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The genesis of our economic crisis

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Post Options Post Options   Thanks (0) Thanks(0)     Back to Top Direct Link To This Post Posted: February/19/2009 at 12:57
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With all the "gay" postings today I thought perhaps I could "snap" the forums back to reality with a serious post.  Besides, Ed needs more college credit.
 
Tell me if you agree.................
 
I am a little concerned over the genesis of the whole economic situation we find ourselves in as a country.  Wanting to avoid and/or identify future recurrence of our nightmare situation I ask why we are in the position we are in?

You hear repeatedly how "things in banking weren't regulated enough" and "irresponsible banking".  I find those two statements to be false.

The banking / housing / lending / mortgage crisis comes from TWO things if you ask me.  Unfortunately it DOES seem that our current economic downturn ALSO has it's genesis in the mortgage crisis....but connecting those two things is a different discussion and I don't intend to link them here.  So getting back to what was the major factor that precipitated the mortgage crisis....

TWO things caused this if you ask me. 

First Cause of our crisis
Irresponsible personal finances, and by that I mean two significant errors a LOT of families have been making since our culture took a dastardly turn in the 90s.

Error #1, as a whole there has been a disturbing trend for people SPEND more than they EARN.  You can see that in this graph.  I recall I brought up this issue and this graph on with various friends quite some time ago.  I first became aware of this graph in 2005.  My personal notes on the graph are from 2005.....



Error #2 (closely related to #1), and I have heard many bankers, mortgage brokers, etc. verify these facts from Maine to Florida, to Hawaii and all parts between...... that people over-bought houses, constantly kept themselves in new cars financed over longer terms, financed "living large" with Credit Cards and the like.  This created two things, false home values and false demand.  Both things have subsequently come to a head.

Second Cause of our crisis
The government and/or the culture forcing loans to be made to families that had no business owning a home and could not afford one.  Enter Fannie and Freddie.  Not only was this government organization coerced for political reasons on a false premise, but a bunch of thieves calculated themselves bonuses and exacerbated the problem.

A little further explanation......Fannie Mae goes all the way back to 1938, with a significant change to the two organizations in 1968, but the real turn down the wrong path came in the late 90's when it was decided (somehow) that it wise to expand lending as is a "right" that everyone should be able to get financing even if it was clear that the buyer would likely not be able to repay the loan.
So there you have it, I find these two things as the overriding cause of the mortgage crisis and the cause of our situation today. Sure, GM with too strong of a union, sure we spent treasure in Iraq and Afghanistan, sure factors like this caused localized economic problems, but the genesis of the problem lies with these two "big picture" items.


Edited by Ick - February/19/2009 at 12:58
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Published in the NY Times on 9/30/1999.
 
Read every word carefully...
 
Fannie Mae Eases Credit To Aid Mortgage Lending
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By STEVEN A. HOLMES
September 30, 1999

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, 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 and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

Post Options Post Options   Thanks (0) Thanks(0)     Back to Top Direct Link To This Post Posted: February/19/2009 at 13:26
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1. Fannie Mae, 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
 
2. In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn
 
3. Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings
 
 
Just gotta shake your head at their wisdom.  Maybe the freakin' poor credit rating was there for a reason guys!


Edited by Dogger - February/19/2009 at 13:26
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Good find Ted, good find.  Who'da thought 1999 would end up being just another product like the new.......
 
Do you guys find those two things to be the genesis of our economic woes?


Edited by Ick - February/19/2009 at 13:26
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The Democratic rule...........Brought to you by the same folks that sponsored the economic crisis. Coming up next............ Mortgaging the future of freedom.
Post Options Post Options   Thanks (0) Thanks(0)     Back to Top Direct Link To This Post Posted: February/19/2009 at 13:55
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I think our society changed also....a lot of people decided that they wanted all of the really nice things in life NOW.  Nobody wanted to save their money until they could afford a big house, they just took out a loan and got one.
Don't forget about the credit card companies getting young kids (18 or 19) up to their eyes in debt as soon as they went to college.
Our country is going to be forced to change our 'buying culture'.


