Sunday, August 7, 2011

What Just Happened? - A Financial Meltdown!

Barely one week ago; Washington was in a frenzy over the debate about the national budget and the national debt, Wall Street ratings firms were threatening to downgrade the credit rating for the United States, stock prices were on the way up, gold was at record levels, Republican House members were showing some spine, and the imposed doomsday deadline of August 2 was only days away.

What Just Happened? – Some Background -

The United States Government has been on a spending spree for several years. It is not all the fault of any one party or president - all are guilty! We have managed to rack up a record debt and continue to approve budgets with trillion dollar deficits. (The deficit is the amount of annual spending that exceeds annual revenue or income.) Since President Obama took office, we have been adding to our record debt faster than at any time since at least World War II. (The debt is the accumulation of all of the excess spending, or deficits and represents the amount of money the Government has borrowed in order to keep up the spending levels. The debt is the amount of money the USA owes from borrowing.) Politicians have been using our tax money for pet projects and political favors. Government has added more entitlement programs and expanded the coverage for existing programs. (Entitlement programs include: SNAP (food stamps - now with 45,000,000 receiving benefits, which is around 15% of the population), unemployment benefits (with 9.1% of the workforce unemployed and receiving benefits), social security, Medicare, Medicare prescription program, Medicaid, housing or rent assistance, Pell Grants, free lunches at school, cash for clunkers, rebates for insulation, Earned Income Credit, Child Care credit, and many others.) (Side note: every one of these entitlement programs is unconstitutional.)

Besides all of the spending for these programs; we were told in 2008 that they must pass TARP (Troubled Asset Relief Program) in order to avert, not only a national but an international financial collapse. This bailout bill had a price tag of $700,000,000,000. In order to help sell this massive bailout bill to the public, we were told that a large part of the money would be used to buy troubled assets from financial institutions. A troubled asset was a foreclosed home (REO). The plan was for the Government to buy thousands of foreclosed homes and get these assets off of the books of the various lenders and agencies. This would improve the lender's bottom lines, make the banks more stable and help the general economy weather the real estate meltdown. The homes would be held until the real estate market recovered and then sold a little at a time, not flooding the market with REOs. We were even told that in the long run, we should make a profit off of these home purchases due to selling them after a recovery. The bill passed and no homes were bought. Many banks went under and the $700 billion was used to bailout Wall Street firms - banks, insurance companies, etc.

Around that same time we were also called on to bail out Fannie Mae and Freddie Mac. We also purchased controlling interest in major corporations such as General Motors and Chrysler. Remember, we had to, the sky was falling and they were "to big to fail".

As soon as Obama became president, he insisted on a stimulus bill, the "American Recovery and Reinvestment Act of 2009". This had a price tag of $787,000,000,000. He promised us that if this passed, it would be used for "shovel ready jobs" and that the unemployment rate would not go above 8%. Again, if it did not pass, the sky would fall. Earlier this year, Obama had to admit that "The shovel ready jobs weren't so shovel ready after all." That statement got him a big laugh. The trouble is that the stimulus did not stimulate the economy. Instead, we wasted the money, much of it going to organizations or projects that had a political benefit for Obama and the Democrats. It also only took a few months for the unemployment to exceed 8% and it has stayed near or above 9% since then.

During the campaign leading up to the last election, Republicans were just about as conservative sounding as anyone you have ever heard. If we just elected them, they would go and do the dirty work to get our financial house heading back in the right direction. Also, during the last election cycle, neither the President nor the Democrat controlled Congress put forth the required budget for the 2011 fiscal year. Why? Because the spending was out of control and they did not want to expose just how much was being spent prior to an election.

In November of 2010, the Republicans won numerous elections and gained numbers in the Senate and took majority position in the House of Representatives. Not only did Republicans win big, but many of them were Conservatives who promised to tend to the business of limiting deficit spending, getting control of rising debt and basically attempting to stall the Obama agenda until he has to run for re-election in 2012. The power the Republicans hold in the House amounts to their Constitutional mandate to have primary responsibility for financial matters and the ability to vote "NO" on other items in Obama's agenda. They hold the power to stop what was going on in Washington.

