Fannie Mae and Freddie Mac Takeover Gives McCain A Political Opening

Interesting synopsis and all relevant. The usefulness of this aspect of the home mortgage mess for political purposes is undermined by the Republican's participation in the withdrawal of regulatory oversight on the whole financial industry.

Fanny and Freddy were fantastic perversions of whatever social policy was supposed to underlay their special advantages in the market---lots of people noticed along the way that the twins were using their special advantages to buy up mortgages that would have been originated and purchased in the secondary market without the not-so-invisible hand of government being involved. As such they were an unnecessary perversion of the market. But since both actually ended up owning the mortgages, they had a vested interest in their quality.

Therefore, it cannot be said Fanny and Freddy were the main cause of the current mess. That mess was created because available investment income around the world, in the wake of the collapse of the internet bubble, was looking for a safe bet and no bet in the world was safer than American home mortgages. This market desire was exploited by investment banks who bundled the debt into securities and marketed them in the vast worldwide pool of available investment funds. The investment banks got their share by acting as middlemen profiting on a series of one-time transactions: bundle similar mortgages and sell the right to collect the payments as a security, collect a transactional commission and move on to the next one.

The core value of the investment being sold was a cash flow generated from home mortgages that were originated by home buyers purchasing homes aided by mortgages generated by mortgage brokers. Again, the profit of the middlemen mortgage brokers was in the transaction: sell the mortgage to the home buyer and then resell the mortgage as fast as possible to the investment bank customers who ended up holding the long term debt.

The problem was caused by the economic recklessness of the two parties in the middle of these transactions--mortgage brokers and investment banks, who made their money in transactional fees and who had no intention of holding the longterm debt. They became ever more reckless--selling and bundling increasingly more dangerous loans until, in the end, they destroyed any confidence the mortgage markets had built over decades. The result is a crisis in the entire home building sector of the economy. The first collapse in this bunko scheme industry alerted investors who, warned they were doing little more than tossing dice, withdrew from the market, pulling the rug out from construction, home building and home resale markets. Now the investors are wary--out of the market completely or waiting for the bottom to be reached, before they again rely on the underlying value of the investment to return to the market.

This whole fiasco is much larger then Fanny and Freddy. They are the largest victims to be found and their directors were undoubtedly malefactors, but they were restrained somewhat by the economic discipline that they ended-up owning the mortgages. Fanny and Freddy's excesses were in exploitation of a special positions in the market created by government established preferences--maintained, in bare economic terms, by kickbacks to politicians. They left their public purpose justification behind decades ago. But the home finance mess itself was the result of politicians--executive branch and legislative, purposefully ignoring the recklessness in the home mortgage markets until the roof fell in. For that failure, there is more than enough blame to be tossed at both parties.

The relationships you mention stink to high heaven, as do many more symbiosis between elected officials and the twin privileged financial institutions. There is much stench here that should be shook out and aired in public, but will it be? I tend to think not; not because it shouldn't be, but because people who live in glass houses don't throw stones.

The most prominent villains in this tragedy are the elected leaders who pushed for deregulations or rejected new regulatory oversights that would have prevented today's foreclosures and the credit crunch.

There are long-term lessons taught by all this: 1) Market Institution acting with a government provided special advantage to accomplish specific public purposes (such as creating low income housing) tend to move away from their public purpose justification to end up competing where ever profits can be found. 2) Lack of oversight in the financial sector is a hugely dangerous circumstance. Greed and reliance on short term transactional income will inflict the economy with serial crises that undermine the quality of life for everybody, save the speculators lucky enough to cash out and hide before the realities market functions reassert themselves. 3) It is a never ending struggle with human nature to permit necessary accumulations of private wealth within a healthy regulatory structure. Wealth invites political corruption and corruption destroys regulation.

I fear the political opportunity you suggest will be passed-on for fear of stirring up a hornets nest that will get everybody in the outhouse stung.

Wasn't it Mr. and Mrs. Phil Grahmn that were instrumental in the deregulation of the mortgage industry that led us into this debacle? It was the GOP that was all for deregulation. There are corporate fat cats in every industry and likely far more Republicans than Democrats at the corporate troth. This is a bogus argument. Besides, the Chris Dodd loan deal was completely debunked. People in the lending industry and related industries have been predicting this disaster for the last several years and deregulation has been blamed by nearly everyone as the cause. The GOP is the party that wants free markets without regulations. History has proven that doesn't work, and Freddie and Fannie are just the two latest messes that prove the point. I would love to see Obama debate McCain on this issue.

