Financial Meltdown


The Financial Meltdown: How it Happened

John A. Rosado

May 1 2010

The Financial Meltdown: How it Happened


I.            Introduction

II.            Historical Causes

  1. 16th amendment
  2. Tax policy
  3. 17th amendment
  4. Loss of state oversight.

III.            Current Players

IV.            Conclusion

The Financial Meltdown How it Happened

This paper is about The Financial Meltdown How it Happened and the historical events that led up to its happening. We must first take a look at economics, which is cyclical, meaning that there is always a time of boom and a time of bust. This is just of fact of life, that goes as far back as stated in Ecclesiastes 3:6 “A time to seek, and a time to lose; a time to keep, and a time to cast away.” We will explore the wave theory. At times people have will have confidence in the economy and help it to grow and at other times people will not have confidence and the economy will tend to shrink. The economy will also have outside manipulation from the government which will have either a positive effect or a negative effect on the economy. The wave theory of economics was first introduced by the Russian Nikolai Dmyitriyevich Kondratyev. Professor Nikolai Dmyitriyevich Kondratyev (Baranov) was a Russian economist of the early 1900’s and a pioneer of dynamic economic theory. Having almost a free hand for research, Kondratyev produced ground breaking theories interrelating economics and politics, taking into consideration such events as war, discoveries, public opinion, and weather as integral parts of a long-term economic life-cycle. Within a market system, Kondratyev proposed economic trends tend to generate harmonics with a periodicity of approximately 53 years. These harmonics are systemic. Kondratyev’s works were first translated into English in the early 1930’s when it was discovered that he had accurately predicted not only the thirties depression, but also the speculative orgy that preceded it. Not only were Kondratyev’s theories valid, but they actually predicted the course of today’s economy — 60 years in advance.

As for timing the wave theory seems long to me, because what I have seen in the last 60 years is about a 10 year cycle, however Kondratyev’s wave theory is more inclusive of a long term wave, that has smaller waves within it. It is much like the ocean with large swells and smaller waves within those swells.

The U.S. government stayed out of the economy for the first 100 years of our history, so to speak however the war of 1812, then the civil war and the many Indian wars. The U. S. Government still had limited funding and limited capability to influence the economy. As the progressive movement gained power the 16th and 17th amendment were introduced and ratified in 1913. The 16th amendment gave the federal government unlimited taxing power therefore unlimited funding in which to influence markets. It makes me wonder “if the government taxes cigarettes to stop their use, a sin tax, then do they tax income to stop work”, another sin tax?

The 16th amendment allowed the federal government to set its own tax rates and funding from any source it chooses. One of the many problems with this is now the federal government was answerable to no one.  The federal income tax was sold to the American public by saying it would only tax the rich. And it did start out (Citizens) at 1% for those earning over $20,000 and 7% for those earning over $500,000 that it would only tax the rich. It also exempted the first $3,000 income earned by a single person and $4,000 by a couple, which is the beginning of the marriage penalty. Well that was true for 4 years. In 1917 the income tax rates were change to 20 different graduated steps and reduced the personal exemption to under $2,000. Even at this rate only 5% of Americans paid income taxes. During WW I top tax rate went to 73% then down to 12.5% in 1921, 46% in 1924 and finally 25% in 1926. The masses had no idea what their tax rate would be nor did they care because it was the rich people who were being taxed and since the rich stole it from the masses to begin with, it is only right to make them pay.

Investors now had no idea what their tax burden would be, even 3 years into the future. The stock market bubble was expanding and the capital gains tax was only 12%, so money went from job creation to market speculation. No matter what the progressives say I find it hard to believe that people with the money are going to invest it someplace they cannot keep it. When the bubble finally burst in 1929 the beginning of the great depression started and lasted until WW II got the economy rolling again. WWII saved the American economy.