Edited by swtucker - February/19/2009 at 13:56
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Exactly swtucker - no different here.  People just don't want to wait until they can afford things
 
There seems to be a real "entitlement mentality" today.
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Interesting article in our local paper today.  Rush Limbaugh has been talking about this too lately.  There was an electronic run on the money market (banks) back in Sept of 08 to the tune of 550 billion in a matter of a couple of hours.  The feds stepped in with 105 billion to keep it afloat but had to shut down the money market to prevent an economic crash... They then upped the federal guarentee to 250k to prevent further runs and calm the storm.  They estimated had it kept going it would have been 5.5 trillion by 2 pm that afternoon collapsing not only our monetary system, but the world economy as we know it. 
 
Apparently Bush alluded to this back in Sept by issuing ambiqous statements of warning concerning that market manipulation was being investigated etc  but never got into details.... Like a bit of a message to those that may have been involved.  This article hinted that if true and speculated who could have done it and why (possibly forgeign govts with interest in steering our election for their own agendas) 
 
A rep from Penn had spoken about it but gotten little to ZERO media coverage.  To this day, little has been said nor explained concerning the whole incident. 
Post Options Post Options   Thanks (0) Thanks(0)     Back to Top Direct Link To This Post Posted: February/20/2009 at 01:21
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Ick, you are quite correct in your analysis. The fundamental issue is that people spent money that they did not have. This money came from the banks who lent it on the basis that property prices would continue to escalate. They calculated that the over valued collateral would over time increase in value and provide ongoing security for the loans. Now who does one blame for this state of affairs? The consumer for excercising poor judgement and lack of economic savvy? Do you blame TV and other advertising campaigns for creating the "must have it " culture, or the banks for their greed to offer 110% financing schemes (with huge bonusses for the excutives as an incentive)? Certainly these bright clever excutives were better educated and informed then the average consumer.
Really a chicken and egg situation, and the chickens have come home to roost.
I would say that the whole world has just re-learnt the lesson that you cannot escape sound economic principles, and you cannot keep spending what you do not have. One of the principles remain that you have to have the correct borrowing to earning ratio or "gearing" in order to make the economy sustainable. And this is what is taught in Business Economics 101, which the Big Bankers should know and should be accountable for.


Edited by 8shots - February/20/2009 at 01:22
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Originally posted by Ick Ick wrote:


Second Cause of our crisis
The government and/or the culture forcing loans to be made to families that had no business owning a home and could not afford one.  
 Sure, GM with too strong of a union, sure we spent treasure in Iraq and Afghanistan, sure factors like this caused localized economic problems, but the genesis of the problem lies with these two "big picture" items.
 
Not exactly. The government did not force those loans to be made. Rather, the conservative government took the "no government regulation" stance, and sat and watched while those loans were being made. 
 
GM's troubles started long ago, when they focused primarily on gas guzzling SUVs. When gasoline hit the $4 mark, they died. I am sure that unions did not help (it's interesting how in other countries like Germany or Sweden unions work with the management to better the company), but the problem is more complicated that that: our health insurance companies are becoming blood sucking monsters - and health costs in America are greater than anywhere else in the world. But then again, we also have, on average, worse health than any other developed country, no doubt because of our eating, lifestyle habits, and high stress caused by poor social protection systems.  
Post Options Post Options   Thanks (0) Thanks(0)     Back to Top Direct Link To This Post Posted: February/20/2009 at 06:28
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Originally posted by cyborg cyborg wrote:

The Democratic rule...........Brought to you by the same folks that sponsored the economic crisis. Coming up next............ Mortgaging the future of freedom.
 
Don't blame only the democrats for all this. This is a crisis that unfolded in the last 10 years. It was during the 8 years of Republican rule that the mortgage scams, home speculating, and "spend money to grow the economy" happened. Remember what GW Bush said in his first speech after 9/11: "go shopping to make the economy grow".  He did not say: let's grieve, let's save money, let's be wise. He said: go shopping.
Shop, they did.
 