Actually it would be grand for Obama to call out the entrenched Washington Democratic Party Leeches for what they are, and use this as a better platform to serve "the people." I do think that it is hilarious that this "highly" conservative administration would opt to reign these institutions back in the Federal Government, but must be seen as a sign that they too are Communists at heart...Oh man! That just made me smile ; )
Anyway I thought this article was a good explanation, and does put some of the blame in the correct place, with the Clinton administration and some of their more wacky ideas.
However the manner in which other financial institutions used the bundling of loans for speculative purposes I believe was what created the bubble crisis in the 1st place, use of unconventional means to drive prices in markets...
Visited any ghost town exurbs lately? Hastily built McMansions rotting in the sun, half constructed by immigrant labor? Greed trumps party affiliation.

Compliments to Jess Wondering for insight and rational explanation. I apologize for the length of my comment, but, this is a serious subject and can't be dealt with as a soundbite or short sentence.

Prior to Congress passing the 1984 tax code revision, I attended a special briefing at Stanfor University, sponsored by The Hoover Institute (a "think tank" housed at Stanford) at which Cabinet Secretaries and their staffs explained the forthcoming changes, deregulations, and purposes.The purposes were to remove Government controls from financial markets, allow Wall Street to market new products given acceptance by the code revisions, and move the vast pools of savings and equities from real estate (like, home equity, savings accounts, CD's, etc.) into these new products and stocks. The code revisions were drafted by a law firm from Los Angeles, paid for by Walter Annenberg, Ronald Reagan's long-time sponsor, disguised by the appointment of a "blue ribbon" committee of financial experts who labored for a year in Washington without changing anything of importance in the prepared code texts. Obviously the revisions worked, real estate markets collapsed, money fled to the stock market and the Federal Government essentially ceased oversight of this sector of our economy, leaving it to the "open market forces". Reagan and his California Band continued their assault on regulatory processes in all areas of our lives, reminding us of their philosophy that "Government is not the solution to the problems that face us, Government is the problem". I suppose none of them ever thought deeply enough about this catchy phrase to discover that "open market forces" is just another way of describing "greed and corruption", or turning the hen-house over to the foxes. Since Reagan made the concept popular, the so-called "Conservative Movement" has worked constantly to dismantle the U.S. Government and its process intended for the protection of our food supplies, borders, financial markets, drugs, water supplies, and on and on. In place of regulatory agencies and functional controls, they have sought to enrich those connected to Wall Street with ridiculous sums, and have told those not connected to await a "trickle down". Well, dear friends, the results are coming in, after two decades of these policies. Public debt of $9 Trillion has been substituted for tax revenues, which your children can repay in our behalf. Nearly half of the net worth of America's "middle class" has been shifted upward to the top 3-4% of citizens (and many who are not citizens of this country), and to the corporations of Wall Street, and none have felt the "trickle". Most families are now mired in debts of mortgages and credit cards, and costs of medical insurances and education for the kids has grown into burdens not affordable by far too many. Still, the Republican candidates are selling these same failed policies to the same thoughtless crowd. I really miss the campaign chant "Four More Years". The collapsing mortgage markets is not a phenomena that could not have been foreseen and avoided, had the regulatory processes been left in place, monitored, and adjusted as needed. I do not claim to have any unique talents or insights that are not readily available among educated adults, but, I saw the problems and predicted the collapse of the housing and mortgage markets, beginning several years ago. My background is in the financial and building industries, and I have degrees in business and economics, as do hundreds of others, some of whom should have been placed in positions of control over these industries to protect the interests of the Nation and its taxpayers. In summary, it has worked this way: Deregulating the financial markets and removing oversight processes was an open invitation to schemers of every description to develop "products" to sell to unsuspecting "investors". Revising the tax code to make such "products" legal and appear to be endorsed, encouraged these schemes and placed them beyond criminal codes for fraud. Allowing banks to sell these products for commissions and fees changed the purpose of banking, leaving the public with only one place to "invest", Wall Street brokerage. Low taxes, Government overspending, rapidly rising incomes to the white collar upper 10-15%, and no place to invest the 401K funds but in Wall Street's products, all led to too much money chasing too few real investments, so Wall Street began to sell multiples of the same, called them "derivatives" and such, sucking off huge fees and commissions to themselves. Using Government policy to keep interest rates much too low for much too long was a means of forcing all loose cash