I had this article sent to me and it definately breaks down the past year's screw ups perfectly.  I hope that 2009 will not be as bad as 2008.  I guess it can always get worse though. 

There are at least three long-standing background influences that contributed to the financial debacle that dominated the US economy in 2008:

1. For almost 100 years, the US government has not felt constrained to match its expenditure with its revenue. This policy was given intellectual justification by the writings of John Maynard Keynes who argued in the 1930s that, during periods of slow economic growth, active and purposeful government policies would allow the economy to spend its way out of recession.[2] It was simply a matter of time before citizens aped the financial habits of their governments by living beyond their means.

2. The Federal Reserve System (the Fed — created in 1913) has accommodated government's policy of spending to excess by inflating the money supply and keeping interest rates artificially low. Today's dollar will buy what in 1913 would cost less than a nickel. This easy-money policy has not only led to inflation but has resulted in investments taking place that would not be justified had the money supply been constrained, and had interest rates more clearly reflected economic reality.

3. Since the 1960s, politicians parroting the suspect theories of Keynes have fed the public's naïve belief that government can provide ever-increasing living standards by means of its monetary and fiscal policies. Pulling a fiscal lever here and pushing a monetary button there meant that constraints on spending were old fashioned, and living standards would forever improve. The limitations imposed by the laws of economics had been repealed if you voted for politicians who promised to provide you with something for nothing. Fiscal prudence was simply a capitalist lie.

It is against this long term, more philosophic backdrop, that the following, more immediate issues, assumed greater importance.

4. Households collectively made little attempt to save for the future. The United States, in particular, borrowed from China, Japan, and Middle Eastern countries to finance its spending addictions. Financial responsibility was considered an old-fashioned, or even an irrelevant, virtue, and people were led to believe that government could, by waving its magic wand, provide improved housing without the pain of saving or foregoing immediate consumption.

5. The acquisition of a house was viewed by many buyers not so much as having somewhere to live but as a painless way to make money. House prices, they naively believed, would always continue to increase in value while the relative burden of mortgages would continue to fall. Not only that, but as house values increased, a house could be used as collateral for a further loan. The financial equivalent of turning sea water into gold had been created. So long as house prices increased, borrowers were in financial heaven. When house prices fell, the earth opened up under the feet of lenders.

6. Government-sponsored entities like Fannie Mae and Freddie Mac subsidized mortgages for people who, under more-prudent rules of borrowing, would never have qualified for a loan from a conservative banking institution. Congressman Barney Frank in 2003 stated in a moment of candor, "I want to roll the dice a little bit more in this situation toward subsidized housing."[3] Well he certainly did, at the same time accepting with gratitude campaign contributions from Fannie and Freddie.

7. The egalitarian policies of government through such legislation as the Community Reinvestment Act of 1977 "persuaded" lenders, Mafioso style, to lend to low-income borrowers, against their better judgment. Government lawyers made it clear that the consequences of failing to meet politically imposed targets and quotas could be dire.

8. It was a matter of time before a substantial minority of borrowers could not or would not service their mortgages. Partly because astute people predicted this, well-known names in the financial world began to package, or sponsor, mortgage and other debts such as credit-card balances into what were called structured-investment vehicles (SIV), dubbed "financial weapons of mass destruction" by Warren Buffet. So complicated were the terms contained in such instruments that many legal minds and the credit-rating agencies were baffled as to exactly what they meant and where the ultimate risk lay. Banks and others could benefit by lending to people who could not afford to pay interest, far less capital, provided they were able to sell the SIVs to gullible investors. Money managers naively bought such investments for pension funds, money market funds, and (even more surprisingly) for their firms' own accounts. This was the primrose path to unlimited housing ownership, with no painful cash deposit, and no adverse consequences to the first lenders.

