Now that Congress has voted down the one solid plan we had to address the credit crisis here in the U.S., lot of folks are wondering where we go from here. And many of those same folks are worried about what this means to them and their money.
First, the crisis itself. Hindsight is 20/20, of course, but signs that we were heading for something bad have been there for a while. Two local investment advisors warned about Fannie Mae and Freddie Mac in the pages of Arkansas Business four years ago:
We believe the time has come to bust up Fannie Mae and Freddie Mac, which have become the final guarantors of the bulk of the residential mortgage debt in this country.
These huge entities perhaps have the strongest lobbying groups in Washington, so the job will require much fortitude and tenacity.
Not long ago, our country went through a financial crisis in home mortgage finance with the savings and loan business.
The federal government was called in to pay off the guaranteed liabilities (the insured deposits) and to make an orderly liquidation of the assets.
Fast forward to today. We have Fannie Mae and Freddie Mac, which have taken the place of the savings and loan industry from a financing perspective.
Thus, the potential hazard of guaranteed deposits that existed in the S&L business has been transferred to these two behemoths. Fannie and Freddie have taken the risk and run with it, leveraging their balance sheets to a point where any sober observer would consider both undercapitalized.
A multitude of mortgage originators has taken the place of S&Ls on the asset side. Many are barely capitalized operations that simply collect an origination fee and transfer the risk to Fannie and Freddie.
Sounds familiar, eh?
Fast forward to 2007-2008. MSNBC shows us how this year unfolded, tracking statements by Congressional members and financial leaders alongside unemployment rates and Dow Jones levels, via this neat interactive chart. Early last year was when we began to see bankruptcies from some of the largest mortgage lenders in the country, whose sub-prime mortgages began to go bad as people couldn’t make their payments.
That’s led to the wave upon wave of bad economic news, and brings us where we are this week. Yesterday’s (in)action by Congress was dramatic, but on the whole not surprising, considering the outcry from “Main Street” that taxpayer dollars shouldn’t go to a multi-bllion dollar bailout plan for Wall Street.
On KTHV at 6 p.m. Monday, Craig O’Neill and I talked about what that bailout plan might have done, had it been approved. Click here to see the video.
So now what? Because of a Jewish holiday, Congress doesn’t meet again until Thursday. Will Monday’s bailout plan come up for another vote, or will an alternate plan emerge? That remains to be seen.
Meanwhile, what do you do with your money? More on that after the jump.
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