into these Wall Street products and created an economy highly dependent on construction for employment and materials. Builders and developers were encouraged to make all houses larger, build a shopping center on every corner, and update with granite counters in every little bungalow in the burbs. Buying houses became a game like Monopoly where money was made available to those who had no way to repay and to those who bought tens or dozens of houses at a time in hopes the feeding frenzy would never end. All of this drove up the price of raw land to unrealistic levels, and builders couldn't raise the prices of their big boxes fast enough, so they made contracts where the buyer's price would be determined "at closing". So, what does all this mean to you? Well, follow the money. Farmer sold his land to a broker or developer who assembled a big tract. Farmer was amazed that anyone would pay a hundred times what the land cost a few years ago, but, why question good fortune. Farmer took his fortune and invested in stocks and bonds, sometimes accepting stock as part of his sale price. The market went up a few points with this new investment. Broker/developer sold options or whole tracts to builders (often the same corporation, but with different divisions to disguise the huge profits being created), often netting two or three times the amount paid to Farmer. Broker/developer took gains and bought even more land, finding that the price of the adjacent farm had doubled or more, but so what, the tide was rising faster than a storm surge. Builder constructed bigger and bigger boxes and offered them for sale at terms offered by the mortgage lenders who could deliver money without any strings - nothing down, just show a driver's license, need not have a job or even a bank account, etc..... Builder could make 50% or more above the costs of construction in the deal, so making the boxes bigger and more costly was the game. At the closing, the mortgage lender delivered enough money to pay for this chain of excess and "open market forces". Most participants took their gains out of the game and borrowed from eager lenders the amounts needed for the next project, else sold stock at 20+ times the earnings, which was the best way - no more risk, pocket 20 times what last year's efforts produced. These were "hot picks" by all the Wall Street pundits, for years. Now, mortgage lender sold his package of papers to a broker, who assembled packages into big lots, then resold them to Wall Street firms who packaged them into even larger bundles and resold them as "Asset Backed Securities". Fannie Mae and Fanny Mack were among the largest buyers of these packages. Each step of the packaging process was paid for with fees and commissions, sometime amounting to hundreds of millions of dollars for a single transaction. The end of this is in sight. The land, the buildings, the papers, all were overpriced and never worth what they were sold to the next level for. Taken together, it was a poncy game, a marketplace without any controls or barriers, left to itself and the "open market forces", including greed and corruption. The money is gone, to the Farmer, the broker, the builder, the mortgage broker, Wall Street brokerage, and the multi-million dollar bonus's paid to so many along the way. What is left is the paper, held by Fannie Mae and Fannie Mack, which has, today, been repurchased and guaranteed by the U.S. Taxpayers - that is, you and me, dear friends. We own the papers and, in the end, will pay for all the excess profits and the uncontrolled lending losses. We can't blame anyone but those who brought this about. Start with the Conservative Movement that has worked so hard to remove its "enemy", the Government, from controlling the banking and financial markets. Include those who, without knowing what they wished for, have demanded that "open market forces" control the world's economies, including ours. Add in a senseless Administration and Congress that allowed the economy to become dependent upon the construction industry, the stock market and Wall Street brokerage. Every time we voted for one of these, or failed to voice our objections to their policies, we were counted as a supporter of the policies. We get what we deserve, what we asked for. The questions before us are: What will we do about this at this time? Will we demand "change" from these failed policies? If so, what change , and who do we trust to implement it? Or, should we just ignore all of this and hope for a better tomorrow, believing that it will all work out somehow, as we have done for so many years? Had we held our elected of the past quarter century accountable for the results of their work I think we would be in a different place today. Instead, we have encouraged them to do nothing, to finger point and blame each other and to let the processes of Government become disfunctional. We have allowed ourselves to be led toward a state of feudal-like controls, where the very rich have control of all that is dear, and the rest drift toward ever-greater dependence on the feudal landlords, the corporations and Wall Street. It was from such circumstances that history's revolutions grew - the Magna Carta, the overthrow of crown heads in Russia, England, France, and other European countries, the American story began, and more. Better that we throw off this yoke now than later. We don't need "more government" or a "bigger government" but we do need a 21st Century Government that will function to encourage and protect the best interests of all the citizens of the Nation and discourage the abuses of the few who would work against these interests.

