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Lehman Bros bust! Merrill Lynch taken over. What now for the Elections?

Stock markets are crashing with the news that Lehmann Bros have finally gone over. Fear is the overriding emotion as one of America's old economic institutions goes into administration. Stock markets are crashing with a vengeance. Merrill Lynch has had to be taken over by Bank of America to avoid bankruptcy. If we were not in a recession before, we are surely in one now. The financial sector has not taken this many blows since the Great Depression of 1929.

Ordinarily, this would lead to a change of Government. How will the American electorate react to this? Will they let the frivolity of a potential woman VP override the need for change? How has Republican attitudes to the free market helped the economy? Has it promoted the lax culture of greed and fiscal irresponsibility? If the Democrats do not win this election, it will prove what I thought when Hillary and Obama were the front runners for the Democratic ticket - that by choosing two minority candidates, they have lost the bestest chance ever of taking over the White House. Rest assured, if they had put forward John Edwards or someone like that for election, they would have walked the election. Can the appointment of Sarah Palin stem the tide of anti-Republican sentiment? Have the Republicans pulled off the greatest escape of all time or does Obama still have a chance of stealing the nomination?

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Tayo, you see. . . . markets rallied 400+ points today on news that SEC was changing laws regarding short selling. . . . how does this fit in with your "bad loans only" theory?

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@Ibime,

Let me use something I'm very familiar with to illustrate my point. As a structural engineer, you know that if you want to build a 100 story building, you need a bigger column at the ground floor than you will need if you were building a 2 story. Assuming that someone now goes ahead and continue to develop on my 2-story building regardless of the structural integrity of the pillars, a collapse will be inevitable. So the problem is not the superstructure, but the foundation. In order words, this is a judgement problem (not regulation) on the part of those who should know better - the CEOs.

That is why I said someone needs to be held accountable. These CEOs, aware of what they were doing wrong, bought the consciences of the Congress men that should oversee their activities. Do you think it is mere coincidence that the biggest recipient of the largese from F&F in the Senate is Senator Chris Dodd who happens to be the Chairaman of the Senate Banking Committe? This is the guy who should oversee their activities but has been made a lame duck through lobbying and outright bribery. And as I noted before, the second biggest recipient of money from them is Obama, and one of his economic advisers is the same former CEO of Fanie Mae.

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Firstly, your article just scratches the surface. You need an indepth knowledge of these things to understand the cause, effect and propagation. Bad loans alone could never bring down the system. Consider the domino effect of the structured products built on top of these bad loans. They are like a pack of cards. The bottom goes and everything comes crumbling. However, if there were no structured products on top of the bad loans, the banks would have survived. They simply used good money to chase bad money.

We can play the game of links all day. I can show you several hundred links explaining the role of strutured OTC's in the subprime collapse. No doubt the foreclosures caused problems but not enough to affect the market to the extent that we see. Just take my word for it, I know what I am talking about.

Someone called it "socialism for the rich". It is the ultimate end game of neo-conservative thinking. If they had allowed proper Government oversight in the first place, they wouldn't be in this position. Government shouldn't run any business but the economy should be state-directed to fulfill the nations goals like they do in China and not left to the Laissez Faire forces of the market who are more interested in speculation than building a sound economy from basic business practice. The Republican argument is the argument of the 70's and 80's not the argument of the 2000's. All tax breaks for these corporations simply go toward more investment in Ponzi schemes and do not help the economy in any way.

I would like to see a more sensible approaching from Obama and McCain. I would like to see them propose tax cuts according to the sector of the economy that needs it most, not according to tax brackets. For example, if you want to encourage more agriculture, propose tax cuts for the agriculture sector. . . . .and so on and so forth.

He neither foresaw nor foretold any nonsense. The man was anti-regulation till last week. He even voted for deregulation in 2000 so I don't know WTF you are talking about. McCain has absolutely no right to claim regulation as his thing. Absolute rubbish!

Talking about Frannie and Freddie shows that McCain is a economic lightweight who barely understands economic matters. What is the point of asking for more oversight of Frannie and Freddie when you have already voted aginst tighter regulation on several prior occasions? By chance, he happened to fall on the right side of the divide on F&F but that does not mean he is a regulator. This coming from a man who has described himself in the past as a'deregulator'. This is what gets me - why does someone who says he knows nothing about economics always take stands on something he knows nothing about? In Nigeria, we call this Aproko noser.

