Many believe the mortgage and housing crisis which triggered an impending financial system meltdown according to the former Treasury Secretary, Hank Paulson, would need a Congressional “blank check” to avert disaster. At least, that is what Ben Bernanke and Mr. Paulson told Congress who then gave them the “bailout bill” including the $750 Billion asked for to save us all.
Bailout Economy
After the election of President Obama the bailout economy started by the Bush administration really got rolling. Not only did banks need a bailout, but so did insurance companies, auto makers, and every conceivable industry.
Now we have a growing need for government the likes of which America has never seen. The concept of “moral hazard” (the belief if one removes negative consequences of risky practices, one gets more risky practices) is now completely eliminated from the debate. Fear, or more correctly, the irrational fear of financial system collapse trumped all legitimate arguments. Not only that, but the speed to action we supposedly needed to save ourselves, didn’t leave any time for a debate.
So we had no debate.
Now we have a bailout economy where the financial headlines are dominated by the most recent industry needing (and usually getting) a bailout.
And this all started with a bank system in need of Congressional action in the form of dollars.
What if I told you the banking system already had a system in place in case of an emergency to save itself without Congressional action?
It’s true.
Back in 1991 Senator Dodd introduced and got passed at the behest of Wall Street a single line in a bill that would give the Federal Reserve the ability to make loans to “in danger” institutions to save the system from collapse.
The law sat dormant for 16 years until this law was triggered to assist in this current crisis, but it seems it was not enough. The Fed didn’t want to go it alone, so they roped in the Treasury Department to help out.
Why?
Whether the bailout money comes from the Fed or from Congress, it’s all the same. So why go through all the gyrations of last Fall and this Spring to get new laws passed ostensibly for bailout purposes?
One could speculate, Congressional leaders need to feel important, so this was their “charade of caring” on display. One could say the same of the new President.
One could say, if the Fed jumped in alone and saved the financial system, laying the debt on the taxpayer without any voter recourse, we’d all see first hand just how “out of control” powerful they really are.
The Fed power was on display again by Wednesday this week when mortgage rates rose the fastest I’ve ever seen in 16 years of watching the markets. Then by Friday, after Fed intervention, they dropped just a fast.
Whatever you want to believe, the Fed’s fingerprints are all over the mortgage crisis and now on the bailout.
Let’s just hope we find a way in the aftermath, to curb their power…
Getting rid of Senator Dodd would be a good start.
Until next week….
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Article Author:
Rob K. BlakeRob K. has written 49 articles for us.
Visit Rob K.'s Website: http://themortgageinsider.net
Rob K. Blake, a 15 year veteran of the mortgage industry, is a renowned public speaker, author, and former radio talk show host. His blog, TheMortgageInsider.net, is dedicated to educating mortgage consumers, mortgage providers, and investors about both mortgage and housing markets.
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My Brother a Director at suisse credit bank,was tellingme all this 9 months ago.You can be sure of one thing though,the big city banks and insurance companies wont be paying the losses
The Fed didn’t want to go it alone, so they roped in the Treasury Department to help out. — Very true.
Fundamentally, the Fed & Treasury do not want to be accused of simply printing money and throwing it at the crisis. In essence, however, this is exactly what they are doing. There’s only so much time before the pot calls the kettle black, and foreign investors call out / lose faith in the dollar (which we are seeing already) and inflation goes through the roof…
Justin Bartlett’s last blog post: Mortgage Rates Increase, Ramifications for Needy Homeowners