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Financial news I consider important, with my opinion, which is worth as much as you paid for it.
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Sunday, November 2, 2008

Blame Republicans or Democrats?

Going into the election November 4th, there will be plenty of buzz on "blaming" one party or the other for the financial situation the US is in. The truth is in the USA BOTH parties are to blame for creating the financial disaster the US is facing.

Also, not just the US but the world is to blame. The USA may have set the stage, but the world followed, without question, in our footsteps. All over the world, easy money and loose regulation, combined with bad accounting practices conspired to create the toxic financial cocktail we are witnessing.

I can honestly say for the first time in my life, I don't have a passion for either candidate. I have, however, historically voted Democrat for President. Maybe someday I'll post a long rant as to why, but that's a different topic.

But in the end, there is "always" one side with "more blame" than the other. Let me explain in simple terms how I see how the US got here.
Unfortunately, I don't have the time to create links and supply research to support my claims. Feel free to post a comment to support links to support or tear apart my claims here.
I'd like to someday get back to this article and create the supporting documentation.
US Financial Disaster Ingredients

USA Setup to be a Weak financial nation, a debtor nation.
First, both parties are to blame for setting the country up as a debtor nation. Under Reaganomics, the US debt skyrocketed. Under Clinton, the government was shut down with President Clinton trying to force the republican congress to agree to his fiscal budget with objective to balance the budget, which he successfully did in 2000.
However, Democrats have throughout the course of the last 30 years have also been guilty of not standing up and forcing fiscal discipline. Although under Bill Clinton, the US debt was reversed, and significant cuts in government occurred. (click) The Democrats, "under the cover" of a Republican president also partook and in pet causes feasted on the fiscal debt spending.
Under George W. Bush the nations debt started at 5.5 trillion, and in 8 years jumped to close to 13 trillion. Think about that, from George Washington to Bill Clinton, total USA debt 5.5 trillion. Added 6.5 trillion in 8 years. Wow. And that DOESN'T include the debt the USA will spend the next year due to this fiscal disaster, or the 6 trillion now guaranteed by feds for Freddie Mac & Fannie Mae.
Blame: This fact alone makes me place "blame" 50.1% republican, 49.9% democrat.

USA in sub-prime loan business
The government in 1998 (ish time frame) setup mortgage program to ensure "all Americans" have easier access to loans. The government offering capitalist products, such as mortgages IS a problem. It by its basic nature places cost/risk onto the tax payer instead of the public sector. This effort/program was primarily Democrat pet project.
In first term of George Bush, there was massive cuts in all sorts of "pet democrat" projects occurred, and repealing pollution restrictions back decades. The Republicans did NOT use their superior numbers 2000-2004 to stop the sub-prime lending backed by federal dollars.
Blame on this one goes to Democrat, 90% vs Republican 10%

Easy credit & low interest ratesAfter 9/11, the republican administration (and at that time congress) backed efforts to stimulate the economy. At no time between 9/11/01 to today has the government discouraged "low interest rates" as spurring artificial high prices for housing and other financial "investments". In addition, due to Republican pushes to "deregulate" the industries (across the board), the US government for the most part took a hands-off approach to businesses. Private businesses reaped in huge bonuses, stock prices, and earnings. But as we know now, much of this in the real estate related businesses wasn't REAL earnings, it was fraud through mis-placing risk, low interest rates, and easy credit due to the government not taking a critical eye on the activities in the market place.
The reality is both parties feasted on easy money and neither raised any serious objections.
Blame 50/50 on this topic.

Accounting outright FRAUDThe USA does NOT follow world standard accounting practices. Even given with all the problems listed above, none of these issues could have created a world-shattering event without the help of "magic" accounting.
If accounting was true and honest, the fraudulent acts being committed would have been realized years ago, preventing the events from spiraling as high as they did. This means we would not be facing world economic disasters, but rather a milder downturn as companies realized losses years ago, stopping the economic inflation juggernaut.
The USA changed accepting accounting practices in place since the Great Depression. That is that banks COULD NOT invest in high risk investment vehicles. Further, bank investment vehicles are prices "mark to market" to assess their true value.

