Taking on the Mortgage Crisis

By Senator Jeff Merkley.

Editor's Note: The Senator will be joining us live at 3 p.m. to answer your questions here at BlueOregon.

America's economy is caught in a vicious vortex. This vortex is created by three interlocking factors; a jobs crisis, a lending crisis, and a mortgage crisis. If we don't address all three crises, the vortex will continue and pull America from a severe recession into a depression, with enormous damage to the financial standing of American families.

Since taking office, I've been concerned that not enough attention has been paid to the third component – the mortgage crisis, and I've been talking with the new administration to change that.

I know firsthand, from my former work as Director of Habitat for Humanity to my advocacy for working families, how important home ownership is to the success of our families and our communities.

Currently, 26,000 Oregonians are facing foreclosure this year, along with over 2 million Americans from across the country. Each of these mortgages is a crisis for the family involved, and another kick in the teeth for our reeling economy. We need a comprehensive program to assist families facing foreclosure and we need to enact reform to allow bankruptcy judges to modify the terms of mortgages for working families, just as they can modify mortgages for vacation homes or yachts.

Last week, I held a Mortgage and Foreclosure Solutions Summit in Oregon with housing experts, community leaders, and families who are currently facing foreclosure. The families I spoke with recounted tragic stories of how difficult it was to keep their homes. One problem they spoke about was how hard it is to track down the owners of loans that have been bought and sold numerous times. And, even if they manage to find the right company, the system we have in place makes it nearly impossible for families to modify the terms of the loan. For years it's been obvious to me and to millions of Americans that the current system is broken and the playing field is blatantly uneven for homeowners.

I am pleased, therefore, that the Obama administration has developed a detailed plan for homeowners to pursue either refinancing or loan modification. This is a very good start.

I would like to hear from as many of you as possible. Please post your thoughts and concerns about the issues facing our state. You can also post any questions you have for me and I'll try to answer as many as I can.

Comments

  • Greg D. (unverified)
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    Senator:

    Allowing bankruptcy court judges the power to modify (aka "cram down") residential mortgages is the key to resetting mortgages in line with current property values. I am concerned that banking lobby interests have reached some key House Dems on this issue and passage of the proposal is now less certain than anticipated. I hope / ask you to support the amendments to the bankruptcy code.

    Greg D.

  • What am I missing? (unverified)
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    Quick question for the former Speaker of the Oregon House,

    Didn't you have an opportunity to try and move this last special session and chose not to push too hard?

  • ontheclothesline (unverified)
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    Could you qualify "live here at BO"? Do you mean "fast batch" or a parallel twitter or chat feed?

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    Clothesline -- Um, you're making this more complicated than it is. Senator Merkley is going to sit down at his computer, check out this post, and answer the questions by posting his own responses in the comments.

  • Chet Anderson (unverified)
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    Senator, thanks for doing this.

    Mortgage foreclosure reform is important for our economic recovery. But how will you make sure that we limit the help to those honest folks who were taken advantage of or who honestly got in over their head? How do we make sure that speculators and quick-flip operators don't get the benefit of taxpayer dollars?

    I think this is critical to keeping faith with those of us who were responsible and only borrowed what we knew we could afford to repay.

  • Zarathustra (unverified)
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    I have a question about attaching "strings" to the TARP funds.

    In the UK, they have attached a provision to their bail-out funds that the financial institutions receiving them do something positive for their clients, like unbiased financial counseling. It's pretty lame in practice, but I've a similar idea for TARP funds.

    I'm sick and tired of financial institutions acting like their major revenue streams come from third party marketing and various deceits and ham-handed tactics to charge fee after fee. How about requiring financial institutions that receive TARP funds to stop engaging in third party marketing and predatory fee structures?

    I know they will retort that now is not the time to cut revenue, but the point is we would like a balance. We are going to be dealing with the magnitude of this for years to come, making choices we'd rather not have to had to make. Let's share the pain. If they can't go back to what was business as usual before Reagan chucked the S&Ls to the wolves, then they are admitting that the structure has been corrupted to the point that it must be totally reformed. As they don't want that, I think you would have no problem passing this, provided the Democratic Party is willing to put it in those terms.

  • De Admiraal van Gent (unverified)
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    Is there any hope of addressing the ridiculous assessments of property value? The inflation has been totally bogus and is the basis for the "debt". This isn't like a farmer that buys seed for $5000 and only makes $3000 off the harvest. It's like a guy that convinces someone else that a rhinestone ring is worth $10,000, then loses it, plus double or nothing, in a poker game, and hears that he owes $10,000. He certainly won't point out that he really owes $20,000, but the point would be that he only owes the true value of a rhinestone ring. Helping him refinance the $10,000, don't cut it as progressive, sorry.