On the other hand, if any government, Dem or Rep., would have stepped in to stop the unsustainable lending, people like you would have screamed about communism, and "we don't want big government" and all that.
 
As far as mortgaging the future of freedom: you cannot have freedom and rule of law and democracy for long in a country that is not economically viable. Hungry people want food before freedom. So,  whatever they are doing, let's hope that it works.
 
Post Options Post Options   Thanks (0) Thanks(0)     Back to Top Direct Link To This Post Posted: February/20/2009 at 06:31
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Originally posted by anweis anweis wrote:

Originally posted by cyborg cyborg wrote:

The Democratic rule...........Brought to you by the same folks that sponsored the economic crisis. Coming up next............ Mortgaging the future of freedom.
 
Don't blame only the democrats for all this. This is a crisis that unfolded in the last 10 years. It was during the 8 years of Republican rule that the mortgage scams, home speculating, and "spend money to grow the economy" happened. Remember what GW Bush said in his first speech after 9/11: "go shopping to make the economy grow".  He did not say: let's grieve, let's save money, let's be wise. He said: go shopping.
Shop, they did.
 
On the other hand, if any government, Dem or Rep., would have stepped in to stop the unsustainable lending, people like you would have screamed about communism, and "we don't want big government" and all that.
 
As far as mortgaging the future of freedom: you cannot have freedom and rule of law and democracy for long in a country that is not economically viable. Hungry people want food before freedom. And if you don't understand this, you probably have never been been hungry enough. So,  whatever they are doing, let's hope that it works.
 
Post Options Post Options   Thanks (0) Thanks(0)     Back to Top Direct Link To This Post Posted: February/20/2009 at 06:35
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Originally posted by anweis anweis wrote:

Originally posted by Ick Ick wrote:


Second Cause of our crisis
The government and/or the culture forcing loans to be made to families that had no business owning a home and could not afford one.  
 Sure, GM with too strong of a union, sure we spent treasure in Iraq and Afghanistan, sure factors like this caused localized economic problems, but the genesis of the problem lies with these two "big picture" items.
 
Not exactly. The government did not force those loans to be made. Rather, the conservative government took the "no government regulation" stance, and sat and watched while those loans were being made. 
 
GM's troubles started long ago, when they focused primarily on gas guzzling SUVs. When gasoline hit the $4 mark, they died. I am sure that unions did not help (it's interesting how in other countries like Germany or Sweden unions work with the management to better the company), but the problem is more complicated that that: our health insurance companies are becoming blood sucking monsters - and health costs in America are greater than anywhere else in the world. But then again, we also have, on average, worse health than any other developed country, no doubt because of our eating, lifestyle habits, and high stress caused by poor social protection systems.  


Not exactly anweis, the Government DID in fact raise the banks debt to capital ratio and forced the banks to make loans or else.  From a banker whose bank has now gone under and he's a friend of mine  that predicted this happening years ago.
Post Options Post Options   Thanks (0) Thanks(0)     Back to Top Direct Link To This Post Posted: February/20/2009 at 06:42
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Originally posted by scooter65 scooter65 wrote:

Interesting article in our local paper today.  Rush Limbaugh has been talking about this too lately.  There was an electronic run on the money market (banks) back in Sept of 08 to the tune of 550 billion in a matter of a couple of hours.  The feds stepped in with 105 billion to keep it afloat but had to shut down the money market to prevent an economic crash... They then upped the federal guarentee to 250k to prevent further runs and calm the storm.  They estimated had it kept going it would have been 5.5 trillion by 2 pm that afternoon collapsing not only our monetary system, but the world economy as we know it. 
 
