Monday, March 2, 2009

Did The 2008 Democratic Election Wins Lead To The Current Economic Crisis?

It is not just Obama, but also the combination with Reid and Pelosi. The four states with the highest foreclosure rates, the most underwater mortgages and the most subprime and toxic mortgages are California, Nevada, Arizona and Florida. With Reid from Nevada, Pelosi from California and Arizona a neighbor, it was predictable that, with the Democrats in control, that Congress would do something to help homeowners, mostly flippers and speculators, who overextended themselves. Most of these were the mortgages securitized and held by the investment banks.

The Iowa experimental election markets are more accurate than election polls in predicting US Presidential elections and predicted a Democratic win way before Obama took the lead against McCain in the polls.

The collapse of Bear Stearns, which was the forerunner of the crisis, was due to an inability of the firm to continue to fund itself because its mortgage securities had a sharp and excessive decline in value and were insufficient collateral. The loss in value of these securities was due to a much higher expectation that their actual cashflow would be much less than predicted. The banks that are currently holding these securities are finding that they are paying and not defaulting, which says that these securities should trade at a much higher price than they are. The decline in value and price of these securities, including at the time of Bear Stearns collapse, is due to an expectation that future, as opposed to current, cashflow will be modified and be less than anticipated.

In other words, the market anticipated the mortgage modification programs, bankruptcy cram downs, Democratic moral suasion and incentives to walk away from paying mortgages and the consequential results. This Democratic philosophy and programs led to excessive and unanticipated devaluation of mortgage securities. It also led to the inability of the investment banks and commercial banks to continue to fund themselves and impaired their capital base through write downs of the excessive devaluation of these securities. The impairment of the financial services sector would naturally lead to an increase fear by the consumers of a collapse of the US economy, which would cause consumers to be thrifty, increase savings and decrease consumer demand. As a result, unemployment would increase and further decrease the value of mortgage securities.

Of course, a collapse in the investment banking area, in banking capital and a fear of government intervention in rewriting banking lending contracts after the fact would and did lead to the current worldwide equity markets decline and economic crisis. Especially, since worldwide governments and central banks follow each other's actions.

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