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Addressing the Cause and Effect of the Credit Crisis, Legislating Denial- Part1

Politics / Credit Crisis 2008 Apr 12, 2008 - 11:12 AM GMT

By: Joseph_Russo


Best Financial Markets Analysis ArticlePart I- Legislating Denial or Sweeping Change for Better or Worse
Part II- Central Bank Insolvency Crisis – winding down a 300-year Paradigm of Failure & Deceit
Part III– Market Update – TA in Full Command - Trading Profitably No Matter Who's Controlling the Markets

Part I - Legislating Denial or Substance
It is quite true that modern society as we know it cannot exist without a sound financial system. However, it may be vehemently argued that a free -modern society cannot exist within a systemically corrupt financial system.

Front and center focus is currently being directed upon the public's widespread involvement in the housing crisis - or more appropriately phrased; - the financial sphere's mass corruption of real property valuations and subsequent issuance of flawed innovative investment products from which they plundered extraordinary profits.

How we address the whole cause and effect of this crisis will shape the course of the 21st Century

We suspect with near certainty that end-game outcomes associated with electing to embrace and work-through worst case scenarios in the short-run shall produce results far more advantageous to our nation in the long-run vs. outcomes associated with a denial-based hope, for best-case scenarios unfolding without incident.

If only America were permitted, or had the backbone to stoically endure the pangs of a relatively short-lived adjustment period, it may then bring about the ideal conditions for enacting sweeping and “incorruptible” policy changes across the entire financial and political spectrums.

Instead, the status quo dictates that legislators will be incessantly lobbied to favor widespread bail-outs, attempts at engineering artificial floors in home-prices, and likely coerced in the process, toward allowing a total forfeiture of powers and oversight to the very institutions responsible for repeatedly failing their mandates and obligations.

No Pain All Gain for Big Power

We suspect the ruling mobs of tyrannical majority may once again be trotting lawmakers down the wrong path in playing their fear-based ultimatum card of total financial system collapse, against subscribing to their voluntary participation plan in usurping a more perfect and absolute power in getting a second crack at supplanting the real economy with another of their brilliantly contrived proprietary versions.

Astonishingly, now that they find themselves totally bankrupt after the first such experiment, what they now appear to be demanding as ransom for “smooth transition” is a bailout of their sacred monopolies to be financed with unrestricted access to public taxpayer funds so that they may legally dictate architecture to some hellish rendition of “virtual economy 2.0” to suit their insatiable and ongoing ambitions.

In a sense, we are deceptively being fear-mongered into supporting exponential growth of widespread corruption and theft of national treasure or else face the unthinkable risk that everything we've come to rely upon will fall apart in ruin.

Such flawed strategies promise to reach long-term goals by yielding full spectrum power to the masters of the financial universe who are wholly responsible for the present set of conditions.

Lawmakers are either complicit, or falsely led to believe that it is only this faction of money-masters, that possess the wherewithal and integrity to spare the masses of any undue pain or hardship beyond that which has already been imposed.

Crisis = Opportunity (for whom)

If we have not already crossed the Rubicon, a continuance toward yielding to the corruptive lure of an easy-way-out, is likely to become the surest road toward indentured servitude for the masses, and insure the complete and utter ruination of the United States as a viable nation.

This may well be America 's very last crisis of mega-opportunity to set things straight –once and for all.

Failure to do so now, is likely to have consequences beyond comprehension for generations to come. Now is NOT the time to fear doing more harm by disturbing the culprit of status quo – but rather the time for a clarion call for bold and decisive leadership to take firm hold of the reigns, and bring an end to this fractious culture of madness.

Think for a moment, what might be better or worse for a nation:

To be led by …

An administration hell-bent and unwavering against all public opinion - to bring fiscal prudence, incorruptible integrity, and constitutionality back into the core of its nations culture

– Or -

An administration hell-bent and unwavering against all public opinion - to wage an endless war on terror, and bankrupt its nation to ruins

If we are to foolishly acquiesce in lowering ourselves to becoming a nation ruled by a single “decider,” we suspect that at the very worst, every rational majority would prefer the former in lieu of the ladder.

Until all those engaged and affected yank their heads out of the quicksand of denial, and accept the rather stubborn fact that for all intent and purpose, the system to which they are vested and aligned is WHOLLY BANKRUPT in every regard so far as the eye can see – nothing of lasting value will ever be achieved.

All of the pending legislation and grandstanding, if not prudently drafted and equitably enforced, will amount to nothing more than an escalation of the already enormous unfunded liabilities pending, and swell them to a level beyond any notional comprehension.

