israel and become citizens.

For the Arab population, the picture was not so bright. Many Arabs had fled the fighting, often at the urging of the Arab armies. The approximately 600,000 Arab refugees were not welcomed by the Arab countries in which they found themselves. Rather than assimilating the refugees as the Israelis had done, the Arabs segregated them into refugee camps. They were caught in a no-man’s land, not wanting to return to their homes to live under a Jewish government and not being permitted to enter society elsewhere. The problem of the Arab refugees continues to fester today.

The Suez Crisis

In spite of the armistice agreements, Israel was not at peace at this point. The Arab nations refused to negotiate permanent peace until Israel returned the land that the Arabs had lost in the 1948 War. Egypt had closed the Suez Canal to Israeli shipping in 1949. In spite of a UN resolution ordering Egypt to allow the Israelis to traverse the canal, the Egyptians did not comply. The Egyptians also blockaded the Straits of Tiran, preventing ships from using the Israeli port of Eilat. Additionally, this period also saw attacks by fedayeen guerillas from Arab countries across the border into Israel.

On July 26, 1956, Egyptian President Gamal Abdul Nasser, emboldened by an arms deal with the Soviet Union, announced that Egypt would nationalize the Suez Canal. Nasser was a former army officer who had led a coup against Egypt’s king in 1952 following Egypt’s defeat by Israel. By nationalizing the canal, Nasser was directly challenging the British and French, even though Nasser promised to compensate shareholders and not disrupt navigation.

The British and French immediately began planning Operation Musketeer to regain control of the canal. The United States, under President Eisenhower, opposed the use of force. The Soviet Union and India led several other neutral countries in supporting the Egyptians. Diplomatic efforts were made to resolve the crisis and Britain and France, while preparing for war, brought the matter before the UN Security Council. Ultimately, a Soviet veto prevented the council from reaching a decision.

The French began supplying Israel with weapons as the crisis grew, and, as diplomatic efforts failed, the two nations began to discuss joint military action. Golda Meir, the minister of foreign affairs, Shimon Peres, director-general of the Ministry of Defense, and Moshe Dayan, chief-of-staff of the Israel Defense Force (IDF) were involved in the talks with the French.

Finally, it was decided that Israel would open the war with an attack on the Egyptians in the Sinai. France and Egypt would then demand that both Israel and Egypt withdraw from the area, so that French and British forces could take control of the canal to ensure navigational safety. The British Prime Minister, Anthony Eden, was convinced to join in the plan on the condition that Britain’s collusion remain secret.

On October 29, 1956, Israeli paratroops assaulted the Mitla Pass forty miles east of Port Said at the northern end of the canal, while Israeli ground forces rolled into the Sinai. Britain and France, as planned, demanded that the two nations clear the canal zone. Israeli forces stopped their advance, while Nasser refused the demand. The British and French used Nasser’s refusal as a pretext to attack Egypt, launching major air strikes on October 31.

President Eisenhower, who was not privy to the plan, immediately saw through the deception and became irate. The United States, the Soviet Union, and most of the rest of the world immediately began to put pressure on England, France and Israel. Since the British and French were both members of the Security Council with veto power, a special session of the UN General Assembly was held.

On November 5, British and French paratroops dropped near Port Said and Port Tawfiq. The next day, more soldiers came ashore in amphibious landings. After advancing about thirty miles, the force stopped as Anthony Eden bowed to international pressure and domestic public opinion and ordered a ceasefire. Israeli forces had also resumed their offensive and now controlled the entire Sinai Peninsula.

The United Nations formed a special Emergency Force to take responsibility for the canal zone. The British, French, and Israelis withdrew their forces on December 22. The Egyptians promptly evicted the UNEF and regained control of their territory. The Israelis attempted to hold Sharm-al-Sheikh in order to prevent a resumption of the Tiran blockade. UN sanctions and Eisenhower’s assurance that the US would maintain freedom of navigation in the straits eventually persuaded the Israelis to withdraw.

The war signaled the end of British and French prominence in the Middle East. The main winner was President Nasser. Even though his forces were militarily routed, with the help of the United States, he had come out on top. He became the father of Arab nationalism and the leader of the Arab world.