Almost immediately, after the election and even before the new Representatives were sworn into office, the effect of the mandate in the elections began to take root in Washington. All of a sudden the Republicans had a seat at the table, after being ignored for two years. First on the agenda was the extension of the Bush Tax Cuts. As Obama could see the writing on the wall, he began making speeches about how "we" had to get the country's finances in order. We had to deal with the deficit spending, etc. He was stumping as a fiscal conservative. Obama said that we cannot raise taxes on Americans during a recession. In conjunction with a two-year extension of the tax cuts, the Democrats and the President went along with some spending cuts. Republicans promised us that we would get $100 billion in spending cuts for the current year where there was no budget. Then we heard that it would be around $65 billion in cuts. The explanation was that the $100 billion was being pro-rated to reflect the fact that part of the fiscal year was already over. By the time the negotiations ended and an agreement was signed into law, we were told that we had a major victory and achieved large spending cuts during the next decade, but only small cuts for this year. There is just one small problem. A current Congress cannot bind a future Congress to their agreed upon cuts to a future budget. So, future cuts rarely happen.

The debt ceiling for Government borrowing of $14.3 trillion was going to be reached in late April. We watched in anticipation of a debt duel. Without Congress voting to raise the limit, the government would be prohibited from borrowing more money. As the average monthly spending includes over $100,000,000,000 ($100 billion) in borrowed money, this presented a showdown over fiscal policy and responsibility.

Miracle of miracles, the Treasury Secretary "found" a bunch of money that would tie us over until August 2, 2011. That became the new, drop-dead date by which the debt ceiling must be raised to avoid defaulting on our national debt and the downgrading of our national credit rating (which was AAA - the highest possible and it had been at that level since World War I).

What Just Happened? – Recently -

With about one month remaining before the deadline, the discussions took on the highest level of importance in Washington. The rating agencies warned that the credit rating might be lowered if the right steps were not taken. The "right steps" were to be a serious plan to lower the deficit, control spending and begin dealing with the massive debt. However, the Democrats got in front of the TV cameras and told the public that we could lose our credit rating if the debt ceiling were not raised.

We were constantly warned by the Democrats that the Republicans would cause our first ever default on our loans if they did not "compromise" and raise the debt ceiling. At first, the Republicans appeared to be holding strong. Conservatives were reminding them as to why we sent them there and encouraging them to be strong and hold the line. They kept reassuring us that they would not give-in to the wishes of the Progressives.

President Obama never presented a plan to deal with the financial problems. The Democrat controlled Senate never presented a plan until the final few days. The Republican controlled House presented several plans and budgets, all of which were summarily rejected by Senator Reed and President Obama. The Democrats kept telling the Republicans that they have to compromise and come up with a better plan. So, the Republicans kept compromising with their own plans and continued to give a little here and a lot there. The result, each time, was rejection and another order to go back and compromise some more. In the mean time, Obama and Reed made speeches as to how the Republicans were on the verge of causing the first ever default on our debt and downgrade of our credit rating.

Obama insisted that any deal must expand the debt limit enough to cover deficit spending past the 2012 elections. He also insisted that any deal include tax increases. He made speeches about the outrageous deficits, even though much of the deficits are the result of his policies and programs.

The Republicans insisted on a shorter term deal for raising the debt limit, one which would cover around eight months of spending. During this time, they wanted more serious debate over limiting spending. They also insisted that any plan be tied with a vote on passing a Balanced Budget Amendment (BBA). They insisted that any deal would not raise any taxes.

