Last week, I pointed out how people who were suggesting the continued decline in the Stock Market was somehow due to a lack of confidence in President Obama, had NOTHING to base their theory on. Instead, I pointed to reports of continued banking failures that began under President Bush were responsible for those declines (such as the revived financial woes of AIG reporting a record $61.7B in just one quarter and would be seeking another $30Billion in addition to the $150 billion they had already received. That record job losses in January… Bush’s final month in office… continued through February should come as no surprise to anyone. As of last Sunday, Barack Obama had been President for a grand total of 47 days. Polls show “the Recession is Obama’s fault” meme is not gaining traction with anyone but the most deluded hardcore Right-wingers, so the Republican “finger of blame” that points ever-outward is pointing more & more towards the election of a Democratic majority in Congress in 2006.

The story goes like this: “Before Democrats took over, gas was $1.50/gal (nonsense, as I pointed out last week, it was over $2.40/gal), the stock market was over 12,000 (yes, and hit a record 14,000 points six months later on July 19, 2007) and there was no “banking crisis”. To hear Republican’s talk, you’d think everything was going just great when the American people voted for Democrats overwhelmingly in the 2006 midterm elections. But as for that “no banking crisis” nonsense, I did a little research and found a few headlines:
Financial Stocks, Funds Down but Not Out
While Rising Rates, Regulatory Ills Take a Toll, the Long View Looks Better

By Chet Currier
Bloomberg News
Sunday, May 22, 2005;

As ugly as early 2005 has been for stocks in general, it has been worse for owners of financial stocks and financial services mutual funds.

Through May 13, the average among 45 financial sector funds tracked by Bloomberg posted a 7.5 percent loss. That compares with an average 5 percent decline suffered by stock funds of all types.

No surprise, given that the Federal Reserve has been steadily raising short-term interest rates. This tends to squeeze the spread between a financial intermediary’s cost of money and what it can earn from putting the money back out to work.

“As much as the financial world may like to blame the Fed, it’s not the only reason the group has struggled,” said Brad Sorenson, an analyst at Charles Schwab & Co. Until very recently at least, “there’s been a complacency toward risk in the marketplace, reflected in corporate credit spreads that have narrowed over the past two years. During this period, financial institutions chased yields and lowered credit standards.”

Regulatory controversies of one kind or another have jolted the shares of several big financial companies. According to Bloomberg, mortgage giant Fannie Mae is down 24 percent from Jan. 1; its cousin Freddie Mac, 16.8 percent; and American International Group Inc. (AIG), 20.6 percent.

Brother, can you spare some credit?
Credit derivatives: Capitalism’s magic bullet?

Andrew Leonard
Apr. 13, 2006

So, basically, the idea is that the more risk is spread out through the financial system, the less likely it would be that a single shock could precipitate a widespread credit crisis. Indeed, the authors of the IMF study say, there is evidence that the maturing of the credit derivative market is already smoothing the ups and downs of the credit cycle — a historically observable pattern in which, over time, credit gets harder and then easier to obtain.

But there may be a couple of problems with the IMF’s generally rosy assessment, underpinned, as usual, by the belief that letting markets handle problems with the least amount of government interference possible is the best way to maintain stability. As a monograph published by the Levy Institute in January notes, the new era of credit derivatives has never been tested by a serious downturn. Many of the largest players, such as hedge funds, are only lightly regulated and highly secretive. Last year, the mere downgrading of General Motors and Ford’s corporate bonds “stunned the credit derivatives market,” says economist Edward Chilcote, causing hedge funds to lose hundreds of millions of dollars. In a real economic downturn “a possible scenario is that many hedge funds will fail simultaneously from exposure to credit derivatives, and banks will rush to buy contracts to cover their exposure. A declaration of bankruptcy by a major corporation would put further pressure on the credit derivatives market. The market might become illiquid, and the potential for a cascade of losses could rise.”

By mid-2005, concern over the credit market was growing over what rising interest rates and excessive deregulation might do to the credit market. Fannie Mae and Freddie Mac (the GOP’s Whipping-Boy for Wall Street irresponsibility) were already tumbling in the stock market.

Long-time readers of Mugsy’s Rap Sheet will be familiar with my frequent concern over interest rates. Massive borrowing by Republicans to fund the Federal Government while simultaneously cutting taxes (what Bush Sr. called “Voodoo economics” when he ran against Reagan in 1980) quadrupled the National Debt under Ronald Reagan (from $1T in 1980 to $4T by 1988), but the problem literally EXPLODED under George W. Bush cutting taxes in a time of war, adding an additional $5TRILLION… more than all 42 previous presidents combined (including Reagan)… to the National Debt (from $5.7T to just under $11T today). The more you borrow, the more of your tax dollars are spent simply to pay interest on the debt so that other countries (and Americans buying bonds) will continue to loan us money. That’s fewer tax dollars available to spend on things from health care and police to explosives detectors in airports and tighter security around chemical and nuclear plants. So the government must keep interest rates high enough to attract foreign investment, without raising them so high that people spend less and save more by putting their money in the bank for the high interest rate, thus slowing the economy. It’s a delicate balancing act.

Problem is, under Bush, the economy got SO bad, they cut interest rates to the bone (a record low 0.25%) to encourage spending… usually on big-ticket items like cars & houses. (see where this is going?) But with bills to pay and less tax revenue coming in, the Bush Administration was forced to raise interest rates even while the economy was still struggling to keep its head above water. Quickly, people that bought homes with “Adjustable Rate Mortgages” (ARM’s) suddenly saw their payments double & triple. People, no longer able to afford to pay their mortgage, were defaulting on their loans and going into foreclosure. Banks, losing Billions, stopped loaning money, hurting the car market… which was already hurting because the Bush Administration’s rollback of economy standards made the automakers top-heavy with low mileage SUV’s when gas prices crept up to $4/gal (explained last week). Cars became more expensive at a time when sales were already slowing.

* Kaboom *

And Republicans want you to believe “it’s all the Democrats fault”. Republicans fall for this nonsense because of a convent form of political myopia* where they cannot accurately remember what happened more than three months ago or foresee the consequences of their actions in the immediate future (see: Iraq).

And on an unrelated note, it’s was bugging me for quite a while: “Why am I having so much trouble feeling comfortable with Treasury Secretary Tim Geithner?” Maybe this has something to do with it:

Tim Geithner and Dr. Jack Kevorkian
Tim Geithner and Dr. Jack Kevorkian

I’m sure it hasn’t helped reassure anyone that President Obama chose someone that resembles “Dr. Death” to rescue the economy. 🙂

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