**Note: This opinion is that of Kate and Kate only. While I think this blog sides more with the conservative crowd, I don’t think you’ll mind this post too much. If you do, Pete can fling hot dogs at my head at the next camp trip*
The Big Bail Out
I have been wavering back and forth, as usual, on the whole monetary bailout the federal government is offering our failed financial institutions. The reality and simplified version of the story is that these companies banked their success on the poor population repaying money they received for mortgages they couldn’t afford. I’m not talking about people who work hard for a living and were suckered in by attractive rates to help them invest. I’m talking about people who should have known better. It always seemed to be common sense that one doesn’t sell their soul for that white picket fence.
Right now, the default rate is at 3%. You wouldn’t think such a small number would be such a big deal, however 3 % of the total home-owning American population is enough to send banks who backed and resold these loans with the promise they would pay in such case of default, spiraling out of control. In the majority of the cases, that 3% shouldn’t have been considered for a loan in the first place, hence their difficulty in producing enough money, now.
The American dream used to come with a price. Hard work and dedication was the motto of the greatest generation as they pinched every penny and saved to buy a house. There was rarely a case of families overreaching for things they couldn’t afford.
With the addition of Fannie Mae and Freddie Mac combined with ARM (Adjustable Rate Mortgage), no oversight on money/no paperwork down loans, I would argue we assured our own financial failure as a country. Poor families were able to walk into a predatory loan office, supply no paperwork or proof of jobs and walk out with keys to a 300+K house. CEO’s then bought and sold those loans and made millions off that particular population while the rates were low and the housing prices continued to skyrocket. Like every bubble that rises past expectation, this one was bound to pop and you are telling me, that no one really assessed that risk?
Are you kidding me?
It was charity, that’s what it was.
It was trying to make that dream more attainable for people who weren’t ready.
Now, don’t get me wrong, I’m not saying every poor person will default on a loan, but there is significant and what I would think, a genuine risk associated with lending money to people who don’t have any. I know that when I give money to someone who I know does not make enough to pay me back, it’s what I would categorize as “charity”.
Now, we offer even more.
When do we rise up and put a stop to this nonsense? When do we say, “No! This will not ultimately help the American economy! I will not lose my house because I’m paying for someone who couldn’t afford their house in the first place!”
Yes, there is no doubt that this is an unfortunate situation all around. If we don’t bail out, thousands more lose their jobs and probably 401K investments. If we do, those who are barely managing to keep the houses they have through hard work and dedication will be partial owners of almost 300,000 properties.
Do you think the government will be selling these houses at market value?
No. So as we raise taxes to balance this gross mismanagement, we won’t even see a significant return on this forced investment. The tax payer gets it up the ass either way in this scenario, no?
Let those companies fail.
Yes, I said it. Let them fail. What makes anyone think pumping more money into these banks and financial institutions will make them magically more responsible in the future? It’s like bailing out a problem gambler.
“Here Frank. I know you’ve lost everything playing blackjack, but here is a whole bunch more money to get you back on your feet.”
What will Frank do, everyone? That’s right, he’s going right back to the casino.
The almost ideal plan should be something like this:
I have already established that we let those companies fail.
Every high level executive through CEO gets absolutely nothing for their mismanagement and disgusting treatment of their employees.
Every mid-level manager and regular employee gets 3 months of severance and gets to leave with their retirement portfolios intact.
Freeze credit to those who cannot afford to use it.
For those who have consistently met their monthly payments, or can show stable proof of employment, let them borrow responsibly.
For those still stuck in the midst of foreclosure, stall the process for a short period of time based on an application letter to reevaluate the loan. Use part of the money for the bailout to hire mortgage agents who will be able to help reset those payments to a more affordable bracket.
For those who had no jobs or any viable income, there is no easy way to say it, but they regrettably lose their dwellings. I would not be opposed to utilizing the resources we already have for job placement and housing help. However, if you are sitting in a half a million dollar house with no way to pay, I can’t justifiably convince myself that you should still remain there, while hard working Americans are doing everything they can to keep up with the rising prices of well, everything. They should not have to pay for people who make no attempt at bettering themselves.
Being financially irresponsible with your personal or your company’s money does not entitle you to suck the tax payers of this country dry.