Today we have the very same problem. When Obama ran for president, he promised that only the rich would see any tax increase. He defined the rich as anyone earning over $250,000.00 per year. Later in his campaign he changes that to $200,000.00 per year, then Biden changed that to $150K per year. As the Bush tax cuts are expiring his action means everyone over $40,000 gets an increased tax load.  Now that he is attempting to push a Value Added Tax (VAT) everyone will get a tax increase. The so-called health bill is a huge tax increase to the tune of trillions over the next ten years. Cap and Trade is a huge tax increase, as Obama said in an interview fuel prices will necessarily skyrocket, with his plan. With all this, what is our tax burden going to be? Actions speak much louder than words. It looks as though rich is defined as everyone that has a job and is trying to feed their family. That is all except the illegal aliens, which do not pay any taxes, and that Obama will not do anything about. He even said that Arizona acted foolishly by signing SB 1070, and that he will have Eric Holder fight Arizona and stop it from being enacted. Again we have no idea what our tax load will be just a year into the future.

As corporate taxes go higher here in America, more jobs will go to China, more Americans will be unemployed. The fewer jobs we have here in America, the less we can buy from China and the greater the economic downturn will be worldwide. Obama’s only solution is to increase taxes and spend more tax money we do not have. It makes me wonder what his motivation is. When you take away peoples incentive to produce, why should they produce? People will not produce anything if whatever they produce is taken from them. What is Obama’s motivation? He is not a stupid man nor does he have stupid men in his administration. Are they all vicious and want to see America destroyed? Perhaps it all about control them controlling the masses. Only they know for sure.

The 17th amendment allowed the citizens to vote for their senators by a popular vote. This allowed the federal government the ability to manipulate the senators which in turn gave the senators the capability to manipulate state governments and state budgets by accepting unfunded federal mandates. In 1991(Mehan, 1993), the city of Columbus, Ohio, undertook what became a landmark study of the cumulative costs of regulatory compliance with environmental legislation alone. The city identified 22 different federal and state mandates implemented in each of the three previous years. While noting that federal and state funding was decreasing, the city concluded that over the next ten years, its costs to comply with these mandates would amount to $1,088,484,880 in 1991 dollars. This figure yielded a cost of $850 per household per year. Keep in mind that Columbus’s total city budget for 1991 was $591 million. The people were always happy to get something for nothing. The masses were never told how much this free stuff was going to cost them, nor did they care because it was government money and comes from the money tree. The senators no longer had to answer to the state legislators; they only had to answer to the masses that did not care about the other guy because the other guy had the money that belongs to me. Therefore it is only right that I get it back by forcing government to take it and give it back to me.

With this let us fast forward to the next Kondratyev wave cycle because he predicted the 2000 tech bubble well in advance of its happening and let’s explore the major players and events. September 30, 1999. Fannie Mae began offering home loans to people who could not afford them. Home loans were offered with NO money down to people with unstable and little income. Regulations by the  Fannie Mae, (Holmes) the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people. Government had the money to manipulate and the senators had the capability to do nothing about it, because they wanted to get re-elected. It seems that statesmen got lost in the shuffle.

Franklin Raines became the CEO of Fannie Mae in 2001 and seems to have cooked the books so over the years he would earn 90 million dollars, because his organization looked so good to investors that they showered him with bonuses. Supporters of (Worst Managers) Raines, 55, insisted that he wasn’t culpable for Fannie’s misuse of obscure accounting standards. But that argument didn’t wash. Raines was in charge in 2001, when Fannie chose to create what the SEC dryly called “its own unique methodology” to calculate the earnings impact of its trillion-dollar portfolio of derivatives. Raines gave Chief Financial Officer J. Timothy Howard free rein and tolerated “weak or nonexistent” financial controls, according to a scathing report issued in September by the Office of Federal Housing Enterprise Oversight, Fannie’s regulator. Franklin Raines is now a chief advisor to Obama on the economy.

