Model Portfolio eugeneg:EMF

The falling/failing economy falls at the feet of this current administration. No one can argue that prior to the massive tax break Bush signed into law in 2001 and the constant interest rate cuts, cumulating in 2005 at 1% caused this current situation. This administration should have gone the hard course of higher interest rates and tougher scrutiny of loans, but instead it decided to play Russian roulette with our country and its citizens and it has lost big time.

What this administration should have done in 2001 after the initial market down turn, was to let the market correct its self, and not interfere. So in their infinite insanity they did the complete opposite. They lowered short term rates consecutively until it reached 1%. Then they decided to cut taxes and give back to the country 1.2 trillion dollars. That broke down too about $600 per person. Most of that money went into paying off debt and not into spending. They believed that these measures would stimulate the economy, it didn't have that effect, but in their shortsightedness they failed to see the ramification s of people to taking out loans against their house for the purchase of new cars and TV’s. This spurred on the real estate bubble to the point that it had grown soo obese that it could no longer sustain its own enormity. People began buying homes they could never afford and not putting a penny down to do it. This forced homes prices every higher into a world never seen before. People cashed out money from their equity to finance trips, cars, TV’s, you name it and all the while sinking further into credit debt, but all the while the Government failing in its duty over see the housing market making sure people were not getting over jubilant, like the housing prices will never fall.

When the Fed finally saw that this economy was slowing they started raising interest rates again. However, most people refinanced their loans many times for lower and lower rates, but these rates were starting to readjust based on the 10 year T-Bill. That yield kept creeping up and up, and the Fed began raising the short term rates. So by 2007 there was a perfect storm brewing. Shady lending practices by the likes of Country Wide, and the packaging of CMOs, caused the first ding in the amour of this bubble back in October 2007. Country Wide reported losses due to bad loans and that was the first kink in the armor, but that was enough to start the balling rolling. By January, 2008 the end was in site. One after another, Banks and Financial Institutions began reporting their numbers for 4th Q 2007. One by one they all were reporting large write off’s and large losses.

Investors began selling and selling. The market tumbled from a high of 14,300 in October to about 12,000 in June. Then came even worse news, housing prices had begun falling and only then had housing prices and housing start numbers had been reported. Investors took that as another sign of a weak economy and began selling. By the end of the summer 2008 the market was hovering around 10,500 and prospect of higher inflation, higher unemployment numbers, the near failure of Freddy and Fanny Mae, AIG and the collapse of Lehman Brothers caused the market to fall 2000 points in 9 straight trading days. By October 9, 2008 the Government decided to step in and help out the banks by authorizing the purchase of all the bad mortgage debt to the sum of 700 billion dollars. However, even at the most critical time in this current market the Government could not agree on what or how or if it was even necessary.

By Mid November it was reported that the big three auto makers were seeking 25 billion in a rescue package to stay afloat. Their testimony was mocked in the media, because the CEO’s all flew on private jets to ask for money from the Congress. This pushed the market down even further to a point it hasn’t seen since the mid-90s.

This entire financial debacle was set in motion by the band-aid type government that the Bush administration had been practicing. Instead of taking the harder road to economic stability, they took the easier road that built a shoddy house of cards that has fallen and caused a mini-depression in the market. Henry Paulson has infuriated many members of Congress because he has gone back on his word to buy bad debt, and instead has given the money to the banks directly. His explanation was that it was to stimulate the credit market, but these banks have been hording the money and only lending in some situations. Paulson should be charged with lying to Congress and Bush, well there is nothing we can do to him now. He will go down as the President that brought down Wall Street.

As for the economy, it will take a lot of work and time to get this thing working again. More regulation will be needed in the housing market and the bad mortgages will need to be bought by the fed and renegotiated to their current prices or maybe a total forgiveness to borrowers.