Two weeks ago, the House passed a bill to deal with national finances and get a BBA passed in Congress. The Senate never even voted on the bill, but tabled it so it would have no debate. At the last minute, Harry Reed proposes a Democrat plan. On Monday, August 1, the House voted and passed the Democrat plan. Later, the Senate voted and passed the same bill, which Obama signed into law on August 2. We were told that the "Tea Party" conservatives won a major victory in this deal. We heard how the Left was upset with Obama and the Democrats for giving the Republicans too much. We were told that the deal has no tax increases.

The "deal" immediately raises the debt ceiling nearly one trillion dollars. It includes spending cuts of around one trillion dollars over the next decade. The actual cuts, we were told, in the 2012 budget are around $25 billion. The rest, we are assured, we will get in the future. (Remember, future cuts almost never happen as this Congress cannot bind a future Congress.) The deal also sets up a Super Committee made up of six (three from each party) from the Senate and six from the House. The tie-breaker is Obama. This committee has been given the responsibility that belongs to the House, to come up with another trillion in spending cuts over the next decade. When a majority of this committee (7 out of the 12, or 6 + Obama) has a plan, each house of Congress gets a straight up or down vote. (That means there will be no changes, no amendments, etc.) If this process results in the trillion of agreed cuts in the future, Obama gets another trillion dollar increase to the debt ceiling. If they cannot reach agreement on spending cuts, the current new law includes a "trigger" to enact a trillion in cuts with half being in the Department of Defense. Then Obama gets another, immediate trillion dollars in debt increase.

Republicans do not want cuts to Defense, so this puts them in a tough spot with one Republican possibly having to go along with the Democrats choices of where spending will potentially happen in the future. The Democrats have no pressure to go along with Republicans as they do not mind the trigger cuts to Defense.

As soon as we were told that there would be "no new taxes" in the new law, Reed announced that the only way the Super Committee will be successful is for there to be tax increases equal to spending cuts. So, not only will the Left insist on more taxes, but the Bush tax cuts are already scheduled to expire in less than 18 months. That alone will amount to the largest tax increase in American history.

So, this big victory for the Republicans boils down to a debt limit increase of over two trillion (to a total of $16.4 trillion within two years), unhindered spending for Obama until after the next election, more taxes on Americans; but, a promise of future cuts in spending.

A large group of Republican House members gave up the fight and voted for the Democrat’s plan when it came down to the deadline. One of the main excuses we are being told is, "The Republicans only control one half of one third of the Government." In other words, we have only the House in the Legislative branch of the three branches of government. Sorry, but that is no excuse! The Constitution gives the responsibility for determining spending and revenue measures to the House. Neither the Senate nor the President can force the House to pass anything and they cannot pass anything without the House going along. If they had stayed strong and said NO, at some point the Left would have actually had to consider a "compromise". That did not happen and the Left got just what they wanted.

On Tuesday, August 2, 2011; Obama signed into law the bipartisan deal. The media is busy trying to convince the country that the Tea Party conservatives were the big winners.

What Just Happened? – The Reaction -

Wall Street - Dow Jones Industrial Average plunged over 500 points in one day.
The Federal Reserve begins talking about QE-3, the printing of more dollars to inject into the economy, which will cause inflation.
The Treasury sells a large chunk of the debt allowed by the new debt ceiling increase and almost brings national debt to as much as our GDP - Gross Domestic Product (the total amount of goods and services produced in American in a year).
The Dollar continues to decline in purchasing power (inflation).
Standard and Poor's downgrades the national credit rating from AAA to AA+. That may not look like a big deal, but it is. It is the first time ever for America's credit rating to be downgraded. This is likely to result in higher interest rates for Americans. As the announcement did not happen until after the markets closed on Friday, it is not clear as to how they will react on Monday. There could be another, massive sell-off of stock.
As confidence in the U.S. and international economy falters, early market selling of gold has pushed the price per ounce to above $1,700.

Reed's reaction to the S&P announcement: It just proves that the Democrat plan is right and we need to raise taxes.
The White House reaction: “This was a hasty decision based on faulty math.”

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