Where did the paragraphs of my comment go?

Somehow you edited out all the paragraphs in my comment. I will try again to post my words with paragraphs. It is a rather long comment and in need of punctuation, so please leave it alone.

Compliments to Jess Wondering for insight and rational explanation.

I apologize for the length of my comment, but, this is a serious subject and can't be dealt with as a soundbite or short sentence.

Prior to Congress passing the 1984 tax code revision, I attended a special briefing at Stanford University, sponsored by The Hoover Institute (a "think tank" housed at Stanford) at which Cabinet Secretaries and their staffs explained the forthcoming changes, deregulations, and purposes.The purposes were to remove Government controls from financial markets, allow Wall Street to market new products given acceptance by the code revisions, and move the vast pools of savings and equities from real estate (like, home equity, savings accounts, CD's, etc.) into these new products and stocks. The code revisions were drafted by a law firm from Los Angeles, paid for by Walter Annenberg, Ronald Reagan's long-time sponsor, disguised by the appointment of a "blue ribbon" committee of financial experts who labored for a year in Washington without changing anything of importance in the prepared code texts.

Obviously the revisions worked, real estate markets collapsed, money fled to the stock market and the Federal Government essentially ceased oversight of this sector of our economy, leaving it to the "open market forces". Reagan and his California Band continued their assault on regulatory processes in all areas of our lives, reminding us of their philosophy that "Government is not the solution to the problems that face us, Government is the problem". I suppose none of them ever thought deeply enough about this catchy phrase to discover that "open market forces" is just another way of describing "greed and corruption", or turning the hen-house over to the foxes. Since Reagan made the concept popular, the so-called "Conservative Movement" has worked constantly to dismantle the U.S. Government and its process intended for the protection of our food supplies, borders, financial markets, drugs, water supplies, and on and on. In place of regulatory agencies and functional controls, they have sought to enrich those connected to Wall Street with ridiculous sums, and have told those not connected to await a "trickle down".

Well, dear friends, the results are coming in, after two decades of these policies. Public debt of $9 Trillion has been substituted for tax revenues, which your children can repay in our behalf. Nearly half of the net worth of America's "middle class" has been shifted upward to the top 3-4% of citizens (and many who are not citizens of this country), and to the corporations of Wall Street, and none have felt the "trickle". Most families are now mired in debts of mortgages and credit cards, and costs of medical insurances and education for the kids has grown into burdens not affordable by far too many. Still, the Republican candidates are selling these same failed policies to the same thoughtless crowd. I really miss the campaign chant "Four More Years".

The collapsing mortgage markets is not a phenomena that could not have been foreseen and avoided, had the regulatory processes been left in place, monitored, and adjusted as needed. I do not claim to have any unique talents or insights that are not readily available among educated adults, but, I saw the problems and predicted the collapse of the housing and mortgage markets, beginning several years ago. My background is in the financial and building industries, and I have degrees in business and economics, as do hundreds of others, some of whom should have been placed in positions of control over these industries to protect the interests of the Nation and its taxpayers. In summary, it has worked this way: Deregulating the financial markets and removing oversight processes was an open invitation to schemers of every description to develop "products" to sell to unsuspecting "investors". Revising the tax code to make such "products" legal and appear to be endorsed, encouraged these schemes and placed them beyond criminal codes for fraud. Allowing banks to sell these products for commissions and fees changed the purpose of banking, leaving the public with only one place to "invest", Wall Street brokerage. Low taxes, Government overspending, rapidly rising incomes to the white collar upper 10-15%, and no place to invest the 401K funds but in Wall Street's products, all led to too much money chasing too few real investments, so Wall Street began to sell multiples of the same, called them "derivatives" and such, sucking off huge fees and commissions to themselves. Using Government policy to keep interest rates much too low for much too long was a means of forcing all loose cash into these Wall Street products and created an economy highly dependent on construction for employment and materials. Builders and developers were encouraged to make all houses larger, build a shopping center on every corner, and update with granite counters in every little bungalow in the burbs. Buying houses became a game like Monopoly where money was made available to those who had no way to repay and to those who bought tens or dozens of houses at a time in hopes the feeding frenzy would never end. All of this drove up the price of raw land to unrealistic levels, and builders couldn't raise the prices of their big boxes fast enough, so they made contracts where the buyer's price would be determined "at closing".

