[H]ere is a summary of how DC and Wall Street got us all into this mess.
After the last Depression, Congress enacted a law, Glass-Steagall, which forbid banks, insurance companies, and investment houses to be in the same institution, to deter reckless speculation with depositors' money, which was seen as a major contributor to the stock market instability of the time. Then in 1999, at the height of the "Deregulation" craze, Citigroup and Travelers merged, a clear violation of Glass-Steagall. But rather than enforce the law, Congress repealed the prohibitions of Glass-Steagall with the passage of the 1999 Financial Services Act.
That opened the floodgates for runaway financial speculation. Wall Street knew that if they made money they would be allowed to keep it, but if their investments lost money, the US Government would step in to transfer the losses to the American people, because that is what had been demonstrated during the S&L debacle of the 1980s.
Starting about in 2005, Wall Street started bundling mortgages together into investment bundles. The initial offerings were greeted with great success, and soon everybody wanted to get in this new "product." So great was the demand for Mortgage-backed Securities (MBS, also called Collateralized Debt Obligations) that Wall Street started running out of mortgages to front-load the system! This led to the creation of the "sub-prime" mortgage; granting mortgages to people who normally would not qualify. Congress, themselves invested in the Wall Street firms that were profiting from selling MBS, passed an $8000 first-time homebuyer tax credit (actually a loan repaid in future taxes) to lure more buyers in which helped front-load the process even faster. This sudden surge in new homebuyers increased demand and home prices skyrocketed! This made investors and homebuyers even more confident, demand for homes and MBS soared even higher and a genuine bubble was being formed.
Demand for MBS was so great that as the supply of available mortgages began to dwindle, brokers started taking 'shortcuts'. Bear Sterns was pledging the same mortgages into multiple investment bundles; a clear case of fraud. Other brokers were blending mortgages into the bundles that were already in foreclosure. As the returns from the MBS failed to materialize evidence surfaced that the earlier earnings had not been genuine, but were "ponzi" payoffs, using money collected from new investors to send dividends to older investors.
The whole scan started to unravel in 2008 and here is where things took a dark turn. Because Congress had their own fortunes invested in the companies at the heart of the fraud, Congress decided to prop up the scam with taxpayer money and block any efforts to investigate or prosecute. That is why TARP was passed by the Congress despite 90% popular opposition. Congress were saving themselves at the expense of the taxpayers. The phrase "toxic asset" was DC-speak for the fraudulent mortgages backed securities, which were being repurchased in order to avoid investors seeking to jail the Wall Street criminals, which would have brought all of Wall Street down. Despite claims that the US taxpayer would be refunded when the "Toxic Assets" were resold at some point in the future, the reality is that none of those assets will ever see a penny of repayment, because they are all the product of the biggest financial swindle in history. Bigger than Tulip mania. Bigger than the Great South Seas Company disaster.
Together with having to cover the credit default swaps sold with those mortgage backed securities, it is estimated that the swindle has cost the nation $27 trillion, at least $16 trillion admitted to by the Federal Reserve in "loans" and "bailouts" (actually buy-backs) from foreign investors such as Credit Suisse, Deutchebank, the Bank of Libya (boy, did THEY get hosed; 98% of their sovereign wealth fund destroyed by Goldman Sachs aka Gold In My Sacks!), etc. Globalism took a major crims n the US financial system and turned it into a global cataclysm from which we are all still reeling.
We are stuck in a debt crisis. Banking funny money inflated the value of many things, like houses, beyond their affordable values, and now there is more debt owed than can be paid back. Similarly Governments have also run up huge, nearly unpayable debts in the course of their operations.
Furthermore, the banking funny money (leveraged monies) was used in the shadow financial system to bet on the real economy (derivatives trading). Now, with losses in the real economy, we are finding HUGE losses in this gambling system. This is why there seems to be endless bailouts- because the taxpayer is on the hook for bailing out massively leveraged financial instruments and we only have 1 for 1 taxpayer dollars to do so. This is why many commentators speak of this situation as impoverishing the middle classes.
Although it would have caused a lot of short term damage, banking bankruptcies would be better. People's superannuation funds could have reinvested into sound businesses after taking a hit in such circumstances. Now whole currencies and governments are under threat of crashing causing hyperinflation as dollars are devalued (think Zimbabwe dollars).
[Posted at the SpookyWeather blog, August 12th, 2011.]