    On an even more radical level, why is real estate a speculation market? How does that help the social good? It's one of the clearest examples where a progressive agenda does really diverge from a American style capitalist agenda. Land should be held in trust, not openly traded, any more than you would the seas.

  • (Show?)

    Senator, thanks for posting here and especially for dropping in later to answer questions.

    I'd add a fourth vortex feature: an energy crisis. The stimulus bill contained resources for energy efficiency upgrades -- which will help homeowners reduce expenses while helping our environment -- but many folks would have like to see more in there.

    1) Will you work to further expand access to home weatherization and energy efficiency improvements for homeowners facing crushing expenses each month?

    2) When do expect banks to start lending again and what are you doing to make that happen?

    Thanks again.

  • PurpleTootsies (unverified)
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    Following up Charlie's question...

    How about real "energy assistance"? What is there today suffers teh vagaries of the "charitable" organization that hosts the funds. Many require tht you hve a disconnect notice before tehy will see you, forcing you to ruin your credit. Mortgage payments matter, but monthly energy bills are the stake in the heart. Relief here would be dearly felt!

  • gl (unverified)
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    I am very concerned with the possibility of changning the mark to market practice. Any insight on this?

  • Senator Jeff Merkley (unverified)
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    Greg D.

    It is unacceptable that a bankruptcy judge can adjust the terms of someone's vacation home or yacht mortgage, but can't adjust the terms of a family's home mortgage. Some version of this power is going to be essential if the Obama strategy of loan modification is going to work.

  • Harry Kershner (unverified)
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    From Danny Schecter:

    "SAVING CITIBANK? Author/Lawyer Ellen Brown wrote to me: “They’re “nationalizing” Citigroup today — by selling common shares to the govt for $12/share when the market rate is $3 I think (I should check) — just long enough to sell off the toxic assets and let the common shareholders take the hit, then turn it back to the privateers!

    “They are socializing the risks—tax payers taking the risk and then the money will be handed back to the private interests that own the bank. They are calling it nationalization but it isn’t because the bank is not a public institution. Citibank is not a public entity. We are going to feed them money to clean up their books, and then we hand it back to them.

    "The banks should be put into bankruptcy FIRST, THEN nationalized. That’s the ordinary way bankrupt banks are handled: the FDIC comes in as receiver and distributes the available assets to the creditors, clearing the books, THEN takes them over and gets them back on their feet. What is happening now is that they’re nationalizing them without bankruptcy, which means we the taxpayers have to actually come up with funds to pay off the creditors."

    So, Senator Merkley: What will you do to end this transparent, blatant rip-off?

    The banks had grown because the Glass-Steagall Act was dissolved. They sold bogus credit default swaps. They are junk because no one has checked if the party on the other side has the money to pay up. People wanted to buy risk. (GM has more invested in bets on General Motors survival than on GM itself)

  • yokem55 (unverified)
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    Senator, thank you for your time. It seems to me that the biggest challenge in providing mortgage assistance is trying to draw the line between "deserving" people who are facing foreclosure because of circumstances outside of their control, and those that were "irresponsible" in their purchase choice and bought beyond their means. Ultimately, it may make little difference in terms of actual effectiveness of a mortgage plan, but it could make a difference in the political repercussions. How or should this line be drawn?

  • trishka (unverified)
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    senator merkley, thanks for taking the time to talk with us today.

    i'm glad you are taking on the mortgage crisis. i agree with you that home ownership is the most viable path to financial stability and accumulating wealth for most middle-class working americans.

    that said, my understanding is that oregon, due in no small part to it's strict land use planning laws, did not see the bubble that many other states (CA, NV, FL, i'm looking at you!) did and that we are statistically actually in pretty good shape compared to most other states, wrt foreclosures.

    with that in mind, while the mortgage crisis needs attention for the country as a whole, is it truly the most pressing crisis in our state at this time? i'm asking because i honestly don't know. is unemployment a bigger concern? the energy crisis? could focussing attention here on energy efficiency measures do more to shore up the economy than overstating the impact of mortgage foreclosures?

    thanks for answering.

  • Senator Jeff Merkley (unverified)
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    "What am I missing":

    In the February, 2008 special session, I pushed very hard to end the two major practices that are hurting working families. The first was to end "steering" payments through which a lender secretly pays a broker to steer a family into an inappropriate loan. The second was to ban pre-payment penalties which serve as a steel trap to lock families into exploding, exploitative, interest rates. We got this bill passed with 31 votes only through the help of three Republicans. Unfortunately, the Oregon Senate did not address the issue and the bill died.