Sources:
http://www.mideastweb.org/briefhistory-oslo.htm
http://www.hello-newman.com/Israel/history.html
http://www.palestinefacts.org/pf_independence_war_end.php
http://www.migrationinformation.org/Profiles/display.cfm?ID=321
http://www.peacefaq.com/refugees.html
Suez Crisis
http://www.answers.com/topic/suez-crisis
http://www.answers.com/topic/gamal-abdel-nasser
http://www.jewishvirtuallibrary.org/jsource/History/Suez_War.html

Origins of the Subprime Crisis

Over the past few months, America’s financial sector has been hit with its largest crisis since the Great Depression. The crisis began with a rise in foreclosures and the failure of some small banks. The problem spread to investment company Bear Stearns failed in May 2008. Liquidation was avoided by a government-orchestrated takeover of the company by JP Morgan. Bailouts of Fannie Mae and Freddie Mac followed. Over the past week, two prominent companies failed. Lehman Brothers, another investment bank, was liquidated, while American International Group (AIG), an insurance conglomerate, was judged by the Federal Reserve to be too big to fail. This prompted the government to bail out AIG by purchasing an 80% interest in the company with taxpayer dollars.

As the crisis grows, there are more and more calls for increased regulation on Wall Street. To determine whether regulation will solve the problem, the cause of the problem must first be determined. If the source of the problem is not simply short selling, fraud, or basic greed, then new regulation might cause further problems instead of resolving our current ones.

When we delve deeply into the causes of the crisis, it is soon apparent that lack of regulation is not necessarily the problem. Along with healthcare and commercial aviation, finance is one of the most heavily regulated sectors of the US economy. The law of unintended consequences states that any purposeful action will produce unintended consequences. An example of unintended consequences is the passage of the Renewable Fuels Standard in 2007. This law was intended to lower fuel prices by mandating increased production of ethanol. Instead, the net result was that food prices almost doubled while oil prices kept rising. With that in mind, we should look at some of the regulations that the government has enacted on the banking industry.

Many point to the Community Reinvestment Act of 1977. This Carter-era law was intended to combat the practice of “redlining,” denying credit to people who live in certain areas. The law’s language was originally so vague that it only required banks to show a good faith effort. This began to change when the law was strengthened in amended in 1989 to grade banks on a four-point scale and to make these reviews public. In 1991, Congress passed the FDIC Improvement Act, allow regulators to consider a bank’s CRA performance when processing applications for FDIC services.

The law was strengthened yet again by President Clinton in 1995. The Clinton Administration changed compliance of the law from a matter of making an effort to one based on hard numbers of specific loans and specific levels of service. It also significantly stepped up enforcement of the law.

Since the passage of the CRA, the purchase of mortgages by minorities and in minority neighborhoods has risen sharply. The problem is that the underlying assumption that minority loans were denied on the basis of racism rather than credit turned out to be erroneous. According to a 1999 report by Freddie Mac, one of the mortgage companies now in dire straits, revealed that African-Americans have disproportionately large number of credit problems. For example, the report states that on average blacks with incomes of $65-70,000 per year have more credit problems than whites with an income of under $25,000. Consequently, as banks were pressured to make more loans to minorities and low-income borrowers, they were also making more loans to people who were poor credit risks.

A second possible root of the current crisis is the repeal of the Glass-Steagall Act. The Glass-Steagall Act was passed in 1933 during the height of the Great Depression. The banks of the era were accused of speculating in unsound investments. Banks would make loans to companies that were shaky, and would then recommend the same company’s stocks for their investment clients. The GSA established a wall between investment banks and commercial banks. The law was intended to prevent the use of deposit accounts to cover a bank’s investment losses.

In 1999, President Clinton signed the Gramm-Leach-Billey Act into law and repealed the GSA. This was done to make banks more competitive with foreign companies that offered a broader range of financial services. In addition to removing the barriers between banking and investing, the GLBA also allowed banks to offer insurance-related services. The predictable result of an increase in the number of sellers in the marketplace was more competition for the available investors.

At the same time, the United States was experiencing an economic boom. The Federal Reserve under Alan Greenspan was aggressively cutting interest rates. The inexpensive cost of borrowing money combined federal pressure for banks to lend to low-income borrowers. As the competition among lenders became fierce, banks began issuing loans that were more and more risky. Loans were made to borrowers without down payments, without income verification, or with poor credit records.

Borrowers who wanted more house than they could afford were sold Adjustable Rate Mortgages (ARMs). These loans had low interest rates and payments at inception, but since interest rates were at historic lows, both the rate on the mortgage and the mortgage payment had nowhere to go but up. In some loans, teaser rates were artificially low at first, and then adjusted sharply upward. In any case, as payments rose, borrowers found that they could no longer afford their homes. Tightening credit made it impossible to refinance into a fixed rate loan and falling real estate prices made it impossible to sell the home for enough money to pay off the loan. For many, the result was foreclosure.