To show how quickly he switched position and tried to claim a populist stance, he said yesterday that AIG should not be bailed out, then changed his tune today. He was playing to a populist tune yesterday and playing to a common-sense tune today. The man has absolutely no knowledge of economics as he has said several times in the past. Obama on the other hand took the default position of saying he does not know enough about the AIG balance sheets to decide - which is perfectly correct seeing how it is impossible to decide overnight without doing proper analysis - unlike McCain who hears the basic gist and puts his mouth in it. This is a Republican tendency. They learn simple rhetoric and cling to it as perfect truth without any investigation. The same basic gist that people like 4Play have been spewing here for ages - less tax for the rich, less regulation, let the market take care of itself because regulation is stifling productivity etc. Maybe this argument was valid in the 70's and 80's but not in the 2000's. The complex mathematics involved in such structured products need strong regulation. I should know because I have studied derivatives intensely.

Here is McCain talking poo about regulation in 1995:

http://www.businesssheet.com/2008/9/obama-more-regulation-mccain-okay-maybe

His hypocrisy is being exposed everywhere:

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/16/AR2008091603732_pf.html

http://tpzoo.wordpress.com/2008/09/18/john-mccain-deregulation-hawk-criminal/

http://www.nowpublic.com/world/mccains-good-buddy-gramm-architect-deregulation-wall-street-0

I can go on and on but let me just stop there.

In 2006 Obama sponsored a bill for more regulation and full disclosure from Wall Street. McCain voted against it. I cannot remember the specifics but I heard it on CNN this morning.

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@Ibime,

http://www.cnn.com/2008/POLITICS/09/17/beck.wallstreet/index.html

Now concerning regulation, I have no problems with regulation to the extent that it is reasonable. As I have mentioned earlier, where does regulation end? The truth is that everything is regulated by the govt, ortherwise there will be no cases in our courts for apparent disregard for laws.

I have a problem with the fact that 3 and still counting of the bigest financial insitutions in this country are now under govt oversight. That is a huge step in the direction of socialism. Governmetnshouldn't be running anything. Laws/regulations must be put in place and implemented to the letter, but tthe govt shouldn't have any administrative power over the corporations.

The govt only messes things up and not make them better (social security and medicaid comes to mind). Why do we prefer private schools and clinics to the public? Why are FEDEX and UPS prefered to USPS? Corporations in the hands of the private sector fairs better than in the hands of the govt.

I disagree that this is a problem for McCain. Rather, he has shown leadership and forsight in this regard. he forewaned of this problem and co-sponsored a bill for oversight over F&F in 2006. But of course, Congress did not let it pass due to its political fallout. Congress had their hands too dirty in it - or should I say their hands were too green in it (Obama's $100,000 in 3 years readily comes to mind). http://www.govtrack.us/congress/record.xpd?id=109-s20060525-16.

Just as an addendum, here's some information from wikipedia about Franklin Raines that McCain mentioned in his address: http://en.wikipedia.org/wiki/Franklin_Raines

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Bad loans alone cannot bring down so many institutions. The regulation needed now involves the regulation of financial instruments. McCain can, will and is taking the blame for supporting deregulation as witnessed in the current news reports.

Short selling is the trojan horse which will kill the West. The worst is yet to come. This is the pivotal point at which everybody moves their money East. George Soros and the like have already done that and sure enough the market will follow. I fear for my future and the future of everyone in the finance sector over the next 10 years. Agriculture and Engineering are back in, whilst finance is out - just like the 60's and 70's.

Republicans should be ashamed of themselves for promoting the Laissez Faire economics that led us to this stage. People with no solid grasp of economics such as McCain keep trumping their Republican economic arguments and simple minded people follow. The Republican argument of the citizens adding to the economy by promoting innovation and competition through less regulation and cutting of taxes holds shallow especially in a globalised world where companies do not represent their countries of origin but themselves alone. How can such companies work toward National goals? State-directed economies are taking over. Compare that with the success of Nationalistic economies like China, Singapore, Taiwan, Korea and Japan who are efficient and achieve optimal social utility. I think we have reached a pivotal point in Western Economic domination. Nationalism or National Socialism is the new capitalism.