So, what does all this mean to you? Well, follow the money. Farmer sold his land to a broker or developer who assembled a big tract. Farmer was amazed that anyone would pay a hundred times what the land cost a few years ago, but, why question good fortune. Farmer took his fortune and invested in stocks and bonds, sometimes accepting stock as part of his sale price. The market went up a few points with this new investment. Broker/developer sold options or whole tracts to builders (often the same corporation, but with different divisions to disguise the huge profits being created), often netting two or three times the amount paid to Farmer. Broker/developer took gains and bought even more land, finding that the price of the adjacent farm had doubled or more, but so what, the tide was rising faster than a storm surge. Builder constructed bigger and bigger boxes and offered them for sale at terms offered by the mortgage lenders who could deliver money without any strings - nothing down, just show a driver's license, need not have a job or even a bank account, etc..... Builder could make 50% or more above the costs of construction in the deal, so making the boxes bigger and more costly was the game. At the closing, the mortgage lender delivered enough money to pay for this chain of excess and "open market forces". Most participants took their gains out of the game and borrowed from eager lenders the amounts needed for the next project, else sold stock at 20+ times the earnings, which was the best way - no more risk, pocket 20 times what last year's efforts produced. These were "hot picks" by all the Wall Street pundits, for years. Now, mortgage lender sold his package of papers to a broker, who assembled packages into big lots, then resold them to Wall Street firms who packaged them into even larger bundles and resold them as "Asset Backed Securities". Fannie Mae and Fanny Mack were among the largest buyers of these packages. Each step of the packaging process was paid for with fees and commissions, sometime amounting to hundreds of millions of dollars for a single transaction.

The end of this is in sight. The land, the buildings, the papers, all were overpriced and never worth what they were sold to the next level for. Taken together, it was a poncy game, a marketplace without any controls or barriers, left to itself and the "open market forces", including greed and corruption. The money is gone, to the Farmer, the broker, the builder, the mortgage broker, Wall Street brokerage, and the multi-million dollar bonus's paid to so many along the way. What is left is the paper, held by Fannie Mae and Fannie Mack, which has, today, been repurchased and guaranteed by the U.S. Taxpayers - that is, you and me, dear friends. We own the papers and, in the end, will pay for all the excess profits and the uncontrolled lending losses.

We can't blame anyone but those who brought this about. Start with the Conservative Movement that has worked so hard to remove its "enemy", the Government, from controlling the banking and financial markets. Include those who, without knowing what they wished for, have demanded that "open market forces" control the world's economies, including ours. Add in a senseless Administration and Congress that allowed the economy to become dependent upon the construction industry, the stock market and Wall Street brokerage. Every time we voted for one of these, or failed to voice our objections to their policies, we were counted as a supporter of the policies. We get what we deserve, what we asked for.

The questions before us are: What will we do about this at this time? Will we demand "change" from these failed policies? If so, what change , and who do we trust to implement it? Or, should we just ignore all of this and hope for a better tomorrow, believing that it will all work out somehow, as we have done for so many years? Had we held our elected of the past quarter century accountable for the results of their work I think we would be in a different place today. Instead, we have encouraged them to do nothing, to finger point and blame each other and to let the processes of Government become disfunctional. We have allowed ourselves to be led toward a state of feudal-like controls, where the very rich have control of all that is dear, and the rest drift toward ever-greater dependence on the feudal landlords, the corporations and Wall Street. It was from such circumstances that history's revolutions grew - the Magna Carta, the overthrow of crown heads in Russia, England, France, and other European countries, the American story began, and more. Better that we throw off this yoke now than later. We don't need "more government" or a "bigger government" but we do need a 21st Century Government that will function to encourage and protect the best interests of all the citizens of the Nation and discourage the abuses of the few who would work against these interests.