Two key things happened.
1) Mortgages where allowed to be "repacked" as tranches in "mortgage back securities", rated like bonds (guaranteed income). These tranches had insurance purchased to "cover" any unforeseen losses thereby making the security AAA. Further, these securities where not valued by open market valuations, but use "computer models". This is a bit like me writing a program stating my car is work 2 million dollars, then selling securities based on my car's listed value. It doesn't make it real if a "computer" says so. Only what people will PAY for an item makes it real. If computer models worked matching reality, I'd be playing WOW 24 x 7. :)

2) Mortgage backed securities where treated like an asset, on separate books, called "level 3" assets. Basically there is credit & debit columns that are used to asses a company's value. Then additional "value" on a separate set of books.

The combined two items above have allowed companies to become insanely over-leveraged, over-valued, and taking higher risks than was priced into the companies.
The result is execs and stock prices where over-inflated through MISREPRESENTATION OF RISK.

Consider this, if I purchase a AAA rated bond at 40% return on investment, and my company generated record profits, yielding me 40 million dollar bonus, only to find out months or years later that AAA bond was reassessed as junk and therefore that's how it had such great returns, and fails, my bonus was based on FRAUD not reality. High rewards is almost always because of high risk, low risk equals low returns.

Legal or not, that's the REALITY of what has occurred. Further Bush administration has rejected funding of FBI to investigate criminal charges involving mortgage debacle.
What is now occurring is deciding who EATS the cost of mis-placing RISK. And so far, it seems the TAXPAYER is going to foot the bill, everywhere. Either through the government spending or the populations 401k & pension plans. The relative few who profited from this scheme are doing great, they got their payout.

This one I specifically place on the Republicans, since this outrageous fraud occurred at the start of the Big W administration. Democrats I am sure where involved, but under GWB, the industry was given free reign with almost no oversight or criticism from the government.

UPDATE: GWB refused funding for FBI to investigate fraud in mortgages, AFTER collapse.

Blame: This one score for Republicans 80%, democrats 20%

Failure of the Media to "Critique" USA actions
Unless you spend 20 hours a week reading newspapers, and occasionally diving into your own hands-on research, it would be nearly impossible for the average person to be "Aware" of the situation the USA was placing itself in 7 years ago. So the question begs, why didn't the media sound the alarm? I personally witnessed interviews from Robert Reich and other prominent authorities years ago that this would occur. But mainstream media didn't pick it up as a major news item.
Reason? There are not enough varied media sources. Before Ronald Reagan, there was greater separation of media sources. Reagan passed a law allowing media to converge, resulting in 80% of the information you hear or read to come from 5 sources. (down from 50).
Blame: 51% Republican, 49% dems, mainly since the Dems under Clinton didn't reverse this course.

USA collapse & Additional Government Spending
THE reason why we are seeing the USA (And world) failing is mainly due to the accounting fraud the government allowed. The US has created less transparency, allowing trust to degrade, and companies to blow up as reality hits the fantasy created.

But now the losses are occurring, we are socializing the losses.
Blame: I give this 51% republican, 49% democrat. Its close, the only reason why I didn't do 50/50, is the actions of GWB's Treasury and Federal Reserve.
The 700 BILLION dollar package is both parties fault, but the spending occurring beyond congress's agreement is under the Republican Administration, Bernanke & Paulson

In summary, given the issues as I see it above, I place "greater" blame on Republicans than Democrats. But in the end, both are at fault for not raising the alarm and acting when each had superior numbers in congress in the last 8 years and acting to reverse course. So greater blame, really is more of a topic in a corner bar debate. However, as a voting guide, I plan to vote against any congressperson that voted for the 700 billion dollar bailout, effectively socializing private losses. In addition that money will be used for buyouts of other companies and paying off foreign companies losses.

For a list of how your representatives votes, click here.

As for either president, either one will face what is now looking almost certainly to be a Depression due to the actions being taken now. Either will face huge debt that they can't pay for. I am torn between Nader, McCain, and Obama for completely different reasons. I'll reserve my comments on which to vote on from my perspective.
I just wanted to lay out the "blame game", as I see it, to be clear on the ownership of the situation. However, voting should have little to do with past blame, just on better future.
In the end, the US public is to blame, for not paying attention to what their representatives where doing in office. And the USA elected GW Bush twice, so his actions and policies where the American will. Lets hope we can do (not just believe/faith the USA deserves) better.

Back to finance and out of politics for this blog.
(image source)

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