Apparently Bush alluded to this back in Sept by issuing ambiqous statements of warning concerning that market manipulation was being investigated etc  but never got into details.... Like a bit of a message to those that may have been involved.  This article hinted that if true and speculated who could have done it and why (possibly forgeign govts with interest in steering our election for their own agendas) 
 
A rep from Penn had spoken about it but gotten little to ZERO media coverage.  To this day, little has been said nor explained concerning the whole incident. 
I believe George Soros and his affiliates (large sections of UN members) are behind this.  It is the way Soros could intervene and 1) impact the election, 2) quietly stand behind a move to socialize the American economical and political atmosphere.  Soros hands are dirty on this and I believe he will be found out and/or state his involvement out of arrogance.
 
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Originally posted by Steelbenz Steelbenz wrote:

Originally posted by anweis anweis wrote:

Originally posted by Ick Ick wrote:


Second Cause of our crisis
The government and/or the culture forcing loans to be made to families that had no business owning a home and could not afford one.  
 Sure, GM with too strong of a union, sure we spent treasure in Iraq and Afghanistan, sure factors like this caused localized economic problems, but the genesis of the problem lies with these two "big picture" items.
 
Not exactly. The government did not force those loans to be made. Rather, the conservative government took the "no government regulation" stance, and sat and watched while those loans were being made. 
 
GM's troubles started long ago, when they focused primarily on gas guzzling SUVs. When gasoline hit the $4 mark, they died. I am sure that unions did not help (it's interesting how in other countries like Germany or Sweden unions work with the management to better the company), but the problem is more complicated that that: our health insurance companies are becoming blood sucking monsters - and health costs in America are greater than anywhere else in the world. But then again, we also have, on average, worse health than any other developed country, no doubt because of our eating, lifestyle habits, and high stress caused by poor social protection systems.  


Not exactly anweis, the Government DID in fact raise the banks debt to capital ratio and forced the banks to make loans or else.  From a banker whose bank has now gone under and he's a friend of mine  that predicted this happening years ago.
I have a relative who does bank startups.  His comment for years has been that the PRESSURE by government to force banks/lending institutions to loan exorbitant amounts to people who clearly had no means to repay (not just houses, but cars and "signature loans" for cash) would create a crisis the likes of which we had never seen.  Now he just says, "I told you so".  As an aside, he purchased a "modest" home in an upscale community (not one of the high end units) which is now devalued to about 35% of the purchase price.  He sees no way to recover his stock market declines (losses) in his lifetime.  A recovery of an order of magnitude would not repair the losses.   


Edited by Kickboxer - February/20/2009 at 06:52
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As one that played the real estate game for years this is way oversimplified, you have to understand derivatives and cmb bonds and the effect deregulation had. Banks became brokers of cmb instead of lending money they made their money off selling the bonds.
 
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Yes there is something by design at play here. Too much was known and nothing was done. There has to be an agenda.
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Economic gluttony with disregard for sustainability became the norm. The blame *AND* the accountability *MUST* ultimately belong to the people. Responsibility begins on the individual level and it is extremely dangerous to hold government ultimately accountable for individual responsibility, and it is dangerous to expect government to leverage our economic habit. If we can not remain individually responsible, we will need someone to do it for us and the end result *WILL* be the sacrifice of freedom. If we can not get out of the kitchen and refrain from economic gluttony, we will need a parent to make us stay in our room. If as a whole we can not maintain responsibility on the individual level, we have already chosen to live under socialism where government determines the things for us that should be determined for ourselves. This is the typical lesson of freedom versus responsibility.

People must wake up, become adults, and stop relying on something to pamper them. We already have too many crutches that enable individual economic irresponsibility. The nonchalant mother of 14 Nadya Suleman is the symbol that irresponsibility in this new era of economic gluttony with disregard for sustainability and we are all going to pay because socialists are gleaming with opportunity to pick up our slack in taking care of ourselves my friend.

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A little short note on derivatives
These things look like something Las Vegas would come up with instead of Wall Street, a least in Vegas you get free drinks at the craps table.
 
Duce  Smile
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Originally posted by Duce Duce wrote:

a least in Vegas you get free drinks at the craps table.
 
