Systemic Failure

Systemic Failure
By Patrick J. Buchanan
March 20, 2009

As the U.S. financial crisis broadens and deepens, wiping out the
wealth and savings of tens of millions, destroying hopes and
dreams, it is hard not to see in all of this history's verdict upon
this generation.

We have been weighed in the balance and found wanting.

For how did this befall us, save through decisions that brushed
aside lessons that history and experience had taught our fathers?

It all began with the corruption called sub-prime mortgages.

The motivation was not wicked. Democrats wanted to raise home
ownership among African-Americans from 50 percent to the 75 percent
of white folks. Rove Republicans wanted to do the same for Hispanics.

Banks were morally pressured by politicians into making home loans
to folks who could not remotely qualify under standards set by
decades of experience with mortgage defaults.

Made by the millions, these loans were sold in vast quantities to
Fannie Mae and Freddie Mac. There they were packaged, converted
into mortgage-backed securities and sold to the big banks. The
banks put scores of billions of dollars worth on their books and
sold the rest to foreign banks anxious to acquire Triple-A
securities, backed by real estate in America's ever-booming housing
market.

Computer whizzes devised exotic instruments -- derivatives, which
could soar in value, making instant multimillionaires, but also
plummet, based on rises and dips in the underlying value of the
paper.

Came now young geniuses at AIG to insure the banks against
catastrophic losses, should the U.S. housing market crash. As the
risk was minuscule, premiums were tiny. Payouts, however, should it
come to that, were beyond AIG's capacity.

In AIG's Financial Products division, based in Connecticut and
London, brainiacs were creating other exotic instruments, such as
credit default swaps to guarantee against losses and insure
profits. To keep these wunderkinds at AIG, they were promised
million-dollar retention bonuses.

Who kept the game going?

The Federal Reserve, by keeping interest rates low and money
gushing into the economy, created the bubble that saw housing
prices rise annually at 10, 15 and 20 percent.

As the economy grew, however, the Fed began to tighten, to raise
interest rates. Mortgage terms became tougher. Housing prices
stabilized. Homeowners with sub-prime mortgages now found they had
to start paying down principal. People losing jobs began to walk
away from their houses.

Belatedly, folks awoke to the reality that housing prices could go
south as well as north, and all that paper spread all over the
world was overvalued, and a good bit of it might be worthless.

And, so, the crash came and the panic ensued.

Who is to blame for the disaster that has befallen us?

Their name is legion.

There are the politicians who bullied banks into making loans the
banks knew were bad to begin with and would never have made without
threats or the promise of political favors.

There is that den of thieves at Fannie and Freddie who massaged the
politicians with campaign contributions and walked away from the
wreckage with tens of millions in salaries and bonuses.

There are the idiot bankers who bought up securities backed by
sub-prime mortgages and were too indolent to inspect the rotten
paper on their books. There are the ratings agencies, like Moody's
and Standard & Poor's, who gazed at the paper and declared it to be
Grade A prime.

In short, this generation of political and financial elites has
proven itself unfit to govern a great nation. What we have is a
system failure that is rooted in a societal failure. Behind our
disaster lie the greed, stupidity and incompetence of the
leadership of a generation.

Does Dr. Obama have the cure for the sickness that ails the republic?

He is going to borrow and spend trillions more to bring back the
good old days, though it was the good old days that brought us to
the edge of the abyss into which we have fallen. Then he is going
to spend new trillions to give us benefits we do not now have,
though the national debt is surging to 100 percent of the Gross
National Product, and may reach there by 2011.

Is Obama willing to speak hard truths?

Is he willing to say that home ownership is for those with sound
credit and solid jobs? Is he willing to say that credit, whether
for auto loans, or student loans, or consumer purchases, should be
restricted to those who have shown the maturity to manage debt --
and no others need apply?

"Avarice, ambition," warned John Adams, "would break the strongest
cords of our Constitution as a whale goes through a net. Our
Constitution is made only for a moral and religious people. It is
wholly inadequate to the government of any other."

In this deepening crisis, what is being tested is not simply the
resilience of capitalism, but the character of a people.

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