Keep it Simple - Get Back-To-Basics – Get Tough, and Get it Right

It's time to get back-to-basics America; All of us big boys and girls should privately weep with shame, then quickly get over it, lick our wounds, then resolve to becoming all-star players the grown-up world of reality and consequence for one's actions and inactions.

Fear not. Tearing down an irreparably damaged financial system and reconstituting it with policies of incorruptible integrity will not destroy the real day-to-day economy.

Quite the contrary – prudently reconstituting the system will likely reignite the real economy with a raging fury, and reposition the financial sphere back to its appropriate and practical purpose of accurately reflecting and calibrating various measures produced by the economy in lieu of usurping total control of it to serve its vexing whims.

One of the first orders of business may be to have interest rates determined by the free market and NOT by central bankers – better yet, abolish or reconstitute the legal structure of national bank charters entirely; thereafter, it should be mostly downhill sledding.

Returning to the ever-pressing Housing/Mortgage/Valuation debacle, we move forward with:

Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA),

Who is responsible for enforcing FIRREA? Which institutions or entities were in violation, and why are those delegated to enforce the act, or in violation thereof, not being held accountable to every extent of the law?


All parties across every strand in the daisy chain of financial innovation must take whatever extent of equitable losses is due them - PERIOD. All those who have broken existing laws, should be held accountable, and prosecuted accordingly – NO EXCEPTIONS – AND NO ONE PLACED ABOVE THE LAW.

In order to achieve the highest level of confidence in legislating reparations from the financial sphere's failure to practice sound lending and appraisal methods – bailouts of any group, individual, institution, company, or entity, in any form, no matter of status, size, or alliance, must immediately be retracted and BANNED from this point forward.

All discovered acts perpetrated in violation of the law, can and should be rectified under the equitable laws to which each of us are bound. Failure to do so sends an improper message that it's okay to break the law without consequence, but only if your big-enough, wealthy enough, or powerful enough to get away with it. Trust and full faith in Government, this does not breed.

Lawmakers must step back to perceive the larger picture, and tenaciously fight to enact legislation permitting the free-markets to reign with Adam Smith's “intended” invisible hand – and not by the hand of a majority-mob of widely perceived dictatorial fascists, special interests, or plain old sore-losers - that if left to their own (big enough to do anything they wish) vices, may-well end up nationalizing banks and who knows what else, and then stick the un-payable bill to an already enslaved citizenry of down trodden tax payers.


Just as homeowners are responsible for due diligence in signing mortgage contracts associated with illiquid real property assets, so too must bondholders/investors/states, and institutions be equally as diligent and bound to accepting the inherent investment risk associated with the underlying collateral of such illiquid securitized contracts.

Elected Stewards enriched by the labor of Taxpayers - fail to deliver time and time again

It is perfectly clear that the rulers of the financial world, along with those at the top of their sacred food chains, must now choose between the sanctity of their contracts and the total bankruptcy of a nation.

Without exercising or defending the legal authority to which they are entrusted to uphold, a tax-payer funded bailout package was forced down the throat of congress without their constitutionally required consent, nor the consent of the people they are paid by, and elected to represent.

This act is simply being pawned off as an emergency measure “so what is done is done – now where do we go from here.” Not only are congress and the American people in effect being held hostage to an unlawful plunder of public treasure in order to rescue the exorbitantly wealthy elite, but they are now being heavily lobbied and coerced to further empower “this massively corrupt financial faction,” whom are wholly responsible (though somehow not held liable) for engendering the crisis in the first place.

Instead of taking the necessary time to dig deep enough to reveal, understand, and adequately address the root causes, lawmakers are at the precipice of handing over total power to the morally, and now financially bankrupt institutions that are least likely to provide voluntary solutions of merit, and more likely to cleverly nationalize anything they can get their hands on, and reduce our nation (if they have not already done so) to a land of indentured servants.

The current crises did not evolve without fair and ample warning

On September 13, 1991 , in a hearing before the Subcommittee on Telecommunications and Finance, the 102 nd congress was made fully aware of the historical certainty of inviting the current financial crisis we now face.

It appears they were presented with, and rejected - a bill to amend (H.R.797) the Federal Securities Law to Equalize the Regulatory Treatment of Participants in the Securities Industry.

Continually at the mercy of corrupt influence of the most egregious sort, congress clearly failed to heed the regulatory measures already put into place some 57-years prior, which were drafted specifically to avoid “such crisis” from ever happening again. Sound familiar?

In 1991, our stewards once again failed us by refusing to acknowledge the known historical risks, and instead responded by adopting a bill that repealed prudent regulation designed specifically to prevent the very crises we are burdened with today.