Duce  Smile
 
Excellent
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Uh.............Those whose luck is such that they can win fairly consistently. Yeah they drink for free.
If your luck is like mine. The drinks are very expensive. Cencored Hell I might (probably) even be buying for the winners for that matter.
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http://www.ffiec.gov/cra/
"The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations. It was enacted by the Congress in 1977 (12 U.S.C. 2901)" 
The banks and the government are in bed together on this. The Federal Reserve is a private corporation our money should not be Federal Reserve Notes it should be U.S. Notes there has been serious foul play at work for years. Even when I was an appraiser we took the three higest sales for comparable properties or adjusted the subject property so it could sell at the price the buyer had agreed. Happy buyer, happy seller, happy banker ==> property prices go up, tax revenues go up.  This had been artificially inflated for years. It's not Democrat or Republican it's both. You cant get into office without more money than any average honest guy has so the people in office are bought and paid for. We are back to Taxation without Representation. Is it any wonder that our imigration policies have shifted power toward the liberal socalists.  These  ideas are not from the decendants of those who fought to create this country.  It is the control of power through the control of finance. The whole thing is quite complex but bad things dont just happen because they happen they happen because someone planned for them to happen. When the money - value disappears where did it go it didnt just go poof it changed hands. I'd like to know who is getting filthy rich through this process because like every other crime you get the answer if you follow the money.  Debt is simply slavery by another name.  No wonder they fear the Constitutional Ammendment Rights there is foul play at hand.
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These two financial instruments changed the way banks do business
Banks became salesman of loans that were bundled into the above, do you know where your home loan is now? Even if you live in a small town your loan may be held by a bank or lending institution in China.  The effect of cmo has hit already the effect of the cmbs is still coming.
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Urimaginaryfrnd,
I believe that the ailing economy has less to do with anyone getting rich by manipulating it than it has to do with losses on everyone's part due to mass spending with little production.

Irresponsible lending became the norm, driven by greedy borrowers and lenders, and overlooked by all because it boosted economy and value, albeit artificially. People borrowed while not producing and the lenders lost what they lent. There are no winners, except that people were enabled to live beyond their means for an entire decade. This includes everyone involved; the borrowers, the lenders, and the loan writing companies. At the peak of the bubble, many of the people that I knew were starting their own loan writing companies or working with friends that started one and I didn't jump on the bandwagon because I knew what was coming and I warned them that so many loans cannot be made without America becoming a nation of producers rather than a nation of borrowers and consumers. We had completely lost our minds, and everyone I said this to clearly did not think they needed to face reality.

It's a wonder how easily people can loose sight of reality even when it is the simple concept that sustainability requires production that exceeds consumption. Here's a scary consideration, government payroll now exceeds industrial payroll. That is completely unsustainable because industry is the producer of wealth and government is a consumer of wealth. Until sustainability is maintained, we are headed for a disastrous reality check. The problem is that a decade of living beyond means leads to the expectation of entitlement, which is the dangerous part because the expectation of entitlement is the doorway to socialism.

How are they going to bring it to us? When the taxpayers can no longer borrow more money to keep sustaining artificial affordability, the government is now forcing the taxpayers to borrow more money - A LOT MORE. Divide $838 billion by the number of taxpayers. I don't know the exact number of taxpayers, but I anticipate that loan we are forced to bear will cost the taxpayer well over an average of $7,000 each - before interest. While Obama preached that the government will spend this money to boost the economy, he did not ever once mention that it is just another attempt to maintain artificial affordability without sustainability  - and he did not once mention that the money actually comes from the taxpayers to accomplish it. But nobody cared because he speaks as though he is so profoundly correct that people buy it without ever considering that this is their money that he is spending for them. This is socialism.

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Mike,
 
I couldn't tell who that was the back seat until I made it larger  It looks like Hillary and Obama in the front, with Michelle and biden in the back.
 
Great great avatar.
 
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