I must jump in. Good comments everyone. Whenever, you have a system where the incomes of individuals and companies depend on commissions and fee income, and you do not have the proper, guidelines, auditing, and accountability in place. You will always have fraud, deception and dishonesty.
It is human nature. There are so many to blame. Figuring it out can be like an enigma within a wheel
riding a roller coaster. I have the following comments

Mortgage Crash
1. The government by changing laws, and reducing accountability that were lobbied for by the special interest groups creating an atmosphere whereby large investment banks could create and sell hybrid products to investors. Some institutional investors should have been smarter, as they have the resources to say, hey this stuff is risky. But hey investors want bigger and better returns to satisfy there clients unrealistic expectations regarding returns. 2. The investment banks, now tell the lenders go ahead and make these wonderful loans and put people into houses even though they cannot afford them and even though God forbid really (not everyone should own a home). Did I say that. The investment banks say we will hold some on our books and some of the more ugly loans we will put in big big bundle of crap and sell them to poor schmuck investor. The investment banks say go ahead make that
SI (Stated Income loan) SISA (Stated income Stated asset Loan) NINA (No income No asset verification
loan), Teaser Rate loans, Pay option, loans ETC ETC we will sell them to all to our ignorant investors.
By the way that is why FNMA and Freddy reduce that guidelines. It was to keep up with the garbage guidelines that the investment banks created and operated under. 3. The lenders, ah the lenders. They now have an outlet to sell all of there wonderful mortgage products. CountryWide at one time had over 200 different types of mortgage loans and terms. How
many different ways can you say (fraud). Every lender in the country jumped on board. Because of all the money to be made. Because they new what ever loan they originated they could get sold somewhere. 4. The Broker. ah the broker, where else in the country can you go from being a used car salesman
making 30000.00 a year to being a broker and making 250000.00-500000.00 a year. And you can do it with no license and a criminal background just for fun. It is estimated that 50% of the brokers in Florida had a criminal background. Again no rules or accountability + money = fraud.

How does all of this relate to FNMA and Freddy. Just that there is so much blame to go around, From
Lobbyists, Politicians, Government, Investments banks, Lenders, brokers. And yes FNMA and Freddy
with there built in system of corruption, buying political clout. So where do we go from here. To be Continued.

I am not comfortable with dismissing this all as human nature reoccurring in predictable cycles. I heard some expert on NPR last night that the failures of Fanny and Freddy would have brought "a worldwide global meltdown of financial markets." All I've read and the reaction to earlier mortgage finance crisis points suggests he's likely correct. The stakes are too high to just sit still and fail to learn a lesson from this crisis. I also note that the trend is toward more instability as the financial sector becomes an ever greater part of our economy. It's now upwards of 20% of the economy when it was only about 10% two decades ago.

Any solution to these kinds of reoccurring "abuses" in the financial system must be structural. An effective solution must take into account human nature: greed. Greed for the individual may be perhaps soul destroying, but the capitalism system (and through it the quality of nearly everybody's life) benefits greatly by exploiting human greed.

There is no explanation for the risk-taking and almost maniacal focus some entrepreneurs have undertaken to build some of the most important institutions supporting our present quality of life. Carnegie, Ford, Morgan and Gates all worked extremely hard and risk all they had repeatedly to build institutions that would return wealth to them and indeed to all of us. Industrial organization, mass production, finance to allow both to occur and continuing application of scientific discoveries to the quality of everyday life by the marketing of technology are pretty powerful engines for our present well-beings. I don't see how any of these can be served by a system that doesn't exploit the human impulse to wealth-seek. Finally, open access to wealth-seeking is an engine for social renewal that would otherwise be obstructed by established class structures. To the extent wealth is reshuffled in society in each new generation, so too is political power.

I propose an historic analogy to the solution of the presently presented financial sector problems–democracy. Democracies in history always destroyed themselves. They either became dysfunctional by excesses of controversy; were undermined by majoritarian oppression of minorities that evolved into ruling class oligopoly or ceded their republican natures to some tyrant who never let the democracy come back.

Many examples of these failures were known to the American national founders. The structures they build into modern democracies to check those self-destructive propensities were liberal limitations on the reach of government–if inviolable rights prevent oppression then it cannot occur; and structural–fragmentation of powers through the system of checks and balances and federalism. By grafting these new structures on majoritarian democracy, a half-a$$ed workable system was rigged. It has proven fairly serviceable for 219 years.