As I said before, I will say again:

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@Ibime,

Like I said before, the main cause of the belly-up is the greed of the financial institutions as well as the borrowers. I'll explain. Despite all the complex financial instruments, there wouldn't have been a problem if the borrowers have the resources to pay and are paying up. The problems only came to light due to default on the loans. I personal do not blame the govt for the problems. I know I have 2 of those kind of loans on my investment properties and they are absolutely killing me. I do not blame the govt but myself for signing those documents. I believe in individual and corporate responsibility, and I consider myself to blame and to an extent, the Mortgage companies for ignoring financial common sense and giving me those loans worth about $400,000.00.

Now concerning regulation, the question is: where does it end? And if I may add, the Banks are now using the same sense they should have had before to offer loans today - under existing regulations. Even though the regulation is the same for now, their practices have changed. So the problem is not the regulations or lack of it, but corporate and managerial irresponsibilities. That is why I said before that McCain needs to hype this a lot. We can't give people a get-out-of-jail-free card for their fiscal irreponsibilites. Where are the probes right now? Where are the special tribunals? Why isn't anyone in jail?

I have a feeling all the legislators have their hands mired in this mess, and that is one reason why govt intervention is bing called for without asking and prosecuting who is responsible.

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What makes you think he doesn't already have it? The question is not what he has but the negative impact rebounding back to hit his own camp.

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hmmmmmm. . . . my political anlysis was spot on. . . . last week I said the impending collapse of Lehmann brothers was going to shift the goalposts in the political debate. . . . today, I said regulation would become the hot topic on the campaign trail. . . . and guess what. . . . it is!. . . .Tayo-D tried to cloud the argument by talking about campaign donations which has nothing to do with it and is completely off the radar. . . . . it seems McCain and Palin have been reading this thread. . . . this is what they've had to say in the past few hours. . . .

McCain: We need more regulation

Last week, he was against regulation

Palin: We need more regulation. The White House fell asleep at the switch.

Come on - is this plagiarism or what? This Dam doesn't know what she is talking about. She watched Henry Paulsons press conference and stole the journalists words. Last week, she was against regulation. Poto-poto Journalism degree doesn't qualify you to hold an opinion on economic matters, I'm afraid!

If I was Obama, I would go and find an old video of McCain declaring his anti-regulation views and air it on live TV.

Now, the same John McCain said he knows nothing about economics and would read Alan Greenspans book to find out. Guess what? It is Alan Greenspans policies of deregulation which are being blamed for the slump.

The Republicans are trying to turn regulation into THEIR agenda. They cannot be allowed to get away with it. Unfortunately, wind has already blown and fowl nyash is already open.

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Was it not McCain who refused to take the route of state-funding? Until voters realise that the Government should be responsible for sponsoring election campaigns, we will never see the end of special interest lobbying. On top of that, Obama ran the most effective fundraising campaign by receiving donations from millions of private individuals. This is more democratic and better reflects the will of the people.

It is called hedging their bets. They obviously thought McCain had little chance of winning. However, they still put some money on him to hedge their risk.

What irresponsible lending are you talking about? Has George Bush not been in office for the last 8 years?

What nonsense! Where did you read that? In some Republican website? Blame it on the minorities ehn? Rednecks in the bible belt defaulted on their loans more than minorities. There is no Govt regulation that forces anyone to lend to minorities. If your credit stinks, then no one cares about the colour of your skin.

Now you seem to have a problem with this concept of regulation. The problem of the subprime crisis is simply caused by cowboys who have not been regulated properly. Little loan companies packaging up bad debt without properly checking the credit worthiness of the underlying and selling it on to banks. The problem is further compounded by derivative divisions short selling such debt and banks taking derivatives on top of derivatives and so on and so forth. Everybody took out derivatives on these debts to the point that the market was driven by speculation on futures. It was like a game of hot potato. At the moment the penny dropped, Lehmann Bros, Merril Lynch and such were left holding the potato. Even if 1 million home owners default on their mortgages, it is nowhere near enough to bring the financial system down. The financial system was brought down by complex financial instruments which were not properly regulated by Government. On top of that, these Hedge Funds then proceeded to engage in negative carpet bagging, spreading rumours about companies and calling back their loans to these companies so that their share price could drop and they could make money by short selling these shares. Hedge funds and carpet baggers constitute the greatest moral hazard to the financial sector, sucking confidence out of the markets and injecting fear. If not for moral hazard, Lehmann brothers and co would have survived - but they couldn't raise enough capital to weather the storm because no one would invest in them. On top of that, banks were allowed to hide their losses in their income statements which led to the loss of trust and moral hazard. Up till now, at least $400 billion of subprime losses are still unaccounted for and are still hiding in the cooked up balance sheets of these banks. Until this money is accounted for, the market will not recover. The greatest mistake the Reagan Government ever made was deregulating just when the world was entering into the computer era and needed more effective regulation.

