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What is Congress to do? (They want us to write a check for One Trillion Dollars).

Congress is about to take action to bailout the banking industry of the bad mortgages they have purchased. Yes, it is a bit more complicated than that. So what does this mean for the average business and the individual. Are there better solutions?

First, we need to understand why this is necessary and how we got here. It is a "we" because it has a profound effect on every single American. Quite simply, we were almost at a state of Bank Lock last Thursday, September 18, 2008. That would have resulted in banks dishonoring withdrawals and withholding funds. Currently Banks are in such a disarray that lending has come to a virtual halt. Very few business loans are being made and consumer loans are only being provided to the absolute most perfect consumer that can exist on paper (or at least in the electronic world). Banks have made some very bad decisions on speculative buying resulting in portfolios that have tied up their available cash to lend, as well as honor deposits should there be a run on the banks.

We have heard the news not to panic, not to make withdrawals, leave the 401k as is, leave the money markets in place. This is out of fear that should there be a mass withdrawal of these accounts, we would see an economic breakdown far worse than the Great Depression. After all, not many have real money. Most of it is in electronic form and if the numbers don't balance, then the system itself is in danger of total failure.

How did we get here? It is easy to blame the American Citizen for taking on loans they could not afford to pay, but this is nothing more than looking for a scapegoat. The subprime loans that are a large part of this problem represent 1% of the actual mortgages on the market. The problem is over speculation can lead to disastrous consequences. We have seen this before with the junk bond market, the Savings & Loans crisis and now with the mortgage industry. The banks are at risk because we have allowed banking, insurance and brokerage to be combined. In a free market society, the real danger on one side is socialized markets and on the other markets controlled by a monopoly. If the monopoly fails, then the market fails. There is no allocation of risks. This is tantamount to an insurance carrier only insuring one product with no allocation of risk. Once that product results in claims, their are no premiums being received from other products to allocate risks.

Speculation has always existed in the free market and will continue to do so. Those who speculate do so at their own risk and should be allowed to do so. Speculators should not in turn look at the government for a socialized corporate bailout. The problem arises is when the American economic system has been put into jeopardy with the American workers money. Americans savings have been place into the speculative market without their consent. An average person's savings has been placed into an institution that has been allowed to cross into other markets resulting in use of those funds for speculative purposes. Speculation can become similar to a pyramid scheme. At some point in time the funds run out to pay the bottom tier investors.

The subprime market was not created to help the average homeowner. It was created to mass an enormous amount of marketable securities. The securities were in the form of bad mortgages set for failure. The loans were provided out of a market with bad appraisals and with loans out of the reach of the homeowners. They were sold on Adjustable Rate Mortgages they could not afford once an adjustment was made. They did this with the impression that the rising values would allow them to refinance into an affordable mortgage. This was tantamount to a pyramid scheme which was strictly designed to create a mass amount of marketable securities. The problem is market saturation. Housing starts boomed and at some point, the prices taper. During this, many extras were financed into the mortgages that have little real dollar value on the home. The real estate value being used to fund this scheme fell and the refinances could not occur. Suddenly the marketable securities started to become worthless.

During this time, the originators of the loans had no intent of servicing the loans. The loans were simply a portfolio that could be bought and sold on the open market. The packages of loans were sold just like they were stock. Large sums of money are made off the buying and selling of the loans. Once homeowners became unable to meet the adjusted rate or refinance, the loans started becoming illiquid. They could no longer be sold on an open market, leaving the last man standing in the speculation with bad loans.  Unfortunately, many intuitions had been involved in this speculation including major banks and brokerage companies. This has now left the American economy in a position that lending institutions have virtually frozen new loans. If businesses can't get loans to expand, growth ceases and jobs are lost. If consumers can't get loans for major purchases, the same results occur.

This problem has been decades in the making. Oil production eased in this country in the last century due to costs, over regulation and environmental concerns. Simply put, it is easier to get it out of a desert than from under water or rock. We have made no investment in an energy infrastructure in the country as for a long time, oil is just a boat ride away. The problem has been created over the years that oil is not bought and sold in a true free market. OPEC controls how much production occurs resulting in price manipulation. Recent futures trading speculation saw the price of oil reach dramatic increases, which was not the result of use, but again the result of speculation. However, the issues returns to decades of not investing in an American energy infrastructure.

