Unlawful Internet Gaming Enforcement Act,

Image by chad davis via Flickr

Most of you have been affected by the downturn in the economy over the past five months. Even if you were not directly affected, I'm sure you know someone who has either lost their house, lost all their equity in their house, or has lost a significant amount of money in their savings. What I'm talking about is the American sub-prime housing fiasco, which is quickly becoming a worldwide financial concern.

For those who are not financial junkies like myself, let me give the brief version of what has happened in the financial markets in recent years. As usual, it has a lot to do with greed, subterfuge, and a lack of foresight.

In 2003, banks and financial institutions realized that the only way to keep the housing bubble inflated was to keep people buying homes. The problem was that most of the eligible market had already been serviced in the previous few years and the market was threatening to dry up.

Luckily, they identified a huge untapped market of potential home buyers: people who could not afford homes. These people would never get a bank loan under normal circumstances, but these were not normal circumstances because the banks had a great plan. They would just hope that the good times would never end.

Taking all of the best parts of "historically low interest rates" and combining that with the traditional "low payments for three years" with just a dash of "don't worry, we'll figure that out when it happens", they created a new financial tool called the subprime mortgage. This deal allowed home buyers to pay only two percent interest on the first few years of a mortgage with the interest rate jumping to a variable rate afterwards.

It's amazing they never thought of this before. All they had to do was figure out a way to convince people with poor credit to lock themselves into longterm financial quagmires. So it was like shooting fish in a barrel.

Suddenly, people who would normally have been renting were able to buy a starter home. People who should have been in the $200,000 market were buying $400,000 homes. And the wannabes started buying McMansions when they should have been living comfortably in a house half the size. These loans started to get extremely popular because when the friends of these new home owners stopped by for a visit, they were amazed by the grandeur and the low payment so the friends got into the market too and bought using subprime rates. And so on and so on.

What wasn't explained to these people (or what they conveniently ignored) was that your mortgage payment - for the first few years anyway - mainly consists of paying down your interest. And if the current rates are "historically low", then they can only go up. Once they passed the subprime phase of their mortgage, they were going to be on the hook for mortgage payments that were up to 50 percent higher than they had been paying before. If they were having trouble coming up with $1,500 per month, how were they going to find another $600?

Now, you might ask why the banks would take on such risk. Good question.

Answer: They didn't care because somebody had figured out a way to make even more money off the situation.

Enter the wolves. Wall Street saw this this situation and went to work selling snowballs to the Eskimos. They started pooling all these subprime loans together and selling them off to banks and other financial institutions. The idea was that as long as the real estate market was thriving, there would always be value in holding these securities. But the real estate market could only keep thriving because of these ridiculous loans.

See the circle?

In essence, it was a glorified pyramid scheme perpetrated by Wall Street and kept hidden by low interest rates. And nobody cared because it was one of those great moments in history when willful blindness of the inevitable future allowed everybody to enjoy the moment. People with poor credit got their once-in-a-lifetime chance to live in a nice house. Wall Street got rich. For a short while, everybody was winning. But it just couldn't last.

It should never have happened at all. After Enron. After the junk bond debacle of the 80's. It should have been stopped before it even got started. Because of this fraud, the US economy is now in crisis mode. The world economy is fighting not to get dragged down. This situation has more parallels with the global depression of the 30's than any of the relatively minor recessions of recent decades.

So how could the Wall Street clowns pull this off again? How could they dupe the regulators, the law, and the politicians one more time? Well, it's pretty easy to rip people off when no one is watching the store. Or in this case, wasting their time worrying about online gambling. There, I said it.

What was the Department of Justice, the Treasury Department, and the SEC doing for the last three years? They were Spending their time and effort stopping people from playing online poker in the privacy of their own homes.

Rather than nailing down and eliminating the fatal flaw in the subprime mortgage bubble, the SEC and the Treasury Department were investigating UK financial institutions that helped online gaming companies legally list on the UK stock exchange.

