An Honest Democrat Speaks Out...

While thugs like Chris Dodd and Barney Frank continue to insist that “the current financial crisis” is a “failure of the market” and that “loaning money to high-risk, low-income borrowers is sound policy,” there are at least SOME Democrats willing to look at things honestly.

After earlier defending Fannie Mae and Freddie Mac, Rep. Artur Davis of Alabama recently said;

“Like a lot of my Democratic colleagues, I was too slow to appreciate the recklessness of Fannie Mae and Freddie Mac. I defended their efforts to encourage affordable homeownership, when in retrospect I should have heeded the concerns raised by their regulator in 2004. Frankly, I wish my Democratic colleagues would admit that when it comes to Fannie and Freddie, we were wrong. By the way, I wish my Republican colleagues would admit that they missed the early warning signs that Wall Street deregulation was overheating the securities market and promoting dangerously lax lending practices. When it comes to the debacle in our capital markets, there is much blame to go around for both sides.”

Rep. Artur Davis (D-AL)

The current crisis is NOT a “Wall Street crisis,” or a “bank failure,” it’s a “short-term credit market crisis.”

The crisis itself is NOT a banking crisis it’s a credit crisis that was brought on when the housing bubble burst, and that bubble was brought on by abuses of the CRA (the Community Reinvestment Act), which were exacerbated by the GSEs (Fannie Mae and Freddie Mac) which both issued tons of "bad," or high-risk loans, bought up more (much of that mandated by the abuses of the CRA that morphed from its original intent in 1977 to the monstrosity it's become) and then fraudulently re-packaged that bad debt as “government-backed mortgage securities” and sold them to various Capital Markets around the world, including, of course, by far the largest such market – Wall Street.

The exposure of our financial institutions (from banks to insurers to brokerage houses) to those toxic loans, spurred some savvy investors (including lots of Hedge Fund portfolio managers) to short-sell (bet on or "take the position that the stock price of that entity would go DOWN") those financial stocks, which in turn kept those companies, many, like Merril Lynch and AIG, with limited exposure to the “subprime debacle” from getting the short-term credit (loans) they needed to operate, as no one would lend to companies as their stock prices fell due to the “feeding frenzy” of short-selling that surrounded their stocks.

What BOTH Conservative Democrats and Republicans have supported, in defeating the original Paulson plan, is limiting taxpayer exposure to all this bad debt. While Fannie Mae and Freddie Mac probably shouldn’t have existed, in fact, Barney Frank is certainly right about the fact that “If it were up to Republicans (actually Conservatives, in general) Fannie Mae and Freddie Mac probably wouldn’t have survived,” AIG is a very different story.

AIG didn’t really have all that much exposure to the bad debt, but they had some and they got caught up in the short-selling feeding frenzy. The government has no plan to run AIG and seeks to divest itself of its current 70% share of that company.

Do we need to fix the short-term credit markets?

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Absolutely.

Do we have to do it by foisting reems of bad debt onto the taxpayer’s backs?
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It doesn’t seem likely. Reducing the Capital Gains tax and a proposal for a one-year reduction in the taxes on foreign profits, a plan that supporters say would help the economy by bringing a flood of investment back into the United States are both seem like better alternatives than a straight taxpayer funded bailout.

The current crisis can really be summed as “Enron Comes to Washington” with Barney frank as Jeff Skillings and Chris Dodd as Ken Lay.