  • Senator Jeff Merkley (unverified)
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    Chet:

    The Obama team is determined to make sure that their assistance goes to legitimate homeowners and not speculators or investors. They are currently writing detailed criteria to address this and I'm looking forward to seeing it.

  • Chet Anderson (unverified)
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    Thank you, Senator. I am looking forward to seeing their criteria as well.

    Another concern: In order to refinance their homes under this program, will people have to work through mortgage brokers? And if so, will they have to pay closing costs again?

    I understand the Obama proposal may include a $1000 bonus to any lender that refinances these loans. I think that's enough of a payment to these banks; and we should avoid adding on additional closing costs.

  • Senator Jeff Merkley (unverified)
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    Charlie Burr:

    The Senate leadership and the White House have agreed to pursue an energy bill in the near future. I absolutely support a lot more on the energy conservation side. Most studies show that the biggest bang for the buck comes from conservation. But we also have to invest heavily in wind, wave, geothermal, and solar power, not to mention dramatic restructuring of our transportation system.

    Regarding lending, there is one hopeful sign, which is improvement in the commercial paper market. But overall, lending is still frozen. One big problem is that banks are protecting their equity against potential write-downs that could wipe them out. The second problem is that they are suffering from a crisis of confidence and are afraid that loans they make now will fail. It's a mess. I think the Obama team is on the right track, however, by putting a lot of conditions on the behavior of banks and working to strengthen secondary markets for loans.

  • (Show?)

    Senator Merkley (I never get tired of saying that, btw):

    Thank you so much for taking the time to live-blog at Blue Oregon.

    As a parent who is preparing to send a child to college next Fall, I'm very concerned with the financial strain on my budget. It appears that unless a family is at the poverty level or has an income well into the six digits, its a tremendous squeeze for families to pay that bill.

    Are there any plans in the works for Congress and the Obama Administration to address higher education, specifically to aid families with the costs?

  • What am I missing? (unverified)
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    Senator,

    Thanks for clearing that up but I still have a small question (that others can answer for me as I know you are busy).

    These Senate and House are different beasts - I grant you that. But....you had a majority in both and you were the leadership. Your telling me you weren't able to work with the Senate to get this passed? Weak answer, I'm sorry. At the end of the day the State Leg gets to say it didn't pass but you looked good going into elections.

  • Senator Jeff Merkley (unverified)
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    Harry Kershner:

    You're absolutely right. The repeal of Glass-Steagall was a huge mistake. The belief that Wall Street would regulate itself was deluded. Does anyone remember the S&L crisis after the S&L industry was deregulated?

    Moreover, the credit default swap industry - fifty trillion dollars! - grew overnight due to the complete failure of oversight by the SEC.

    Today I met with the Chair of the New York Stock Exchange. He told me that the credit default swap industry used the term "swap" in place of the term "insurance" to avoid regulation by the New York state insurance regulators. Amazing.

    So we ended up with fifty trillion dollars of bogus insurance helping to sell inflated mortgage backed derivatives. These derivatives have infected financial institutions around the world and we're now facing the biggest economic challenge since the Great Depression.

  • Senator Jeff Merkley (unverified)
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    Trishka:

    We have to attack all three economic crises at once in order to try to break this vicious vortex. Today we learned that Oregon unemployment is now 9.9%. That is a four percent increase in four months. The economy is falling off a cliff.

    While you are right that the mortgage problem in Oregon has not been as high as in some other states, it is growing fast. I believe the renttrack statistics for foreclosures show that we have gone from about twentieth in the country to about fifth in just a few months.

    And every time we have a foreclosure, we have a family with destroyed finances and we have an empty house further pulling down house values in the community. Moreoever, failed mortgages are at the heart of the collapse of the financial institutions. For all these reasons I want to do everything possible to address this issue.

  • David Robinson (unverified)
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    Senator,

    The proposed mortgage assistance legislation provides relief mechanisms for people who are still living in their houses, making their mortgage payments, and not too upside-down. What about the people who have had to move for a new job and were not able to sell their homes (like military personnel)? These people are just as impacted as the people who have stayed in their homes and made payments?

    Also, quite a few markets are more upside-down than the 5% allowed in the legislation. Will you be sponsoring legislation that helps these people? I would forward a recommendation that we create a Federal Mortgage Equity Loan Program similar to the Federal Student Loan Program. People could obtain Federally insured loans for the upside-down portion of their mortgage for owner-occupied, and down to 80% for non-owner occupied. These Federal Loands would act like Federal Student Loans - no repayment for X-years, cannot bankrupt out of, 1st-in-line debt at death.

