The prognosis for a positive and quick recovery of the capital and credit markets heard recently on any variety of news outlets is fundamentally, hearsay. The truth, in the end, will prevail, but it’s scary, at best.

In the past week, despite a not-surprising upswing in the DOW, so great a preponderance of injurious economic intelligence has come to light that it is apparent any positive forecasts by media pundits are wholly without merit.

While the markets have absorbed the less than encouraging reports with surprising composure, economists who do more than appear on television programs believe this is merely a reflection of the shortened week; the Thanksgiving holiday and; the honeymoon period with our new President-Elect, Mr. Obama.

Wall Street, as ever founded not on fact, but more often on rumor, lives for the next media bulletin about cabinet appointments for the new administration. While such announcements are, of course, of considerable import to the nation, the facts of economic alteration to our fundamental systems of capital and finance should, in our humble opinion, take substantive precedence. The view that an appointment to the Cabinet is of superior import to consumer spending, durable goods and jobs reports indicates a shocking lack of priorities.

The exigencies of our contemporary economic conditions require singular focus on the present reports, and with acute awareness to the grave situation, to the longer-term impact of the information being reported.

Not only are government reports of economic conditions being overlooked by those in whom investors and bank customers rely upon to review such data, but other, equally alarming information is correspondingly being circumvented. 

We refer to an article in BusinessWeek, entitled "The Sub-Prime Wolves Are Back", dated December 1st, 2008, discussing the present-day activities of those mortgage brokers and companies that were the initiatives of the sub-prime crisis. The article rightly points out that more than 16,000 such companies have, in the past year or less, filed and received license from the Federal Housing Administration to issue loans under that agency’s guarantee program.

The article by Chad Terhune and Robert Berner, very well researched and reported, points out quite correctly, that some of those licensed by FHA are presently in bankruptcy proceedings, while others have been sentenced in criminal proceedings having to do with the excesses of fraud during the inflation of the sub-prime bubble. It correctly prepositions the logical conclusion that we are about to repeat the sub-prime crisis and perhaps to a greater extent than sub-prime itself.

At risk in this precarious situation is the confidence in the very nature of our financial systems. Think what it would mean, after more than $2 Trillion in taxpayer and Federal Reserve Funds, massive emergency legislative efforts, bailouts, loans, bankruptcies, job losses and the near collapse of industries… if we allowed the same criminal lenders to do the equivalent felony all over, and bring the system once more to its knees.

Confidence is what drives our economic systems which are based on faith and credit. If there’s no confidence at all in any financial institutions or in government itself, then anarchy will become the system we operate under and there will be a global economic collapse, probably resulting in another international war and regime change, even in the most stable nations.

So far, these intrepid reporters have uncovered loans made to underqualified borrowers, including one woman, a foreign national here on a student grant from her country, who bought an expensive condominium without any proof she can pay the bill each month. That is but one example of the continuing sub-prime activities of these unscrupulous lenders and brokers, who use the liberal FHA guaranty programs in the most immoral manner possible.

The consequence of yet another collapse in lending would most assuredly create such a panic that our cash itself would be deemed worthless, bringing the entire U.S. Government to a grinding halt. In effect, the system of governance of this nation would simply cease to exist, forced, as it were, into bankruptcy. With no alternative in the wings, and with a system different than other nations like Britain, France and Israel, where when a government collapses, continuity is assured by the formation of a new cabinet, our system simply stops. It is not merely a choice of one party versus another in such a case, but a total lack of choice between our present system and anarchy.

If such a crisis even begins to become serious, as the article suggests is already taking place, then a subsequent collapse would destroy any chance of resolution. The Federal Reserve would fail, followed shortly by the banking system, then the stock and commodities markets, followed very shortly by the Treasury, at which point there would be no funds to pay anyone working for government or any benefits normally received by our citizenry. Riots would ensue and there would be dissolution of the Congress, if not total revolution on the streets. Police and military would be powerless and unwilling to stop the rioters as their pay was promptly eradicated. They might even join revolutionaries.

Entire industries would collapse, not simply automotive, but financial services, retail, foodservice, tourism, and just about everything else.

Sounds like a doomsday scenario? Well, take a careful look at the history of South American countries, or of France in 1789-93, or Russia in 1917. Lack of confidence in economic or political systems inevitably leads to either revolution, coups d'etat or regime change. Have you ever wondered what other nuclear powers would do if the U.S. Government were to fall?

The FHA must immediately take steps to rescind the licenses of any sub-prime lender, broker or agent and must limit its licensing so that only qualified banks that clear FDIC standards are permitted licenses. Moreover, it must prohibit banks from working with any broker or agent that has filed bankruptcy, even under another company name within the past 5 years and prohibit anyone at its licensed banks from working with any individual convicted of a felony crime in the past 5 years.

Congress must take steps as soon as possible to create a system of checks and balances for lenders, and assure the public that the financial systems are safe and secure by taking steps to ensure that banks are policed from without, not within, and that loans being made that are less than sound can be stopped before they are closed, giving ample opportunity to all parties to bring loans into full regulatory compliance before they are completed.

For quite some time now, we at the Institute have been warning that there are dire economic crises to come if the system of lending is not secured from the point of loan origination upwards. For some reason, the view among many legislators is that regulatory controls should be from the top downwards. This is inverted and archaic and will perpetuate, as evidenced by the BusinessWeek article, the economic crisis indefinitely and prevent banks from extending credit and investors from returning in sufficient quantity to mortgage backed securities.

Then, with such a safe system in place, confidence can be fully savored in the light of day, without any concomitant dire consequence.

We urge Congress, the FHA, Secretary Paulson, Chairwoman Bair and Chairman Bernanke to take appropriate and immediate steps to these ends and to reign in the FHA.