9. So long as (a) the value of housing increased, (b) borrowers paid on time, and (c) confidence remained in the credibility of SIVs, everything was hunky-dory. Unfortunately, all three cratered about the same time; house values stagnated or fell as supply exceeded demand; when values stuttered, so did borrowers repayments, and confidence plunged. Borrowers, having promised to pay and having offered security for their promises, were failing to pay because their security had declined in value. They repudiated their debts, and the burden fell on hapless financial institutions. Populist politicians rarely blamed the borrowers, because there are so many of them and they vote; instead they blamed greedy capitalists, speculators, short sellers, anyone except the debtors, and the imprudent economic policies of the US government.

10. As events began to unravel in mid-2008, well-established firms like Lehman Brothers, went to the wall. Others like Bear Stearns and Merrill Lynch were sold at knockdown prices. Yet others, like insurance giant AIG, were effectively nationalized.[4] Meanwhile, the stock-market value of banks and other financial institutions took a nosedive. For example, Citibank stock price fell by 79% between October 2008 and October 2009. The broader stock-market indices like the Dow Jones also plummeted by around 40%. The US government had no systematic policy, and rules were made up as more and more bad news emerged, especially about jobs. Citibank had a labor force of 375,000 in 2007; in November 2008, it was announced that 53,000 jobs would go by the first quarter of 2009. Senior government officials were like shipwrecked sailors (and were spending money like drunken sailors) paddling like mad but with little idea of where they were going, or why. The only consistent rule was that something had to be done, and the US government must be the action party.[5]

    It is difficult not to recall the words of Herbert Spencer: "The ultimate result of shielding man from the effects of folly is to people the world with fools."

The financial crisis of 2007–2008 was a Ponzi scheme writ large. A Ponzi scheme, or chain letter, initially succeeds but eventually collapses, just as imprudent loans may at first succeed in their objectives but eventually the laws of economics come into play and expose the futility of the whole exercise. A pyramid scheme is always unsustainable for the simple reason that it is based on faulty principles and built on flawed foundations. Until too late, no one in authority (regulators, risk managers, senior bank executives, credit-rating agencies, investment analysts) asked the key question, namely, how on earth was it possible in the long term to make profits by lending money to people whose chances of paying it back were practically nil?[6] The issue was simply swept under the carpet because loans to deadbeats provided a better short-term return than did lower-risk debt instruments.

mises.org/story/3263

Veterans Group Sued Over Pay Per View Boxing

I ran across this article the other day and was disgusted.  Now I can understand that companies have to make money, but this was just ridiculous.  I don't think I can support KingVision Pay-Per-View and J&J Sports Productions (the sad this is that I love boxing).  Anyway, here is the story from the LA Times...

When Don Avila, a Vietnam War vet and commander of American Legion Post 299 in Chino, was asked by a food vendor recently why he spent so much time working at the legion hall for no pay, he had no trouble explaining himself.

"It's an honor," Avila told him, pointing toward a wall lined with photos of past commanders back to 1924. "I'm up there with World War I, World War II and Korean War vets who served their country."

Post 299 is a social hall, pub and restaurant for several hundred Inland Empire vets. Some are shuttled in from nursing homes; some are out of work because of the recession. At the hall, members eat home-cooked meals, such as chicken pot pie with mashed potatoes and stuffing, for just $6.

And sometimes, they watch a fight with the guys. For years, the post has been calling its cable TV company when a good fight was coming on and paying a fee of roughly $50 to get it shown at the post. Sometimes it was hard to raise the money to pay for it by passing the hat at the fights, but they usually came close.

So you can imagine what a shock it was earlier this year when Post 299 got sued twice -- for $150,000 and for $160,000 -- in a dispute over two pay-per-view boxing matches shown at the legion hall in 2008.

It was accused of showing the fights without proper licenses and permits, but Post 299's officers said they had no idea they were out of compliance. Besides, they argued, they weren't making money showing the fights.