Yet another commonly cited source of financial problems for companies is a change to arcane accounting rules that occurred over the past fifteen years. In the past, companies used cost accounting, which applies historical costs to a company’s their assets. More recently, the SEC and the Financial Accounting Standards Board have changed accounting rules to a method known as Fair Value Accounting. Assets are now valued at their market price. In other words, assets are valued not by their true economic value, but by what they can be bought or sold for on the current market.

The obvious problem is that when a market suffers a sharp decline, so does the value of the company’s assets. It doesn’t matter that the decline may only be temporary or that the company had planned to hold the assets for the long term. In effect a company’s holdings are required to be valued at an unrealistically low price. When the market was high, fair value accounting was one of the tools used to artificially inflate Enron’s bottom line.

In aviation, there is the concept of an accident chain. There are few instances in which an accident is caused by only factor. In most cases, there are multiple factors that link together to form an accident chain. If any of the factors are missing, the chain is broken and the accident does not occur.

The subprime mortgage crisis is also the result of numerous factors. Government pressure convinced banks to make risky loans. Low interest rates, deregulation, and increased competition all combined to fuel a housing bubble that eventually burst in 2007. When the bubble burst, fair value accounting principles exacerbated the problem by magnifying the decrease in value of the securities held by banks.

Old-fashioned greed also undoubtedly played a role. Some companies, such as Countrywide Financial, focused almost exclusively on the subprime market. Many of these companies did not service their loans, but instead immediately bundled them into mortgage-backed securities and sold them to other companies, such as Fannie Mae and Freddie Mac. In this way, the cancer of failing mortgages was metastasized throughout the financial community.

Some lenders engaged in predatory lending practices. Likewise some borrowers defrauded banks. For whatever reason, many borrowers were either misinformed or failed to care about the terms of the loans that they obtained. Bad loans were either sold off to other companies or the homeowner simply walked away from the house, leaving the bank to foreclose.

Hedge funds, aggressive funds that catered to limited numbers of ultra-wealthy clients, snapped up risky financial products in their attempt to boost returns. Naked shorting, selling short without having stocks to cover the position, occurred even though the SEC considered the practice fraud and attempted to rein it in.

The greed and fraud did not stop within the bounds of the financial community. Countrywide made loans with generous terms to VIP borrowers. The list of Friends of Anthony (Mozilo, Countrywide’s founder and CEO) is long and distinguished. Democratic Senators Chris Dodd, chairman of the Senate Banking Committee, and Kent Conrad received favorable loans from Countrywide. So did numerous members of the Clinton Administration such as cabinet members Alphonso Jackson and Donna Shalala, staffer Paul Begala, and Postmaster General John Potter. Henry Cisneros, Clinton’s secretary of Housing and Urban Development was a former Countrywide director. Franklin Raines and Jim Johnson, former CEOs of Fannie Mae as well as fundraisers and advisors to Barack Obama, also received preferential loans from Countrywide.

In 2003, three years before the crisis broke; President Bush did make an attempt at reforming Fannie Mae and Freddie Mac. The housing industry and realtors opposed the plan, which went nowhere.

Representative Barney Frank of Massachusetts, now chairman of the House Financial Services Committee said, “These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

In 2005, John McCain sponsored the Federal Housing Enterprise Regulatory Reform Act. This law would have established a new independent regulatory agency to oversee Fannie Mae and Freddie Mac. Unfortunately, the bill was allowed to die in committee; the same committee headed by Friend of Anthony Chris Dodd.

There is another saying in aviation: “Don’t just do something. Sit there.” Hastily doing the wrong thing is often worse than doing nothing at all. Government pressures and corruption were largely responsible for the unfolding financial crisis. Hasty and ill-advised additional regulation is more likely to make the problem worse instead of resolving it.

Sources:
http://www.answers.com/topic/community-reinvestment-act-of-1977
http://www.cato.org/pubs/regulation/regv17n4/vmck4-94.pdf
http://www.city-journal.org/html/10_1_the_trillion_dollar.html
“How To Save the Financial System,” William M. Isaac, Wall St. Journal, September 19, 2008
http://www.nysscpa.org/cpajournal/2006/1106/infocus/p14.htm
http://www.investopedia.com/articles/03/071603.asp
http://www.investopedia.com/terms/g/glba.asp
http://www.prospect.org/cs/articles?article=the_conservative_origins_of_the_subprime_mortgage_crisis
http://www.portfolio.com/news-markets/national-news/portfolio/2008/07/16/Countrywide-Deals-Exposed
http://sweetness-light.com/archive/bush-mccain-tried-to-reform-housing-finance
http://www.govtrack.us/congress/record.xpd?id=109-s20060525-16&bill=s109-190

Tips For Creating Extra Room In Your Budget

With gas prices rising, many American families are starting to feel a financial pinch. My family and I have experienced a pinch for several years now due to layoffs and slow growth in the airline industry (I made less than $15,000 in 2005). We have learned several lessons about how save money.