This vicious cycle has put us in the economic crisis we are currently in. Inflation hit all time highs in the 70s due to oil prices that were the direct result of a previous oil embargo and dependence on imports. Resulting in this inflation were interest rates that were too high for the average American to actual purchase a home. As a result, the idea of Adjustable Rate Mortgages were created. These were sold on the idea that rates would decrease and refinancing could occur. The ARMs have now been in the forefront of the subprime market that was created for the speculation.

During this, loans that were once assumable have been removed. Prior to the fiasco of the 70s, a homeowner was able to sell his or her home without the necessity of a new loan. After all, the mortgage holder could buy and sell the loan on the open market and in a free market this is commercial paper that homeowner should be allowed to sell as well. Assumptions were a routine and normal part of the real estate market. The underlying problem is the holders of the mortgages were servicing low rate loans that were sometime 4% or even less and new loans were hitting near the 15% range. These loans as marketable securities were less valuable than new ones with higher rates. Thus the non assumable loan was created eliminating loan assumptions and the available wrap around mortgage used in many instances to sell an existing home.

We have now been placed into a market that the stable lenders and speculators are in the same office. The ARMs have created a disastrous result in the failure of the pyramid. Even worse, the average homeowner can do nothing to make his or her way out of the crisis as the values have been depleted and the speculative money in the pyramid has run out. On top of this, the homeowner cannot find someone willing to speculate on his own and take over the house, bring it current and hold it for resale.

One pertinent role of government in a free market society is not only to control the creation of monopolies, but to control usurious interest rates. Over the last few years banking regulations have change to such an extent that the 18% credit card that existed during a time of double digit prime has all disappeared. Consumers now face the real possibility of being saddled with 29+% credit cards at a time the Federal Reserve Rate is 2%.  The result on the consumer market has been one third of the money being expended on consumer goods is actually going to the monopolistic institutions that have created a financial strain on their own depositors in order to service the speculative market decisions that has resulted in catastrophic consequences.

Now one must become a drone and meet the human behavior science beihid FICO score that not one man on Wall Street can explain. Credit institutions have been allowed to determine rates based upon an unknown human behavior model that does not understand the real world. Rate increase happen to a majority of Americans who always pay their bills on time without any explanation. Many consumers that never miss a mortgage payment or any bill of any type are now classified as subpar.

So with this mess, Wall Street now wants the American Taxpayer to bailout with 1 trillion dollars for bad speculation. One major understanding of this is that the 1 trillion dollars spent on speculation is not money lost. It is money that has been spent and now on someone else's books. Many have profited extremely well off the speculative marker that has put the Banks in this position.

It is unfortunate, but an immediate bailout must occur. The only other option is for the Federal Reserve to print more money, provide every adult citizen with the 1 trillion dollars in cash on a equal basis, eliminate all debt and start completely over. Of course this remedy, is socialized wealth redistribution and is far from reality.

Congress, must immediately purchase these bad loans. For the taxpayer sake, such purchase must be limited to actual mortgages and not nonrecoverable debt such as credit card debt. In exchange though, let's not worry over executive compensation at this point. That can be dealt with at a later time. Something must be done for the American Citizen in order to justify this transaction. For every institution that sells this debt to the government, those institutions should limit all current credit cards to a maximum of 18%.  There must be some justification for such a large risk being taken on by the American Citizen.

For all the residential mortgages being purchased, those loans need to be immediately readjusted to a fixed rate with terms that brings the loan current. The loans should then be readjusted to allow for loan assumptions in a similar way they occurred 30 years ago. Homeowners can then have a way to sell their homes immediate or stay in the home with a more stabilized market. It will take the average ordinary real estate speculator to ease this crisis. The market that needs to be recreated is the smaller real estate investor market that once existed. After all, the failure of a loan real estate speculator will not result in a 1 trillion dollar buyout.

Beyond this, we must revisit the limitations on banks, brokers and insurers being all in the same business. It never worked before and has no hope of working in the future. If we are not careful, we will have less competition, larger institutions, total monopolies in all sectors of our economy.

The tax dollars being wasted must be invested back into the infrastructure of this nation. We need a national sense of rebuilding our energy, transportation system and space program that will bring us together for a purpose which results in our grandchildren referring to us as the Builder Generation.

At some point, those in Washington must come to the realization that it cannot continue to thrive off the idea of taxing a man just because he goes to work. We all owe less when we call in sick than when we have a productive day at work. Now that must again ask us for One Trillion Dollars. Perhaps we should all find the extra $2,000 a piece from our grocery bill and just go ahead and send them a check (hopefully the banks will have the funds at that point to honor the check).