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Mortgage crisis
From mortgage crisis to
financial crisis to world economic crisis?
Article added on September 20, 2008
As we say in German,
“the fish stinks from the head”. The CEOs and other decision makers have to
be held accountable if they were champions of corporate
and individual greed by cooking up books, behaving fraudulently, neglecting
common sense and due diligence. If found guilty, they should be forced to
pay back their bonuses and termination pays and lose their pensions funds.
President Bush's and Treasury Secretary Paulson's $700 billion fund to
bailout US financial institutions can use some cash.
To resolve the Japanese banking crisis of the 1990s cost Japanese taxpayers
an estimated 20% of Japan's gross domestic product (GDP). The Swedish
banking crisis of the early 1990s cost Swedish taxpayers an estimated 6% of
the Swedish GDP. If you go for the lower number, in the United States, 6%
would be some $850 billion.
Not only the American insurance and financial sectors are in turmoil. You
may remember that one of the rare banks with a triple A rating, the leading
Swiss bank UBS, lost some $40 billion in the subprime crisis. The
comparative advantage of “black
money” (in German: Schwarzgeld) was not enough. Schwarzgeld is
money not declared to tax authorities. It amounted to some 50% of all
foreign deposits with UBS, according to a television statement in the 1990s
by the former UBS chairman Marcel Ospel, who was forced to step down because
of the subprime meltdown. In addition to black money, UBS heavily “invested”
in subprime mortgages. What a great business model! Luckily, unlike
Swissair, UBS is a private company. “Only” its shareholders and not Swiss
taxpayers had to pay the price for incompetence and greed. Since UBS is one
of the world's best funded and most solid banks, it survived. Within 24-48
hours, the bank managed to organize a capital injection of some $12 billion.
In
the United States, Lehman Brothers with its 25,000 employees and $600
billion in assets was not so lucky and went bankrupt because nobody wanted to
take unknown risks by buying it. The US government was - rightly - not ready
for a bailout of Lehman Brothers. When A.I.G., the world's largest insurance
company with over 100,000 employees worldwide and over $1 trillion in
assets, was on the brink of collapse and ask for money, President Bush, the
Fed and Treasury Secretary Paulson estimated that A.I.G. was too big to
fail.
The subprime crisis or how it all started
What may be the beginning of a world economic crisis started
with US subprime manipulations, mortgages given to people who could not
afford them in the first place, and mortgage backed financial instruments
sold to third parties as “secure”
investment papers, which turned out to be just paper.
Fannie Mae and Freddie Mac were government sponsored companies which
controlled some 50% of all American mortgages. The Fannie Mae and Freddie
Mac debt enjoyed the backing of the United States government. That is why US
regulators allowed banks to treat Fannie Mae and Freddie Mac stocks as
T-bills or cash to meet their capital requirements, as someone pointed out
in Forbes magazine.
As two contributors in the New York Times wrote, Fannie Mae and
Freddie Mac “were weakly supervised
and strayed from the core mission. They began using their subsidized
financing to buy mortgage backed securities which were backed by pools of
mortgages that did not meet their usual standards.” A bubble of worthless
paper or paper worth much less than stated was born.
As someone in The Economist pointed out, the United States government
implicitly guaranteed the creditworthiness of Fannie and Freddie, enabling
them to borrow at below-market rates. Private shareholders pocketed the
profits by lending this cheap money at higher interest rates. In short, the
US government subsidized the shareholders of Fannie and Freddie. Democrats
and Republicans in Congress helped to create a bubble. Some of them did so
more eagerly than others because they were heavily lobbied. Among them:
Barack Obama. No, he is not the culprit for the housing bubble, but he
surely was no help in avoiding it. John McCain rightly suggested to disband
Fannie and Freddie, whereas Barack Obama wants to reform them.
The subprime and banking crisis and the 2008 presidential election
In an environment in which the market economy and free trade will be
unjustly blamed for the mess, it is urgent to vote for John McCain. The
Republican presidential candidate has a splendid voting record when it comes
to free trade. Unlike Barack Obama, he voted for free trade, against
subsides and protectionism. McCain opposed the Farm Security Bill, milk
subsidies, Amtrak subsidies, highway subsidies and prescription drug
entitlement. There can be no doubt that John McCain is the better candidate
than Barack Obama when it comes to avoiding a world economic crisis.
As for a gloomy outlook, there is still a credit card crisis looming in the
United States, and there are plenty of other
sectors of the economy with unhealthy situations, with one player
dominating one entire sector, e.g. Google and Microsoft. As for a worldwide
outlook, let's just mention agriculture as a highly subsidized and protected
sector and OPEC
as a cartel with a big influence on the energy market. Sleep well!
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