Ron Paul Takes Federal Reserve to Task on CNBC
Posted on: Sep 21st, 2008 | By Contrarian Profits | Filed under Featured, Financial News
“The creature that destroys value.” This is how Republican Congressman Ron Paul described the Federal Reserve on CNBC’s Kudlow & Company.
Paul also calls the Fed and “illegal institution” and “an immoral institution.”
For the most part, the mainstream press seems to have decided that the Fed- and Treasury-led bailouts of Wall Street finest are scary but necessary. But the big picture, says Paul, is that the dollar, once backed by gold and then by Treasury bonds, is now backed by junk mortgage securities that nobody wants. And this is a nightmare scenario for the dollar…
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It is amazing how everyone has missed the simplicity of this crisis. Ron has also missed the fact that this was a private sector problem and it is private sector champions who are now trying to pass the buck to the little guys, and to the government!!!
The crisis was caused by poor lending practice by financial institutions, who allowed garage based agents to source mortgages on their behalf. Commissions were paid to these people if the mortgagors did not default within the first 3 months, after which the mortgages were packaged into bonds and sold to the investing public. 3 months? A seasoned mortgage? The investors were foolish to buy these bonds. The credit rating agencies should be sued for negligence. How could a bond with mortgages that were only seasoned for 3 months attract an investment grade rating? No way! But the investor was foolish for relying on the rating agencies alone for comfort. Don’t forget, these investors (the institutional ones who now want to be bailed out) are supposed to be intelligent! They’re paid 6-7 figure salaries, so you would expect them to at least do some of their own research and homework before investing in these securities surely! How did they miss the junk bond status that they truly deserved??????
Then there is Henry Paulson! What a lazy, juvenile solution he and his cohorts have come up with! The problem is that it will not solve the huge overhang of houses sitting vacant and unsold. It will not relieve the downward pressure on house prices. It is this downward pressure on house prices that scares the banks and the consumers, not the toxic MBS’s (”mortgage backed securities” for those of you who aren’t familiar with the term).
It would be much simpler, more efficient and effective for the government to buy the foreclosed properties, rather than the whole security package. (They could then use some of these houses to meet some of their social welfare responsibilities/needs.)
To properly value the whole mortgage backed security requires something like 3,000 mortgages to be separately valued for each security they seek to purchase (i.e., the mortgages that constitute each security line), which would be very, very time consuming, costly, rarely accurate and not transparent.
Rather, to buy the properties that have been foreclosed would be easier to value and would be more transparent. Not only this, but this approach would underpin housing prices and provide a boost to confidence in the real economy, which is the outcome that is sought by the less direct, less efficient, less effective and more morally corrupt approach being proposed by Paulson and his bunch of merry men (who also appear to be as overpaid as the investment managers who failed to recognise the risk inherent in the MBS that they were buying-oh! I forgot. It’s the same people!!!!!!).