Suddenly, we are urged not to find fault or blame, but instead, we hear plenty of clamor directing us to focus our attention on the promise of “new” regulations that will prevent this from ever happening again.

What was wrong with the generally effective regulation that was repealed in 1991? Who is to be held accountable for such negligence, and should similar entities and institutions that lobbied for the repeal of such safeguards be granted unfettered control in regulating such systems from this point forward?


Securities Regulatory Equality Act of 1991 (Introduced in House)


Subsection (i) of section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 781(i)) is repealed.

Lawmakers must Reject additional Schemes to keep severely overvalued home prices inflated

Efforts to raise mortgage limits, keep house prices artificially afloat, or efforts to maintain high tax bases and other similar ponzi-schemes to mask real values will FLAT-OUT-FAIL if properties are not first PRUDENTLY APPRAISED using standardized industry protocols based on direct or variable cash flows that the collateralized properties are able to generate in their respective rental markets.

Such rational appraisal standards should then become a strictly regulated and vigorously enforced LAW by which all real property exchanges must conform prior to the legal transfer of ownership.

So far as we can tell, such federal appraisal law standards already exist, and apparently have simply been ignored, never enforced, or both.

Appraisal Standards in Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989


The residential Real Estate Market (American Dream of Homeownership) should not be governed by the vexing emotion of intrigue inherent in a stock market-like speculative “greater fool theory” whereby home-prices may be set, and or be limited only by what some FOOL is willing to pay based on the prevailing incentive traps or rumor, which may seduce him or her to such levels of stupor.

However, It's still a Free Country last we heard…

That said - if a party wishes to pay a price above the appraised value for whatever reason, they should be free to do so, providing certain conditions are met. One such condition might be that the overpayment be in the form of additional cash above and beyond the required down payment so as not to impede upon prudent lending standards. Another such condition may be in the form of transparent paper trails of full disclosure, specifying the amount of excess cash payment made above the appraised value so as not to skew the states record of valuation assessments, and also to fully disclose to future buyers of such properties, the specific amount of excess cash payment willfully paid by the previous owner at the time of the last transfer. We suspect similar rules of disclosure and freedom to overpay may also apply to auctions as well.

Corrupt, Deceptive, illegally executed or flawed-Contracts should be ruled invalid and BROKEN

The first thing that must be done (COLD TURKEY) is to quickly get past the initial pangs of withdrawal in marking all of the securitized investment products to market basis the properly appraised underlying collateral value of those instruments.

In short, the most expedient and equitable way to determine a properties true-value is to capitalize it somewhere marginally above or below 100 times its present and/or variable future cash flow prospects.

On a positive note, some hints of prudence relative to such processes do appear to be hidden in H.R 3915.


Mortgage Reform and Anti-Predatory Lending Act of 2007

(Referred to Senate Committee after being received from House)


(v) Property Appraisal Requirements-

(ii) Performs each appraisal in conformity with the Uniform Standards of Professional Appraisal Practice and title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, and the regulations prescribed under such title, as in effect on the date of the appraisal.

SUBJECT: Appraisals for Use by a Federally Regulated Financial Institution

APPLICATION: Real Property


In order to comply with Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), the federal financial institutions regulatory agencies (“agencies”)( note1 ) of the United States have adopted appraisal regulations and guidelines. These laws, regulations and guidelines are established to protect federally insured depository institutions and include the requirement that appraisals be prepared in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP).

Time will tell if such prudence is ultimately exercised in equitable fashion, or if such standards will be masked with more complex and undesirable forms of flawed financial innovation.


Below, we provide a simplified example of a recent (would be) re-appraisal write-down case:

The property studied is an attached 3BR 2.5BA condominium located in the state of California . The property includes no land beyond that of the fractional percentage of the common community land as shared and specified in the bylaws of common association.

It has been determined that this particular unit presently has a comparable fair market rental value of roughly 1.10 per SF, yielding $1620 per month in prospective cash flow.

The most simple and direct cash flow appraisal protocol would re-value this property somewhere in the vicinity of $162,000 based on its present fair-market rental yield. Below is a visual 5-year price history of the property.

In our simplified example above, the property near its peak FOOL value of 544K in 2006 was sold just prior to the top for 520K in the summer of 2005. Somebody got lucky…


At its peak, the contrived bubble-value of this home had MORE THAN TRIPLED in a scant five years.

An increase of such magnitude is historically unprecedented, incredibly-unstable, and was unmistakably a “bubble begging to burst” as early as 2003.

Given what has been allowed to transpire unabated, prices must naturally return to a minimum level at which such contrived valuations began their unchecked escalation.