When the suits were first threatened last year, the post didn't have much extra money on hand so it contacted a lawyer and ex-Marine to see if he could defend them free of charge. The Marine didn't know this area of the law, so he had to send his comrades to another attorney. But after spending $1,600 in legal fees, the legionnaires had to go it alone.

"We couldn't afford him," said Richard Medina, a Vietnam vet and the post's sergeant-at-arms.

Last month, Avila and a couple of colleagues went to the South Pasadena law office of Thomas P. Riley, who filed the lawsuits against them, to discuss a settlement.

Riley explained that Post 299 had a residential account with its cable provider rather than the required commercial account, and that it had not paid licensing fees to the owners of the broadcast rights -- KingVision Pay-Per-View and J&J Sports Productions.

Avila and company explained they were unaware of the need to do any of that.

"We're the American Legion," Avila told me. "We wouldn't want to do anything illegal."

But he and his mates were intimidated by the lawsuits and agreed to settle them for $10,000 each, with a payment of $5,000 down and $1,250 a month after that, according to Avila. Driving back to Chino, though, the vets had a sour taste in their mouths.

OK, so now they knew the legal requirements for showing a fight. But they barely broke even on those matches, by their account. So why were they forking over $20,000, as if they'd been caught stealing?

Another thing that upset them was the allegation that they'd charged admission for those fights. They swear they never did. The tradition is to pass a hat for voluntary donations to cover the cost of the pay-per-view event.

"I've never seen anyone charge, and we've been having fights for 10 years," said Paul Dincin, a Vietnam vet and two-time past commander of Post 299. He was at one of the two fights in question and said there was no entrance fee.

Avila, who was at both fights, said there was no cover charge at either and passing the hat didn't raise quite $50 total. The post might have made some extra money at the bar because there were more people in the hall than usual, he said, but a lot of members nurse just one or two beers all evening, so it's not as if the post strikes it rich on fight nights.

"A lot of times when we pass the hat, some guys will throw in 25 cents," Avila said. "If it's a member, we ask for $1 or $2 or sometimes $5."

Avila and a few other members gave me a tour of Post 299 last week, showing off photos of past commanders and presidents of the Ladies Auxiliary.

In the bar area, which has the four TVs that carried the fights, there's a wall of license plates from other Legion posts around the country.

"We're a community," said Eddie Falcon, who served in the Navy.

"It's like family," Medina said.

"Our wives and daughters come in here too," Avila said.

The Sons of the American Legion are also active at the post. They donated the shuffleboard game that stretches along one wall, from the enshrined names of deceased Post 299 members all the way to the POW and MIA display.

When I left Post 299, I drove straight to South Pasadena to call on Thomas P. Riley. He was busy, but we talked by phone the next day.

I wondered how Riley's boxing production clients could feel good about taking money from Post 299 when its officers said they didn't know they were breaking any rules.

"It's tragic that a mistake was made. However, my clients need to be compensated," said Riley, who files countless similar claims, sometimes against other veterans' groups.

Riley said that if a sports bar down the street played by the rules, it might have cost a few thousand dollars to show those fights, but the sports bar might have lost customers to Post 299 because it had a cheaper deal. So the lawsuits protect his clients and their customers.

He also said he had a sworn statement from a witness who was at the American Legion fights and said there was indeed a cover charge. When I went back to Avila with this, he scoffed. The closest thing to an entry fee, he insisted, was when the member who was collecting donations hit up a couple guys right after they entered the hall.

Riley said KingVision Pay-Per-View and J&J Sports Productions were sympathetic to the cause of the vets, and he promised to check and see if they would reconsider the $20,000 settlement.

When he got back to me, he said the answer was no.

Well, I can't say that I expected any different. A warning would have been classier, of course, but there seems to be good money in threatening veterans and then squeezing money out of them.

Avila said there will be no more pay-per-view fights at Post 299. When I asked how they'd come up with the money to pay the settlement, he said, "We'll scratch and we'll scrimp and we'll save."

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Homeboy Industries Suffer Massive Layoffs