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"The government's response to the financial meltdown has made it more likely the United States will face a deeper crisis in the future, an independent watchdog at the Treasury Department warned." - TARP Watchdog Neil Barofsky: Government Bailout Has Increased Risk Of Economic Crisis

Ok, so maybe the Treasury itself isn't admitting failure, but the person in charge of watching over the TARP program is. He sites multiple instances of corruption, and says the Treasury should "enact clearer walls" to try and stop it.

Treasury said it welcomed Barofsky's oversight but resisted the call to erect new barriers against conflicts of interest. The new rules "would be detrimental to the program," Treasury spokeswoman Meg Reilly said in a statement. The existing compliance rules "are a rigorous and effective method of protecting taxpayers," she said.

So the system can't work without there being corruption? Spoken like someone taking advantage of the system. Obviously they aren't rigorous enough. This is typical of government programs though.

Barofsky goes on to say,

"Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," Barofsky wrote.

He also makes the same argument that is indicative of any bailout, be it banks, the auto industry, or any business. Most call it a "moral hazard"...

Since Congress passed $700 billion financial bailout, the remaining institutions considered "too big to fail" have grown larger and failed to restrain the lavish pay for their executives, Barofsky wrote. He said the banks still have an incentive to take on risk because they know the government will save them (emphasis mine) rather than bring down the financial system.

We need to let these companies fail, no matter what the consequence to our economy. If we don't, the consequences will become worse and worse until at some point - like all economies that inflate their currency - the entire economy will collapse.

Fannie Mae and Freddie Mac were originally created as a way to increase the amount of credit available to consumers to purchase homes. They did this by buying mortgages on the open market, packaging these mortgages as securities, and selling them to investors for a fee. The reason why investors agreed to purchase these securities is because Fannie and Freddie promised to pay off the mortgages even if the home owner defaulted on the loan. So all the mortgages purchased provide the investor interest without the risk of default.

Because of these types of securities, as well as historically low interest rates, a major asset bubble formed in the housing market. Home valuations skyrocketed and people were cashing out the "equity" in their homes and spending it on whatever they desired. As the bubble continued to increase in size, more and more people jumped on the bandwagon and went deeper into debt. Fannie and Freddie continued to guarantee any loan put in front of them.

Eventually the bubble burst. So many people defaulted on their loans that Fannie and Freddie had no way to pay for all the defaults on mortgages they backed, making the assets they sold "toxic." Nobody knew what they had bought or how safe the loans they owned actually were. Although the government repeatedly said that Fannie Mae and Freddie Mac were not backed by the government, when the time came they bailed them out to the tune of (up to) $400 billion. To date, both companies combined have used about $111 billion of tax payer money.

The saga continues. "The Treasury Department said Thursday it removed the $400 billion financial cap on the money it will provide to keep the companies afloat." If these two companies have only used about 1/4 of the money allotted to them, why would the treasure remove the $400 billion financial cap?

Maybe it's because we are on the verge of another mortgage disaster. Maybe because the FHA is the new subprime lender. Maybe they have a hint - this time - of what is coming our way.

The government may be keeping housing prices inflated through programs such as the tax credits to new home buyers, by continuing to back subprime loans to encourage more demand, or by limitless bailouts of failed companies, but in reality all it is doing is making the situation worse. No matter what Congress, the Treasury, the Federal Reserve, or the President thinks, they can not control the market. The market always wins. Eventually, as the new subprime buyers default on their loans, prices will again drop causing another massive collapse in the housing market. The government is simply getting ready to try and keep everything afloat a little longer. Unfortunately they are just making things worse for everyone. Taxpayers bear the brunt through higher taxes, debt and inflation, home buyers get stuck with overvalued homes, and the Wall Street investors benefit as they earn profits on money they risked, but should have lost.

Welcome to socialism 101. Wealth distribution at its finest.

Yeah! My letter to the editor was finally posted in the Journal Star. Unfortunately, they posted it along with four others, so I can't link to it directly. It's the last one on the page though. Here it is again:

I keep hearing the recession is coming to an end. Unemployment is down, the stock market is up, and the stimulus is working. But if we actually take a look at the economy, what has changed?

Booms happen when people make mistakes about the economy. Housing is a perfect example. Credit becomes easy to get, people buy houses, house prices go up, people buy houses as investments (sometimes more than one), prices continue to go up - until it all collapses.

But housing is only one sector and just a symptom of the real problem. The real problem is we don't produce goods anymore. For the past 30 to 40 years, we have increased borrowing and decreased saving. We turned into a "service" economy.

As we spent more, it became easier for investors to make money from financing and servicing our debt than manufacturing goods. Banks and credit card companies grew, coffee shops and big box companies grew, and industrial and manufacturing companies shrank or were sent overseas. Last year, as we leveraged the last of our assets (housing), we ran out of money. The service and finance industry collapsed, or tried to. Our economy needs to correct itself by moving away from services and back toward manufacturing.

The problem is that bailouts and stimulus are preventing this correction. The government is spending our tax dollars to prop up the failed service economy. It's actually encouraging more debt through programs such as Cash for Clunkers and the $8,000 new homebuyer tax credit. In short, nothing has changed. Until it does, until our government lets this correction happen, we will continue our downward slide from recession into actual depression.