  • Senator Jeff Merkley (unverified)
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    Thank you Blue Oregon for having me. I'm sorry I couldn't stick around to answer all of your questions. I look forward to participating in additional online discussions with you in the future.

  • (Show?)

    And thank you, Senator, for joining us. Let's do it again soon!

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    Senator Merkley, thanks again for posting here and responding to folks' questions. We very much appreciate the work you're doing there and your willingness to drop by.

  • trishka (unverified)
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    thanks, senator. i didn't know about the shift in foreclosure rates from 20th to 5th. that certainly places the problem in a different light. it's great that you are all over this. oregon is well represented.

  • (Show?)

    Senator,

    I'm most concerned that the response to the mortgage crisis seems to be treated separately from the bank bailouts. $275 billion for home owners won't be enough to restore the economy's engine, with 2/3 or so of GDP coming from consumer spending.

    It seems clear that overly leveraged bets on mortgage securities is what has imperiled our financial system, and no one has yet been able to put a number on the real losses the banks face--even though huge guarantees have been made.

    It also seems clear, as Paul Krugman has pointed out, that the big banks like Citi and B of A only have market value today because of the speculator hope for government support.

    What percentage of outstanding mortgages are held by banks with essentially no market value? Why would the government not require the ceding of these assets in exchange for government support?

    The government could then pool these assets along with those held by Fannie & Freddie and find itself with a far more efficient vehicle for stimulating the economy by giving each taxpayer a 'share' in the national mortgage bank.

    I would limit the convertibility of the shares. That share could be cashed in now for relief on a mortgage or a down payment on a first home, for education or health care expenses, or for retirement at age 70 or so.

    I would also use the work to ease credit to make it easy to get second mortgages to do energy efficiency work--at zero percent if possible. Require energy audits with recommended courses of action, and then follow up to confirm that the work did what it was supposed to do. You can retrain contractors to do 21st century home remodeling, and get the mortgage industry working again.

    Finally, I would suggest a regulatory prohibition on trading of credit default swaps without possession of the asset in question. That $60 trillion market seems to be the real culprit in our economic crisis, and it had no business ever existing. It was essentially a massive counterfeiting operation, with the rating agencies and investment banks as the primary actors.

    My best, Rich

  • jaimie (unverified)
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    I think President Obama has a great plan to help with this. I was so impressed. I encourage everyone to check these sites out: http://www.whitehouse.gov/blog/09/02/18/9-million-plus/

    http://www.treas.gov/initiatives/eesa/homeowner-affordability-plan/ExecutiveSummary.pdf

  • (Show?)

    I have to echo complements to Senator Merkley for showing up like this on BlueOregon. I would hope that in the future, Kari, you would put in a real identification system, so we don't get anonymous attacks.

    Attacks are OK. They're part of politics. But I want to know what hidden agendas people have.

  • (Show?)

    I would hope that in the future, Kari, you would put in a real identification system, so we don't get anonymous attacks.

    Working on it.

  • mp97303 (unverified)
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    Kari, just curious, what is a "real identification system" anyway?

  • Steve (unverified)
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    "For years it's been obvious to me and to millions of Americans that the current system is broken and the playing field is blatantly uneven for homeowners."

    Nice firebomb, sir. You do realize a lot of banks are in trouble also? Plus a lot of responsible people who only bought what they could afford and try very hard to make payments are getting nothing at all from the govt program.

    I mean I hear a lot of grief and gnashing of teeth, but would love to her your solution. I already know about the suffering.

    PS - If you drive away the anonymous contributors, you'll lose a lot of "unique visitors" and your website will start losing ground to other websites in town.

  • (Show?)

    I regret to have missed this as it was happening real time, but I was in a meeting related to my union at PSU. So sort of related.

    If you happen to drop by Senator (I'm with Carla--that's nice to say!), my addition would be to hold the line on mortgage relief. There's a tendency to divide the poor from the not-quite-poor and pit them against each other. We've seen this in the mortgage relief debate, as certain interests have tried to scrap meaningful reform on the thin rationale that some people will get help who speculated. This hardly seems a reason not to push forward. This is one voter who's happy to see tax dollars go to help families stay in their homes. Keep up the good fight!

  • (Show?)

    Kari, just curious, what is a "real identification system" anyway?

    Well, we're not going to make people visit my office and show their ID if that's what you're asking. :)

    This has been one of the biggest conundrums of the internet - not just this blog - but there are least two solutions.

