March 2008 financial meltdown

The March, 2008 Financial System Problem.

What happened? What should be done? / By: Martin Carbone

The current financial system meltdown seems to boil down to the following.

We have:
(A) a commercial banking-money system that is run by the Federal Reserve System,
(B) an investment banking system and
(C) a wall street shadow system that generates and works with all sorts of paper products which are quasi-tied to the money system. (see this article of 5/5/08, "Success Breeds Failure" from the NY Times wherein Paul Krugman discusses the need for legislation of this shadow system)

(A) is pretty much controlled by Banking Laws and various Regulations from HUD and the FDIC (the agency that controls bank deposit Insurance).

(B) and (C) are barely controlled by very weak and hardly enforced regulations. This is primarily true -- because hardly anyone understands the paper-products. (see http://www.nytimes.com/2008/04/27/business/27every.html?th=&emc=th&pagewanted=print where Ben Stein discusses the problem in a NY Times article.)

(A) has been historically looked at as needing laws, regulations and controls -- because the general public is involved in the transactions -- primarily business loans and private mortgages, and the general public needs protection.

(B and (C) have not been covered tightly because the players were large wall street firms who (a) should be able to protect themselves and (b) who resisted controls.

It now turns out that many of the paper products generated by (B) and (C) are essentially worthless and everyone who holds them are at risk of going broke.

The companies involved in (B) and (C) and some government officials are now arguing that they should not be allowed to fail because it would destroy (A).

I think that argument can’t be true. I think it is a smoke-screen. (A) should have been and probably is isolated from (B) and (C). Just because an investment bank is called a “bank” and the FED can lend them money created by the FED - it should not be considered part of the commercial banking system and should not be considered worthy of protection by the FED. The wall street firms and investment banks should be allowed to fail. And if any commercial banks are holding those “bad” paper-products, they should be allowed to fail too.

There is no real loss here. The only thing that can be lost is the value of the ill-generated paper products. And they did not have value in the first place. If regular commercial banks sold their good mortgage paper for overvalued paper generated by wall street and investment banks, they should demand to be made whole (by legal action) by wall street and the investment banks. If the investment banks and wall street firms go bankrupt and can’t pay -- that is simply too bad for the commercial banks.

If there was fraud or improper action by wall street firms or the investment banks -- that should be punished by appropriate commercial and business laws, including (a) restitution of money illegitimately siphoned out into private accounts and (b) prison terms.

The homes covered by the original mortgages are still there. They have not lost any of their true value as a home (a place to live). The country as a whole has not lost any true value.

The mortgage default problem should not be mixed up with the issue of the losses by wall street and the investment banks.

Only the commercial banks who lent money to the home buyers should be allowed to foreclose on homeowners. If the investment banks and wall street firms who now hold the mortgages try to foreclose, they should be challenged by the commercial bank involved on the basis that the investment bank’s payment was made with paper generated by fraudulent methods. The FED should side with the commercial banks. If that argument holds in court, the commercial bank will be made whole -- by getting back the original mortgage and they can work it out with the home-buyer -- or selling that mortgage for legitimate payment to the FED.

I think the public -- you and I -- have a right to take the Federal Reserve System to court and demand that they do not bail out the Wall Street Firms and the shadow system. The FED has no right to create money for that purpose. They are, it seems to me, obligated and restricted to use their created money to help regularly chartered banks.

Does anyone on this list know of a pro-bono law firm that would like to accept the challenge of taking the FED to court?

I look forward to a discussion of this issue. Does my presentation make any sense to you? Where do we go from here?

Marty Carbone