If you were to pay attention only to the mainstream media (and as a reader of this blog, clearly you do not; good for you!), you would be propagandized into thinking that either capitalism has failed and/or that “It’s All Bush’s Fault.” I think this is neither completely Bush’s fault and I think capitalism hasn’t yet had a chance to reign victorious over a profligate federal government bent on taking over large sectors of the American economy…

I will be intellectually honest with you: I supported the $700 billion bailout of the financial sector, solely because of the fact that this money is actually a loan, garnering a 5% dividend per year for the first 5 years, and 9% thereafter up to 10 years out (USNews). Obviously, one could argue, “If the banking institution must agree to these dividend terms on the loan, why do they need the money to begin with?”

That is a great segue way question into another question: How did American banks get into this position to begin with? Essentially, it all began back with the Housing and Community Development Act of 1977 (the Community Reinvestment Act; in reality, the Glass-Steagall Act of 1933 has arguably played a role as well). In a very general nutshell, the government made a bunch of regulations that strongly encouraged private banking institutions to provide loans to people of lower income.

While this governmental regulation had very altruistic and noble intentions, as time passed, it continued to be revised such that standards continued to be allowed to become lower and lower until lending institutions were able to give loans to individuals who did not verify their income. Do you see a problem here?

While it may be exceptionally profitable on the front end to receive origination fees and loan resell fees on these kinds of loans, how did anyone expect people who did not verify their income to be able to pay any of the loan back?

Besides that, banking institutions would then re-package these loans into Collateralized Debt Obligations (CDOs) and begin selling them to other institutions. Then, someone somewhere decided to ask the key question, “What is the value of these securities?” If you have no documentation to back up how these loans are going to be paid back, how does anyone know what the value of the packages are?

Nobody did (nor does), and, hence, Structured Investment Vehicles (SIVs) were then created as a holding area on bank balance sheets to try to quantify exactly what kind of a situation financial institutions were in. Of course, by the time all of this got set up, it was far too late to do anything about it, as the cancer of undocumented loans had spread world-wide. Further, publicly-traded businesses of all sizes had the double-duty of being required to deal with the Sarbanes-Oxley Act of 2002 (“Sarbox,” “SOX”), else face recriminations from regulators.

While we can assign blame to Democrats (and Representative Barney Frank (D-MA) and Senator Chris Dodd (D-CT) currently come to mind, as they chair their respective chamber’s finance committees), Republicans did not, in my view, push hard enough to get the government out of the way of this entire situation.

To put it more clearly: government made a policy that the private sector had to follow, despite the fact that the policy was not grounded on the premise of real individuals with insufficient income to deal with a mortgage. Then, when the private sector ran into problems, the government subsequently blamed it for having gone “too far” with the government’s own chicanery.

Now, it seems that everyone wants a piece of the pie. More specifically, as redstate.com posts here and here, American automakers are next up for wanting yet more money from the US Treasury. Why is that a bad idea but the other bailout was only slightly more reasonable? Because for the automakers, this isn’t an issue of needing more money; it’s an issue of their requiring a complete overhaul of the way they do business (and former Massachusetts Governor Mitt Romney specifically talked about this in the New York Times).

Here’s yet another dirty little secret that the Democrats know and, if Republicans are smart, will play against them: If GM, et al., file for bankruptcy, it would very likely mean that all contracts would become null and void. And who has a substantial stake in contractual obligations with companies like GM? The UAW. They are simply too big of an interest group for the Democrats to ignore (and a current Senate proposal would shift monies from development of fuel-efficient vehicles as a potential remedy, thereby leaving bailout monies on the table)

So, what’s the solution here? Let the free market run its course (it’s going to, one way or the other, anyway). Restrain the federal government from being so profligate with taxpayer’s money. And do all this under the auspices of “The Art of Conservative Political War.”

“We The People” can ultimately do it, I assure you. It’s the way the system’s set up.

-Phil