    <h1>1. Make people pay something. Even $1 credit card transaction would verify identity.</h1> <h1>2. Use a login system that's already tied to real identities. In just the last few weeks, Facebook has released a service called Facebook Connect that allows site owners to use Facebook logins as their authentication system. Facebook is well over 99% real-IDs and has over 45 million Americans participating (and 100,000 more every day.)</h1>

    Whether we require a real ID or simply encourage one is another question for another day. Stay tuned.

    And now back to the topic at hand, OK?

  • mp97303 (unverified)
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    Thanks for the info. That answered my question.

  • Leo (unverified)
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    I wish people would stop referring to falling housing prices as a crisis. The crisis was that we allowed speculation in shelter to inflate the biggest asset bubble in history. In the presence of a bubble, falling prices are not the problem; they are the solution.

    I fully support the ability of judges to write down mortgage principal in order to reduce foreclosures. It will allow housing prices to quickly fall to a sustainable level and in the process charge the cost of the bursting bubble to the people that profited most by inflating the bubble: the banking and real estate industries.

  • (Show?)

    I agree that bankruptcy judges should have that power, but it's not enough to solve the economic problems associated with having, say, half of California under water on their mortgages.

    The problems with relying on the bankruptcy process for relief are that it's slow and doesn't touch enough people. This isn't just a question of what happens to individual households (though that's a critical part of it), it's also an issue of the aggregate effects of having a critical mass of people overextended financially.

    The banks are essentially being relieved of their over-extension through the bailout and other processes (maybe). But that relief also needs to flow through to the households on the other side of the mortgage contract, or the 'right-sizing' of the speculative bubble won't happen. The economy will be severely overburdened by having so many households being legally obligated to hold up their end of the contracts.

  • Leo (unverified)
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    You are right; writing down the mortgage principal won't solve all of the economic problems. However, I think we're better off taking the losses quickly than stretching out over decades.

    One of the reasons why the credit markets are frozen is because the big banks are afraid of finding out how little their loans are actually worth. They are essentially trying to hide their losses and hoping that the situation will improve or that the government will bail them out by buying the bad loans at inflated prices. Writing down mortgage principal will short-circuit this process. The true value of these bad loans will be recognized, and then people will begin trading them again, albeit at significantly reduced prices.

    The bubble loans are not completely worthless, just as the bubble houses are not completely worthless. But everyone is afraid of finding out what they're really worth. Recognizing their true diminished value will get the credit markets going again, just like recognizing the true diminished value of housing will bring buyers back into the housing market.

    It is essentially correct that housing prices must stabilize, but they will not stabilize at bubble prices. We should speed economic recovery along by quickly letting housing prices fall to a sustainable level.

  • judeqfe (unverified)
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    Senator, Thank you for approaching your constituents in this forum. I think it is CRITICAL to call a moratorium on foreclosure evictions until a plan is in place to address this issue. It is detrimental to the common good to empty houses, put people on the street and potentially further burden the community. While I am concerned that we don't reward the unscrupulous I am more concerned that we don't punish the innocent. I have lived in my house for 23 years and never missed a payment. I did however, take advantage of refinancing, to allow me to stay home to raise my three children in their early years. Life didn't turn out as I'd planned and I am now a single mother with a job that is potentially on the line. If I lose my job, it may not be long before I lose my house. I believe we are in a national state of emergency. I urge you to seek all available solutions that protect working families and the most vulnerable.

  • Jiang (unverified)
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    It's his duty people; quit fawning. The questions always ignored on BO went ignored, to the praise of the regular Dems.

  • whatsuporegon (unverified)
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    I think the federal bill misses the point on non homeowner occupied homes. Even though a homeowner moves because they lose their job, can no longer afford their home, or other not for profit reason -- it doesn mean they should not be allowed to refinance above 80%. Not all landlords are renting their homes because they want to, they are renting to keep their head above water.

  • Robert Minniti (unverified)
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    I would like to float a proposal for an economic stimulus plan past you for your consideration. The basics of the idea are in an article at http://tinyurl.com/dknr3c . Please review this article and let me know what you think. This will be the basis for a more in depth paper on the concept.

    Thank you for assisting with this project.

    Robert K. Minniti, CPA, CFE, Cr.FA, CFF, MBA

  • brian (unverified)
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    Senator,

    Uh, you missed one component to your "Vortex" - higher energy prices! Higher energy prices (otherwise known as "don't drill offshore, let all other nations send us oil") directly led us to this crisis! If we do not wake up and explore all energy facets, including drilling for our own oil, we are only in phase one of our demise...

  • (Show?)

    It looks like more stimulus is on the way. Despite the billions paid to bail out the banks and jump start the economy. Lets hope round two has a better impact.

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