Rather than investigate the biggest Ponzi scheme ever perpetrated upon the American public, the DOJ was setting up sting operations in airports to nab the executives of publicly traded firms which happened to be enabling Americans to play poker on their home computers. They were going after companies like Yahoo, Google and Microsoft which accepted money from these companies for advertising.

How about the politicians? What were your elected representatives doing?

Well, they were passing the Unlawful Internet Gaming Enforcement Act, what Barney Frank calls the "stupidest law ever passed". This law requires the banks to basically monitor every single transaction in the United States to make sure money is not going to an offshore gaming company.

I can hear the siren call: "For God's sake! Stop the gamblers from spending their expendable income. They are going to need that cash once their mortgage payments double!"

Since October 2006, when the subprime guys were at the climax of their heist, the politicians and regulators from the Treasury, the banking industry and the Department of Justice have been locked in a room trying to figure out how to police the Internet. These regulations were supposed to come out in June, then got pushed back to October, and then during the last round were pushed back even further after the banking industry balked at how much effort and work it was going to take to enforce the law.

That's a lot of time and effort spent to restrict gambling. And how much time did they spend trying to control unfettered greed from spinning your country into a recession? For those losing your home, you don't want to know.

But they got what they wanted, I guess. They effectively stopped people from playing at Party Poker and probably halved the $7 billion US online gaming industry. Meanwhile the politicians are debating the pros and cons of a $150 BILLION economic stimulus package to keep the U.S. out of a recession that might have already started. But at least you can't go blowing your money on gambling anymore. The poor guy who loves to play poker really got the shaft. He now has fewer places to play and also lost $100,000 of equity in his home.

I'm not even going to get into the psychology that makes someone believe that allowing an adult to gamble $100 of his own money is wrong, but allowing financial institutions to effectively wager billions of dollars on interest rate hikes is morally and ethically kosher.

And what would this situation be without a little irony?

One of the big accomplishments in the war against gambling was when Bill Frist was able to make an baseless association between online gambling and terrorism and use that to get the UIGEA bill passed as part of the Safe Ports Act. Alright. Nice political maneuver.

An offshoots of this subprime fiasco is that major American financial institutions have now been forced to accept significant foreign investment. So Citibank's major shareholder is now a Saudi Prince. Merril Lynch had to accept billions in financial aid from "sovereign foreign investors." Oil money. In short, two of the most venerable U.S. financial institutions are being bailed out by the Middle East.

I'm in no way saying these investors are terrorists (that's a trick employed by politicians and the DOJ) but I am saying this crisis has opened U.S. corporations to more influence from abroad - Influence that might not be in line with what is in the best interest the average American.

Do you feel safer now?

They also found another novel solution to another problem that didn't exist. Remember that hypothetical child who would steal daddy's credit card and gamble all night with it? Regardless of the fact that this has never been an issue, it is still a regular go-to argument for anti-gambling crusaders. Well, Citibank has reported that their consumer debt risk is at its worst level in years because people are so leveraged. That means even if that child got daddy's credit card, it's completely maxed out and worthless. Problem solved.

How about a little more irony...

The politicians and DOJ had fun characterizing the offshore gaming companies as illegal Pirates of the Caribbean. However, the Caribbean nation of Antigua and Barbuda has argued successfully in front of the World Trade Organization (WTO) that the U.S. has not equally applied its gaming laws, in contravention of its commitment to the WTO. In December as a form of restitution, Antigua was awarded the right to legally sell pirated copies of copyrighted material owned by U.S. companies. Music, movies and software are some of the stuff Antigua is now allowed to sell online. And cheap too. So your government's solution worked. They eliminated the illegal pirates by making pirating legal. That sucking sound is more money being flushed out of the American economy.

But hey, they sure kicked the online gaming industry's ass, didn't they?

The final irony has yet to reveal itself, but I can see it coming...

After that economic stimulus package goes into effect, the government is going to need to find a way to pay for it. Can you think of any industries that are begging to be introduced and regulated in America and could generate significant amounts of tax revenue?

I can. Imagine the irony if the one industry the government so disastrously distracted itself trying to fight ended up being the industry they ultimately embrace in their scramble to right their ship.