Just like in in 1929, the proponents of Laissez Faire econonomics and deregulation have shown that they are incapable of self-regulation. Greed, Corruption and Ponzi schemes are the ultimate endgame of right-wing Conservatism.

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@Ibime,

$126,000 to Obama (in 2 years) and just $16,000 to McCain in a space of 10 years. Something is wrong somewhere.

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WORD OF ADVISE ::

IF you have 401k in a money money market account or if you are participating in a company vested account with matching funds, get with your account manager and review your standing balance.  Obtain a performance sheet going back three years and see what you are worth today.  If you can, invest it in FOREX or FEATURES, even GOLD.  

Take your money away from market speculation and put it in tangibles right away.  

Another you could do, use the money to purchase high valued art or works of craftmanship, heirlooms and stuffs like that that you could reconvert later on for profit  when the economy recovers.  I am not your financial adviser, this is just a friendly heads up.  Consult your financial adviser for tax liabilities.  It is 10% on Federal on 401k and then a 20% penalty for early withdrawal, depending on the way you had it secured and also, how you get it out.

You can also convert it to educational fund for your children.  Get hold of your life savings and act right now, Trust me!!!

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Campaign financing has nothing to do with policy. . . . both Republicans and Democrats collect contributions from all the major financials. . . . McCains campaign manager is a lobbyist for Frannie and Freddie so I don't know what you are talking about. . . . Lehmann Brothers also contributed to both campaigns. . . . it is normal for banks to hedge their bets by contributing to both candidates campaigns. . . .the question is, whose fiscal policy represents these special interests?. . . .McCains policies favour less regulation and lower taxes for them whilst Obama's policies favours more regulation and higher taxes for them. . . . . so whose policy is like George Bush's. . . . infact, McCains economic policies are an almost exact replica of Bush's policies.

You can read about lobbyists and contibutions to both the McCain and Obama camps here:

http://www.commondreams.org/archive/2008/07/16/10392/

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Nah. . . .the debate is about regulatory policy, not about blahdeblah. . . .why are Republicans always quick to advise Obama not to pursue a certain strategy. . . . are they scared or what?. . . . suddenly Frannie and Freddie are the cause of all economic problems just because Obama took money from them. . . . we can look into McCains campaign contributions and cancel out that debate completely. . . . the issue here is that Obama should argue that the Republicans laissez faire attitude to regulation led to the problems we are seeing now. . . . and it is up to him to convince the American public of such. . . . McCain fully subscribes to all of George Bush's economic policies. . . . so he has to make the argument that the same policies which caused these meltdowns will be carried on under McCain. . . . like Bill Clinton said, it's the economy silly!

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@Ibime,

http://www.opensecrets.org/news/2008/09/update-fannie-mae-and-freddie.html

http://www.uncorrelated.com/2008/09/barack_obama_dfannie_mae.html

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Cheya! Treasury Secretary Hanry Paulson has been holding question and answer session with journalists. I feel sorry for the guy. He looks completely shaken.

Here is a summary of some of the points he has made (My points in brackets):

The regulatory system is inefficient and defunct and needs to be updated. (Republicans always favour less regulation)

Market discipline is now non-negotiable and regulation must reflect that (This is what the Democrats have been saying for ages)

Question from Journalist: Did the Bush administration fall asleep at the switch?

Henry Paulson: I will not comment on that because we have a general election going on now. I will leave the election candidates to argue that over the next few weeks.

My comment: A golden egg just landed in Obama's lap. He needs to make political capital out of this.

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