Regardless of whether or not the last 520K transaction was mortgaged via sub-prime no-doc / no-down, or whether it was purchased by a fully qualified borrower with 20% down and a prime loan, or paid in full with cash - it was recently sold in a state of pronounced distress, for a price of 382K.

Despite the downward adjustment reflected in the last comparable distress sale at 382K, this home remains severely over - valued by more than 50% per the federally regulated appraisal standards as described in title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 .

  To further encourage or attempt to prop-up this type of denial based process simply adds fuel to the fire, and creates nothing more than a temporary, artificial buffer fostering perpetual “orderly declines” on par with Federal “dollar policy.”

The infamous “orderly decline” is a blatant and obvious dollar-policy term embraced in mum by officialdom for managing the inevitable path of total destruction of its debt-backed legal tender.

Government's complicity, and or inaction to properly govern, or repeal the granting of such a grossly flawed monopoly of money creation, is due to the obvious means by which such a system has enabled government to grow unabated, and finance unlimited ambition with wasteful folly without having to directly tax its citizenry.

Governments have effectively been able to side-step the perception of direct taxation in this most effectively deceptive scheme, realizing with confidence, that the majority of its citizens (alongside an undetermined portion of elected politicians) could never be expected to comprehend its true consequence.

As the chart below exhibits, one quite illuminating manifestation, which further compounds the current housing crisis, is a blatantly obvious, easy to comprehend, direct taxation on citizenry resulting from the extreme lack of fiduciary and regulatory stewardship that preceded it.


Equitable Distribution of Losses / Chance for worthy individuals to salvage primary residences

Prior to the inequitable (to both parties) and overvalued distressed property transfer in our example above, the underlying asset should have first been re-appraised in the vicinity of 162,000 via Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) – with a subsequent offer of reparation made available first, to the distressed seller.

The Reparation

Bondholders, banks, and other institutions holding the paper would take whatever write-down loss in principle that prevailed on the underlying collateral. Concurrently, a conditional restructured financing option would then have been offered to the distressed seller at the newly appraised 162K value - so long as that individual could furnish a minimum 20% down payment, and adequately qualify for repayment of the newly structured mortgage terms.

If any such category of owners or distressed sellers of primary homes cannot properly qualify for the fairly adjusted valuation terms, nor produce the required 20% deposit required to re-structure their mortgages – then those owners must default, and the property foreclosed and sold in the open market at the newly established capitalized cash-flow appraisal value.

Secondary homes and investment properties should not qualify for such finance restructuring. However, when and if such classes of properties are sold, the sale should conform and be contingent upon meeting strict compliance with the new national regulatory appraisal and lending standards enacted as a result of this crisis.


The general substance inherent in any similarly structured programs will equitably cleanse the system faster than any complex incentives to mask losses or deceptively prop-up home values. Programs of such forthright structure will create lasting and durable economic stimulus second to none, and at the same time - equitably penalize all those who took undue risks, and offer equitable reparations for those deserving, and capable of homeownership.

Enacting bold and upright programs of such nature may pave the way toward a massive display of consumer confidence and inspire stewards alongside the entire electorate to collectively resolve in steering America back on her proper course. Moreover, the fruits of such work may begin to lay the foundation for widespread and successful sweeping changes throughout the entirety of our admittedly broken financial and political systems.

Let's see how close we and our stewards come to getting it right – this is likely our last chance in turning this long suppressed mega-crisis into one of truly momentous opportunity.

Trade Better / Invest Smarter...

By Joseph Russo
Chief Editor and Technical Analyst
Elliott Wave Technology
Email Author

Copyright © 2008 Elliott Wave Technology. All Rights Reserved.
Joseph Russo, presently the Publisher and Chief Market analyst for Elliott Wave Technology, has been studying Elliott Wave Theory, and the Technical Analysis of Financial Markets since 1991 and currently maintains active member status in the "Market Technicians Association." Joe continues to expand his body of knowledge through the MTA's accredited CMT program.

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© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Glenn Walters
13 Apr 08, 09:09
fiscally and morally bankrupt

Your analysis, conclusions and comments are quite correct.

Unfortunately, the American public is morally bankrupt and cannot begin to accept the notion they are not entitled to big houses, prosperity, and excess consumption. Our government has perpetuated this myth by their rampant forty year borrowing spree that has legitimized the myth that unlimited borrowing to fund our entitled lifestyle is not only acceptable, but our GOD given right. After all we are Americans!

We believe we deserve this lifestyle and the government has evolved to be the ultimate payee to sustain our currently unjustified lifestyle.

None of this will correct itself because we lack the national will power to recognize the harsh realities. Hence we need a catastrophic economic collapse to create the change your article contemplates could occur on a rational basis.



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