What’s next, another bailout for the airlines? What about a nice fat check to retail chains? If we don’t stop this now, this planned path to socialism will be this country’s downfall. Right now, this has nothing to do with capitalism.
In the immortal words of Robert A. Heinlein, TANSTAAFL.
There ain’t no such thing as a free lunch and I am certainly not paying for everyone else’s.
I can barely manage my own right now.
This is a fantastic post about the state of the economy. This curious girl has some other great information.
People aren’t eager to bail out these large failing companies, but the alternatives seem worse. If the wrong banks fail chances are likely it will throw us into a depression and stall economies around the world. It’s as if your son confessed he owed $20k to a bookie. You might not enjoy bailing him out. He certainly doesn’t deserve it, but the alternatives are much worse.
…And just as you’d discipline your son after his debt is paid, so too must the government decide how they will avoid this crap in the future. Do we increase government regulation (ew.) or do we risk the next generation may repeat these mistakes. Bear in mind, in 1999 and 2007 two pieces of legislation designed to guard against abuses that caused the 1929 market crash were repealed. These are among the half dozen factors that contributed to our current problems. Clearly the stock market is dangerous, and we can’t leave greedy men to govern themselves.
Our 401k may be in danger, but raising our taxes to save them in like stealing from Peter to pay Paul. From what I understand, the Fannie Mae and Freddie Mac bailout were just that: free money & golden parachutes. (Please correct me if I am wrong.)
AIG was different. AIG is getting a large 2 year federal loan to help keep it’s operations afloat. Why AIG and not the airlines or Pa’s Hardware store? (1) A bankrupt AIG would sink the global economy. $1.1 trillion in assets. (2) AIG boasts diverse income. AIG stands a good chance to pay back the loan. The loan carries a hefty 12% interest rate. The government may turn a pretty profit, but even that silver lining turns my stomach. Americans already believe running a government requires the same mentality as running a business when in fact the two ought to have opposite mentalities.
This new round of “bail outs” worries me. The folks asking for the cash are applying pressure or order to avoid scrutiny. They want things to move quickly and quietly. We are fortunate that some representatives agree with Kate and others are afraid to loose Kate’s vote. From what I understand, congress did not approve the initial terms. They want to know why the cash is needed and how it will be used. (My old senator Richard Shelby lead the 5 hour panel hearing. You go, boy!)
I like your solutions, especially the part about no golden parachutes.
I’m against the idea of a golden parachute. I say we should turn all the ex-CEO’s into gigolos for Ugandan soldiers with the AIDs.
The liberal lending laws that allowed anyone to purchase a home that they couldn’t afford are partly to blame.
A little point counterpoint:
http://en.wikipedia.org/wiki/Community_Reinvestment_Act
Conservative economists claim that the CRA encouraged risky lending[6] [7] and the development of the subprime debacle, but this is disputed, as Robert Gordon has pointed out that approximately half of the loans were made by independent mortgage companies which were not regulated by CRA at all, and thus had no government obligation to offer credit to minorities. These companies made subprime loans at twice the rate of CRA banks. Another third of the major subprime lenders had very little CRA involvement.[8] Further, the weakening of the CRA in 2004 was followed by intensified subprime lending.[9] In favor of the idea that CRA encouraged the mortgage crisis, however, economics professor Stan Liebowitz expressed his opinion that banks were forced to loan to un-credit worthy consumers with “no verification of income or assets; little consideration of the applicant’s ability to make payments; no down payment.” The chief executive of Countrywide Financial, the nation’s largest mortgage lender, is said to have “bragged” that to approve minority applications “lenders have had to stretch the rules a bit”, suggesting that Countrywide was responsible for relaxing its standards rather than the other way around.[10]
Economics professor Thomas DiLorenzo attempts to counter Gordon’s statistic by arguing that even if half of the subprime loans were made by non-CRA companies, the CRA had caused tens of billions in defaults on mortgages by unqualified borrowers.[11]
Congressman and 2008 Republican presidential candidate Ron Paul has partially attributed the ongoing subprime mortgage crisis to legislation such as the CRA.[12]
Ellen Seidman, the former director of the US Office of Thrift Supervision,[2] argues that the CRA did not have an effect on the United States housing bubble. She observes that CRA banks were particularly warned to make responsible investments, citing a speech by herself as an example.[3] She notes that if unregulated independent mortgage companies do make subprime loans, affiliated CRA banks should not be able to count them for CRA purposes, although she does not indicate whether this practice currently occurs.
