From Investors Business Daily:

While not blameless, Wall Street is an easy scapegoat. And investment houses that made billions slicing and dicing mortgages into CDOs, derivatives, credit default swaps and other exotic paper are easy to demonize. But the problem wasn’t these financial instruments. Or even the obscene profits they generated. Mortgage-backed securities were nothing new, and we’ve always had speculation in the market.

The problem was the underlying assets: low-quality mortgages. We’ve never had so many junk home-loans poisoning the financial well before. And who poisoned the well? Washington and its affordable-housing policies.

It was Washington that declared prudent home-lending standards racist and gutted traditional underwriting rules in the name of diversity. It was government that created the risk on Main Street.

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Charlie Gasparino in today’s New York Post:

The municipal-bond market is in crisis, with prices fall ing and investors running for cover — and for good reason.

Munis — bonds sold by states, cities, counties and other localities to finance government operations — are in trouble because the Ponzi scheme of Big Government is coming unglued. The markets are merely reflecting this reality, as they always do.

The $3 trillion muni market was once regarded as the safest of all investments because the bonds are backed by government taxes. Now it’s showing all the earmarks of the 2007-08 meltdown.

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The Federal Reserve announced “Quantitative Easing 2” (QE2) last week, a stimulus program whereby the Fed will print $600 billion of paper money to buy U.S. government bonds. Fed Chairman Ben Bernanke took the extraordinary step of trying to justify this action by writing an Op Ed in the Washington Post. The article claimed his goal is to drive down longer term interest rates and drive up stock prices, so that “a virtuous circle will support further economic expansion.” The concept is that if Americans felt richer because their 401Ks went up in value there would be a “wealth effect” encouraging the public to spend more money and businesses to increase capital investments. Unfortunately, this is like starting a barbeque with a flamethrower. You will surely create a fire, but it will probably burn down the neighborhood.

Back when Lehman Brothers filed for bankruptcy in the fall of 2007, the Fed panicked and “Quantitatively Eased” by slashing interest rates and purchasing $1.7 trillion of mostly dicey mortgage related bonds from the banks at full value. The price of food and other commodities were sent skyrocketing, oil climbed to an all-time record of $145 per barrel. Consumer price inflation rose by 5½% over the next year, but the higher costs of essentials hammered personal disposable income and consumers put the brakes on their discretionary spending. As the U.S. money supply leaped, hedge funds borrowed in depreciating U.S. dollars to invest in appreciating Asian currencies.

Instead of creating an economic boom, Chairman Bernanke actions caused the worst recession since the 1930s. As business profitability tanked due to lower sales and higher material costs; production was cut and workers laid-off. The rate of unemployment and underemployment soared on Main Street. When the bubble burst and the markets fell back “under their own weight” and a period of deflation began that is probably far from over.

Wall Street on the other hand, did quite nicely thanks to Ben and his buddies at the Fed.

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Here is an idea:  Greece is getting ready to sell some of its assets to pay for its gigantic debt (Corfu and the Parthenon are not on the auction block yet), and the US should do the same. According to the Financial Statement of the United States, there is about $2.6 trillion of stuff we could sell (See  Page 49 of the report, it’s page 69 of the whole document). A few items on my list:

Loans receivable and mortgage backed securities:  $540  billion
TARP direct loans and equity investments: $240 billion
Property, plant, and equipment: $784 billion
Freddie and Fannie preferred stocks: $65 billion

I would add California, New Jersey and maybe New York: $500 billion (The three states have a lot of debt and many  high maintenance people living there so I am not sure how much we can get for them).

What’s on your list?

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For anyone who thinks that big Wall Street and Big Government aren’t joined at the hip, promoting policies and laws that keep each other fat and happy often at the expense of the American taxpayer, consider the career of Robert Rubin.

Rubin, of course, is largely gone from the public scene after spending 10 disastrous years as a board member and senior executive at Citigroup, the banking giant that epitomizes all that is wrong with American finance, and before that, a largely successful run as Treasury Secretary in the Clinton Administration, which he joined after running another controversial bank, Goldman Sachs. But his legacy looms large, mainly because I believe he was one of the reasons why the financial crisis occurred in the first place.

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The Federal Reserve’s purchase of $300 billion in Treasury debt, as well as its purchase of mortgage-backed securities, has aptly been described as “monetizing the U.S. government debt,” with appropriate concern that it will fuel inflation. 

If President Obama fancies himself a twenty-first century Abraham Lincoln, then we need Timothy Geithner to be his Salmon Chase. Lincoln’s Treasury Secretary was remarkably successful at financing the Civil War, with only limited inflation, and remarkable fidelity to the Constitution.

Chase was a radical Ohio abolitionist before the war (sometimes called the state’s “attorney general for runaway Negroes”), and a relentlessly ambitious rival of Abraham Lincoln. After Lincoln beat Chase for the 1860 Republican nomination, he made him his Secretary of the Treasury. Almost all historians regard Lincoln’s ability to keep Chase on board as one of the marks of his genius as a statesman.

Chase was also a hard-money man, and abhorred paper money—especially the paper emitted by state banks, excoriated (if somewhat exaggeratedly) as “wildcat banks”– creditors were said to have to battle wildcats to attempt to redeem the worthless notes of these reckless frontier banks. Chase believed that the United States needed a national currency, issued by a national banking system. As the Civil War’s costs grew exponentially, Congress pressed him to monetize the government’s debt by issuing Treasury notes unredeemable in gold or silver, and to declare them to be legal tender for all debts—the “greenbacks,” which color our paper money to this day. Chase stuck to his constitutional guns for as long as he could, but finally gave in. But he “hated the crime about to be committed,” as historian Bray Hammond put it. By the end of the war, Chase got his national banking system, and had eliminated unconstitutional state-bank paper currency.

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