In economics, the excesses of unbridled greed represent the human characteristic that must be channeled and mastered if capitalism is to avoid its occasional plunges into recklessness and the extreme social dislocation that can and do sometimes result. People far brighter than I, and far more vested in the capitalist structure than I, have predicted that such excesses will likely result in abandonment of capitalism itself at some point in the future.

But there is also another dynamic present resulting from greedy self interest: the interaction of wealth seeking with office holding. That interaction results in the undermining of any scheme that could balance greed and public welfare over the long term. This is the discouraging aspect of the problem.

But applying the same solutions that mastered democracies excesses, the means for striking a health balance of regulation of financial institutions can be provided by formal structures that consciously isolate conomic regulation from majoritarian impulses and from self-serving elected officials.

There are already public financial institutions constituted with this sensibility in mind–the "independence" of the Federal Reserve System for instance, but by-and-large the heavy carrying of regulation has been left to impulses of the political branches who prove over and over again they are not fitted to the job.

Jumping back to the democracy example, the tendency to undermine liberal rights has also been present in this nation's 219 year history. Yet, over the long run, the rights have been vindicated and (I know this will be hard for Bush haters to accept given his recent antics) grown as a restraint on majoritarian democracy. The First Amendment and the Right to Privacy are largely creations of the last half of the 20th Century; economic liberty is greater now than it was in 1960.

The long-term solution for financial regulation it would seem, would mimic the effective solution to democracy's fatal excesses: isolating power to regulate financial matter from direct majoritarian impulses and fragmenting it to reduce direct accountability to self-interested elected officials.

I just am not by nature a cynic or a pessimist. There are major problems in the financial system that represent major threats to the well being of billions of people on the planet. The "invisible hand" guided the speculators to bundle mortgages in a reckless ways to exploit an available market for the securities. As a result other markets were adversely affected–home values, direct mortgage sales. Common sense regulation would have prevented the excesses brought on by the new opportunity.

I do not see how we can expect persons of an entrepenural bent to ever pass on the opportunity to make billions of dollars when such opportunities are legal and available. We have to empower some agency with the means to protect healthy markets from splash back from reckless profit taking. And we have to do it in a way that isolates it from your godd@mn congressman.

Seems like we are getting off base talking about constitutional issues and wheater are founding fathers meant for us to be a democracy or not. Of course they did. Jess I agree with your comment below

"The problem isn't what the government did, but what private actors in markets did and will do again unless structures are put in place to isolate unrestrained speculative financial behavior from mature and secure functioning markets. "

The laws put into place by president Clinton regarding " partners in the American Dream"
and continued under president Bush with his ownership society goals. Were done with good intentions
of putting more people into affordable housing. The problem with many good intentions is that you cannot see into the future and what the end result will be.

Those laws brought into the market millions of more people that could now buy houses.
which created a upward spiraling market that went out of control. With money flowing upward to everyone. everyone made money. builders, Realtors, Brokers, banks, title companies, appraisers
investment banks, and yes you and I the investor.

Bill I have to disagree with your last statement. Since all money was flowing upward and ended
with the investment banks before being purchase by the investors. It was the investment banks
that saw the opening of reduced standards and took advantage of it and said they would buy all of the
sub-prime loans they could at higher rates and give investors a bigger return. Fannie and Feddy had to follow to stay competitive. Wrong move, wrong decision.

The problem as I see who was at the gate, who should have been controlling the flow of the water,
who could have stepped in and said this is getting out of control. Who could have said the market cannot sustain this kind of real estate value, we need to do something to slow this down to prevent
an inevitable crash. (although I don't think anyone could have anticipated how bad this is and will
continue to be for a long time.)

Socrates1 As bad and the fed and Greenspan missed this one. I cannot agree with you on getting rid of the Fed.
up until the last 5 years they have done a good job regulating the flow of money and getting
us through several recessions. However on this crises Mr Greenspan missed it big time.

It is one thing to put these initiative in motion, it is quiet another to control and regulate the process.

When ever you and something that is unregulated with no accountability and no rules and you have huge amounts of money and greed involved you will have financial disasters.

If you want to read an articale on why Fannie and Fredie ended up the way they did. Please

If you want to read an article as to why Fannie and Freddi ended up the way they did please go to the following.

While Obama is in a hotel in Florida.
He is practicing for the mano a mano meeting with his master.
You know priority is priority.