Economic Crisis Averted, Temporarily!

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Three days ago, the world took a half step that had one foot on the cliff and other other over the abyss. Fed Chairman Bernanke, Treasury Secretary Paulson, and Congressional Leaders gathered in an emergency meeting and observed to the shock of many, the other foot stepping into the abyss. They agreed in unison and immediately to pivot the dangling foot back onto the cliff side. The abyss was a run on money market funds around the globe, which was poised to take place in hours or days, at most, creating a global financial meltdown.

The Big Picture.

What has transpired however, since yesterday morning, in avoiding the abyss can be compared to a vehicle's driver suddenly recognizing an imminent head on collision with a tractor trailer, and swerving the vehicle off the road and away from head on collision. What lies ahead of the careening vehicle running off the road is now what leaders are trying to determine. Is the vehicle now going to smash into an Oak tree, a lake, a group of celebrating innocent bystanders, or come to an uneventful stop in a level, dry cow pasture, harming no one and nothing?

The answer to the last question can be partially answered, now. What lies ahead of the careening vehicle is not a level, dry cow pasture. This careening vehicle has not left the pavement in a rural area of Kansas. It left the pavement in the heart of Manhattan, New York, and there is no distance to slow down before colliding with something else.

That's the big picture of what is happening for those who would be lost by a detailed explanation of the financial mechanics of what is happening. But, for those capable and willing to follow, the major details are worth grasping.

The Beginning.

Lisa Lerer explains in March of 2008 one of the crucial causal factors of the current near miss, meltdown:

The general co-chairman of John McCain's presidential campaign, former Sen. Phil Gramm (R-Texas), led the charge in 1999 to repeal a Depression-era banking regulation law that Democrat Barack Obama claimed on Thursday contributed significantly to today's economic turmoil.

"A regulatory structure set up for banks in the 1930s needed to change because the nature of business had changed," the Illinois senator running for president said in a New York economic speech. "But by the time [it] was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework."

Gramm's role in the swift and dramatic recent restructuring of the nation's investment houses and practices didn't stop there.

A year after the Gramm-Leach-Bliley Act repealed the old regulations, Swiss Bank UBS gobbled up brokerage house Paine Weber. Two years later, Gramm settled in as a vice chairman of UBS's new investment banking arm.

Later, he became a major player in its government affairs operation. According to federal lobbying disclosure records, Gramm lobbied Congress, the Federal Reserve and the Treasury Department about banking and mortgage issues in 2005 and 2006.

Make no mistake, for Sen. Phil Gramm to be successful in this effort required a Congress and President with the ideological belief that government oversight and regulation were an impediment to wealth creation and long term economic health. Gramm found such favorable views in a Republican controlled Congress and Pres. George W. Bush.

By January of 2007 when Democrats took back control of the Congress, the damage to our future financial systems had already taken place, as the markets around the world had engaged in years of trading asset backed paper in an environment of real estate transactions in which buyers were not financially qualified to carry the mortgage burdens they signed for, and an environment in which property valuations had reached bubble proportions. All that was needed to bring the crisis to the fore was a major financial institution failing to demonstrate adequate financial resources to cover its falling values in mortgage backed paper assets.

By Fall of 2007, one year ago, it became clear to many that this trigger of a failing financial institution and the cascade effect it would have on other financial institutions was inevitable. The Democratic controlled Congress had been in power for only 6 or 7 months when this awareness began to spread throughout Wall Street and Government circles.

The Political Dilemma.

Once Congressional politicians, The Federal Reserve Board, and the Bush Administration acknowledged what was happening last Fall, th

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This page contains a single entry by David R. Remer published on September 20, 2008 8:32 AM.

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