An analysis by attorneys Traiger and Hinckley concluded that CRA banks were less likely to sell risky mortgages onto the secondary market, and likely mitigated the effect of subprime crisis.[13]
Another good read:
http://www.lewrockwell.com/dilorenzo/dilorenzo125.html
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis
A letter was sent to Congress earlier today signed by over 100 leading economists across the political and theoretical spectrum. Many of the economists strongly disagree about how the current crisis was created, but all express serious concerns with the current bailout proposal. Here’s the content of the letter:
As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:
1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries “systemic risk.” The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.
2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.
3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America’s dynamic and innovative private-capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.
For these reasons, we ask Congress not to rush, to hold appropriate hearings, to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.
Full text and a list of the signers can be found at:
http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm
A paper written by economists Franklin Allen of the
University of Pennsylvania – Finance Department; European Corporate Governance Institute (ECGI) and Elena Carletti of the University of Frankfurt Center for Financial Studies traces the development of the current crisis and focus on the role that liquidity problems played in it.
One of the points made by the paper is that a method of valuing called mark to market (where the current value of something, usually contractual rights to receive, or deliver, cash or another financial instrument, based on the current market price for that instrument or similar instruments) can understate the value of banks and other intermediaries and make them appear insolvent when in fact they aren’t.
Example: the final value of a futures contract that expires in a year from today won’t be known until it expires. If it’s marked to market, for accounting purposes it is assigned the value that it would fetch in the open market currently. This can lead to an understating of the actual value of contract when it expires. Currently FAS Statement 157 (a rule put into effect by the Federal Accounting Standards Board – if you take accounting courses, you learn about these people) requires that certain assets held by financial companies, including sensitive investments linked to mortgages and other kinds of debt, be marked to market. In other words, you have to value the assets at the price you could get for them if you sold them right now on the open market. You can see how this would be a major factor in the current crisis.
The paper suggests that “…in financial crisis situations where liquidity is scarce and prices are low as a result, market prices should be supplemented with both model-based and historic cost valuations.” In other words, allow financial institutions to depart from mark-to-market accounting in determining capital ratios and solvency metrics until this crisis ends.
Over on Kate’s blog a link was posted to an intelligent (in my opinion) article by James K. Galbraith arguing against the bailout and not only presenting some common-sense reasons for rejecting it, but some common-sense recommendations for what could be done:
http://tinyurl.com/3thhx7
I’m a fan of govt regulation and oversight in certain situations.
I believe firmly in regulating the:
* Airline industry (the US “Just in time” business strategy needs acceptable time lines for delivery of people and goods)
* Energy industry (Lifes depend on energy)
* Financial Markets (To smooth the bumps be it bubble (telecom) or collapse (mortgage)) (Lives depend on financial stability)
De-regulation of many industries have crippled this countries ability to operate and compete. Our stability and ability to deliver has been greatly reduced in the past 10 years and the only thing keeping it hidden is market excess or “Irrational exuberance”
That was unexpected. No witty retorts? Is that you catalyst?
I’ve been a little pre-occupied as of late at work and the economy has me concerned. The last time the economy was this bad there was a good size war shortly there after. Nothing like war to clear the national debt.
Mortgage (global economic crisis)
Iran (potential war with Israel and surrogate war with US and Russia)
Afganistan (has never been at peace and potential for surrogate war with US, Iran, and Russia)
Russia (reconsolidation and potential surrogate wars with US)
Georgia (puppet regime thinking big brother is going to save them and sadly being right)
Venezuela (looney in charge)
Cuba (current looney being replaced by?)
Israel (stock piling US arms)
France (in the throws of unchecked imigration)
North Korea (looney power vacume)
Africa (more starvation, drought, and breading ground for new diseases/virus)
America (Hell bent on NOT getting off foreign oil unless we drill in every national wild life reserve… forget electric cars, biofuel, or other alternatives lets just burn ethenol and destroy our engines, lower our mileage and ignore the fact that it doesn’t save us any freaking money or the environment…)
So yeah, I have five kids and the world has me a bit off my ease right now.