First, take a close look at your spending. Most of us spend a lot of money on things that we don't really need. For example, do you really need a fancy new cellphone for $200 when you can get a free one? Do you really need all those extra cable channels? My cable company offers a minimum package of network channels for about $8 per month, a savings of $45 over the next package. Buying bottled water and $3 coffees also adds up quickly and is not necessary. Go to the library instead of Blockbuster and the bookstore. Most of us can find some areas where we can trim the fat.

Cars cost Americans a lot of money. Keep your old car after it is paid off. This will free up the amount of your car payment ($300-500), but that is not all. With your car paid off, you can reduce your insurance and drop the expensive collision coverage, saving more money. By shopping around for gas, you can also save money. Visit http://autos.msn.com/everyday/gasstations.aspx?zip=& src=Netx to check gas prices in your neighborhood.

Another great source of savings is eating at home. A typical restaurant restaurant meal for my family of three is at least $15, even at a fast food restaurant. Multiply that by several times per week and it adds up quickly. Clip coupons for what you need and browse local supermarket sale papers. Many neighborhoods have a discount grocery store, such as Sav-A-Lot. Also, buy generic brands of food. The generic brands meet the same FDA standards as more expensive brands. In most cases, you can't taste the difference. In some cases, generic brands actually taste better!

Finally, a long term solution to solving your credit crunch is to get out of debt. It takes time, but paying off credit cards and loans will free up hundreds or thousands of dollars each month. It will also relieve the stress of wondering where your next payment is coming from. It will also enable you to start saving so that you won't feel the pinch in the future.

Morality and the Law

We live in a society where morality has been defined downward for years. Many people, elected officials included, believe that the law only applies to others. For example, Republican Senator David Vitter and Democratic New York Governor Eliot Spitzer were both implicated in prostitution scandals. Various other elected officials and businessmen have been implicated in everything from sexual harassment to bribery to tax evasion.

In truth, society is held together by morality. When morality fails, it is necessary to pass laws to resolve issues that good ethics would have prevented. The finance industry is currently in a state of chaos at least in part because mortgage companies loaned money to people who could not pay and then sold the bundled mortgages to other companies. Other companies have normal business practices that include denying legitimate claims, submitting false billing, and the old fashioned bait and switch.

The law is a good place to start in determining morality. It has been said that morality cannot be legislated, but nothing is further from the truth. Our laws reflect our national morals. When we pass laws against murder it is because we, as a republic, have respect for the sanctity of life and believe that it is wrong to deprive another of their life. When we pass laws against robbery, burglary and theft, it is because property rights are strongly ingrained in the American morality. If a limit on carbon emissions is enacted, it will be because we, as a republic, have decided that we believe that it is wrong, immoral, to allow unrestricted emissions of carbon.

What is legal and what is moral are not always the same, however. Some things are legal, but not moral. Others are not immoral, yet are still illegal.

It would be a stretch to argue that driving 56 miles per hour is immoral, but doing so in a 55 MPH zone is illegal. A law in Georgia made it illegal to buy alcoholic beverages by mail order. A similar law made it illegal to buy a car over the internet without involving a local dealer. Neither of these laws is grounded in morality or ethics, instead they were passed to benefit specific industries.

Similarly, what is legal is not always moral or ethical. One of the best examples of this is Nazi Germany. In the 1930s, Hitler’s government passed laws stripping Jews of their rights and property. These laws, which resulted in the deaths of millions of Jews, were both immoral and unethical, even though they were totally legal under existing German law.

Slavery is another example. Keeping human beings in life long, involuntary servitude was once the norm around the world, including the United States. Doing so was legal under national and international law of the times. A growing number of people around the world became convinced of the immorality of slavery and eventually eradicated it in most countries.

Today, there are several moral issues that face the United States and the world. Among these are abortion, gay marriage, pollution, terrorism, and genocide. We must decide what we believe is the moral answer to these issues and then determine what action should be taken, if any.

To lead the way, we need leaders who share our morals. Our leaders should be held to a higher standard of behavior and not given a pass based on the office they hold or which party they belong to. These leaders should set a positive example for the rest of society and initiate a return to ethical behavior from the boardroom to the classroom and beyond.

If we do not return to a moral and ethical society, the very foundations of our country will continue to erode as politicians pad their pockets at the expense of taxpayers and corporate executives sell out their employees and stockholders. The race will not be to create wealth, but to find someone from whom to take it. The resulting morass of legislation will eventually strangle more and more of our freedoms.