In 2003 the Bush administration sounded the first alarm of the potential problem coming down the pike. Sept. 10 2003 Bush (Labaton) recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry. The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios. The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.

Unfortunately, Bushes alarm went unheard. The power of the Financial Services Committee with Barney Frank managed to convince enough people that there was no problem.  Frank had (Poor) aggressively thwarted reform efforts by the Bush administration. He told The New York Times on Sept. 11, 2003, Fannie Mae and Freddie Mac’s problems were “exaggerated,” a gross miscalculation some five years later with costs estimated to be in the hundreds of billions. “These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis,” Frank said to the Times. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” These two organization did lead the way to this financial crises we face today. Since he pushed so hard it make me wonder what besides the $42,350 in campaign contributions he received.

In an interview I had with JD Hayworth May 1, 2010 I asked why since he was on the ways and means committee why the republicans, who were in charge, “why they did not heed the warning?” He said “Not enough republicans had the intestinal fortitude to tackle the problem.” He also told me to look up a letter written by John Allison, CEO of BB&T.

On September 23 2008 John Allison CEO of Branch Banking & Trust Co. wrote a letter to each congressman and each senator, in which he explained the issues of the current financial meltdown. In his letter he states that the reason for of the current banking problem is that it was caused by Freddie Mac and Fannie Mae and pressure from the Clinton Administration to give the masses a home. (Allison) These government supported enterprises distorted normal market risk mechanisms. While individual private financial institutions have made serious mistakes, the problems in the financial system have been caused by government policies including, affordable housing (now sub-prime), combined with the market disruptions caused by the Federal Reserve holding interest rates too low and then raising interest rates too high. (P 1) His bank was one of the well run banks that will be punished by the fixes.

What shall we do to fix the problem caused by intentional manipulation of the housing market? Shall we investigate and convict the people who made millions from this debacle? Shall we just go about pining and blame the rich for stealing more from us poor hard working people? This is a quandary. Oh, I know what we can do lets have Obama make another speech and say it was the evil Wall Street tycoons, who caused it. After all Obama’s hands are clean, because he only received $126,000 in campaign contributions from Fannie Mae and Freddie Mac, and let’s not forget the sweetheart deal he got from Countrywide on his house in Chicago. Then let’s have Christopher Dodd rewrite legislation in the senate, he unveiled his own plan for an overhaul of financial regulations that he hopes can avert another meltdown and be passed by Congress before November’s elections. Yes, his hands are clean after all; he only received $165,400 in campaign contributions from Fannie Mae and Freddie Mac, plus a sweetheart deal for his home in Connecticut from Countrywide. Then we need to add Barney Frank to help fix the problem, after all he only received a mere $42,350 from Fannie Mae and Freddie Mac and of course we need to forget about his personal relationship with Herb Moses, an executive for the now-government controlled Fannie Mae. Then how can we forget about the only man smart enough to lead the treasury and steer us out of this mess, Timothy (tax cheat) Geithner, who blamed Turbo Tax for his unwillingness to pay his taxes for years.

Now that we have the foxes that opened the door to the chicken coop in charge of protecting the chicken coop up, we have nothing to worry about, or do we? After all Geithner never saw this coming while head of the New York Fed. “We considered (Cover) a full range of options and decided that now is the time to pursue the essential reforms,” Geithner said. “Those that address the core causes of the current crisis, and that will help to prevent or contain future crises.” Those “essential reforms” include the establishment of a new Financial Oversight Council to coordinate between banking regulators and watch for systemic risk; new powers for the Federal Reserve to supervise all systemically important firms; a new National Bank Supervisor to oversee all federally chartered banks; and new powers to allow the federal government to wind down any failing financial institution.

