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This truly is a crisis of epic proportions. Many people here don't understand what is at stake if Congress does not act to remove a significant portion of the illiquid debt that has been taken on by these institutions.
This crisis is a direct result of banks giving out too much credit to too many people who were not able to manage that credit. It is both the banks faults and the individuals' faults for partaknig in this bad behavior. But more importantly, it is the fault of a Republican led Congress that relaxed most of the restraints on the lending practices of financial institutions.
Yes, there are plenty of problems stemming from the fact that the working class has taken the brunt of the Bush/GOP policies over the last eight years. The Average Savings Rate of the American Citizen has been negative for more than 2 years. This was an early indicator that we were in trouble. Jobs have been sent overseas, social working programs have been decimated and affordibility indexes and cost of living has skyrocketted, putting many in poverty.
The consumer base, basically has been decimated by the GOP Congress for the last 8 years. And at the same time, financial safegaurds and protections for the individual and consumer have been removed. This has all been a setup for the current financial crisis. You could say it was deliberately engineered by the GOP.
And we could continue to fault the GOP and the rich Wall Street CEO's all we want. But that doesn't make the problem go away.
Let's look at what is happening. The current loans that have been defaulted on have grown into the 100's of billions of dollars. The record number of foreclosures last year built this up to unprecedented proportions. And yes, this problem could have been predicted a year ago. What does this mean to banks? Well first, they must sell the property or call a loss on the loan. Initially that is what happened. Then they sell it, using the same bad practice to another individual who can't afford it. Do this two or three times and the banks can no longer use this property as an asset. It's been leveraged multiple times. And it's exchanged hands from one bank to another like a seriously hot potato. What are the repurcussions:
1. Eventually, some bank(s) gets left with the bad loans. These banks end up failing. If these banks manage deposit accounts, either another bank must purchase their deposit accounts or FDIC kicks in. There are only so many banks to acquire and so many failures FDIC can handle.
2. Credit becomes scarce. As I noted in my journal earlier today, there are only a handful of companies left handing out Mortgages. And these are not the kind of mortgages that are easily affordable by new home buyers. Interest rates go way up on these (up over 1.5 in two weeks) because supply is extremely low.
3. Businesses can't borrow money. This will affect how CFO's manage the cash flow. Not only will consumer spending drop off dramatically, but business spending will drop significantly, leading to an economic slow down, higher unemployment and the beginning of a depression.
4. Markets will crash. This will affect everyone. Many people are living their retirements off of their 401Ks and pensions which are invested in relatively safe funds, which now, are no longer safe. Some funds will completely demonitize leaving many people selling their funds at a loss and living off far less than they imagined. This is also setting back the retirements of people who were near retirement (well, those who are still working) and it will cause many people in the 30-50 range rethinking their long-term plans.
What happens if the Government doesn't act to basically absolve this bad debt, there will be more bank failures, less available credit and higher costs to individuals. So much so, that a depression is unavoidable. No one is talking about bailing out stock-holders or CEO's. This is a protection of epic proportions for the American people to preserve the financial industry and prevent a depression.
If the Government acts to remove some of this bad debt, then credit will be restored both to individual and businesses. It will still be bad for the American people, but not nearly as bad as a depression.
We need to get over the 'class warefare' mentality here and recognize the problem our Nation faces. It faces this great disaster in the wake of Republican Rule. We must join together to solve the problem, not to divide the party over it. This problem was caused by partisanship. It can only be ended with unity.
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