During Geithner’s Senate (Covey) testimony, he admitted that both Fannie and Freddie played a central role in the financial crisis, telling Sen. David Vitter (R-La.) that the two government-sponsored enterprises (GSE) were a “core part” of the country’s financial woes. “Absolutely,” Geithner said. “Fannie and Freddie were a core part of what went wrong in our system.” Geithner explained that the administration did not have the time to come up with coherent regulations regarding Fannie and Freddie because of its other legislative priorities. Geithner did promise to work with Congress and other federal agencies in trying to solve the Fannie and Freddie fiasco, promising some type of proposal in early 2010.

I wonder if these proposals will also include what porn sites the oversight committee should watch, like the SEC did. In a Washington Post article Dozens of Securities and Exchange Commission staffers used government computers to access and download explicit images and many of the incidents have occurred since the global financial meltdown began, according to a new watchdog investigation. We really need to throw a lot of bums out of our government and return it to the people. We must do that through the election process. We must prosecute those that are responsible for corruption and put them in jail. Those in the public trust are supposed to be held in a higher regard. Those who abused the public trust must be held responsible a prosecuted to the full extent of the law. Right now it is far to easy to get away with corruption.

We have looked at many things in this discussion of our current financial meltdown. We have looked at the key players and the key reasons. We have looked at the current president and some of his key advisors. We have looked at tax policy from the beginning of the IRS up to today. Unfunded mandates are also a tax increase but hidden and they tie the hands of the local governments, which were given to us by the 17th amendment. We have followed a small part of the money trail. We found that the money trail is wide spread among both political parties. We saw that alarms bells were sounded of the coming collapse, however no one want to do anything about it. Everyone had a reason, which was about money. Everybody in power got a little richer. To fix this mess, we must start by repealing the stimulus package, and repealing the health bill, both bills do nothing except stimulate bigger government. However, I believe “We The People” need to fix processes, when they are bad and punish people, when they break the law, weather for financial gain or not. After all we are supposed to be a nation of laws, not of men. We have explored the wave theory because it appears to be a great predictor of today’s world, because it recognizes the virtues, or lack of, in people. Again we are not helpless fools, but we do have human nature and the wave theory seems to recognize that aspect of our world. We met the players that caused today’s problem, and we have placed them in charge of the hen house, so they can fix it for us. Finally what do we do about it? The only power we have is provided to us is in the United States Constitution. We vote the people out that are causing us this problem. We as an electorate must become informed of what our elected officials are doing. A fully inform electorate is not easy, but it must be done. We must return reason and sanity back to the house and senate this fall. We must negate all the evil that Obama, Pelosi, and Reed have done to this country. We must stay vigilant and return to the values that founded this country. We must replace the foxes this year, with the 2010 elections; because in 2012 we will not be able replace them. Joseph Stalin said in the 1930s “he who casts the ballots, decide nothing. He, who counts the ballots, decide everything.” We have evidence of how that works in Minnesota with the election of Al Frankton to the Senate.


O”Connor, Karen. & Sabato Larry, J. (2009) American Government. New York:

Baranov Eric V. Theory Letters Retrieved 04/30/2010 from WEB

Citizens for Tax Justice Retrieved April 30, 2010

Holmes, Steven, A. The New York Times September 30, 1999 Retrieved April 30 3010

Cover, Matt., June 19, 2009 Retrieved April 30, 2010

Fannie Mae and Freddie Mac Invest in Lawmakers Lindsay Renick Mayer on September 11, 2008 Retrieved April 30, 2010

Labaton, Stephen. The New York Times September 2003 Retrieved April 30, 2010

Businessweek  The best and worst managers January 2005 Retrieved April 30 2010

Poor, Jeff; Business & Media Institute 9/24/2010

Retrieved April 30, 2010 Business Media

Citizens for Tax Justice Retrieved April 30 2010

Mehan,  Tracy, G. The Buck’s Passed Here’: Unfunded Mandates for State and Local Governments

Published on October 5, 1993 by Tracy III Retrieved 04/08/2010 Heritage Foundation

Allison, John. Branch Banking & Trust Retrieved may 2, 2010

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