Bailout?

The big to-do of late has been the housing bubble burst, followed by the sub-prime mortgage crisis, and now the investment banking failure and bailout. The Federal Reserve tells us that we’re supposed to save the national economy by handing those same failed banks a few hundred billion dollars! I’m not an economist, and if I had all the answers I’d probably be the Secretary of the Treasury instead of writing this column, but I’ll toss my nickels worth in anyway. Ready? I think this is the biggest confidence game pulled on the American taxpayer in the history of the United States, and our illustrious Congress is going along with it!

While the banks must take a lot of the responsibility for the current mess, the crisis was initiated when “political correctness” was forced on the mortgage industry during the Clinton years. The In 1992 the Los Angeles Times reported that a Democratic Congress "mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers. Operating under that requirement, Fannie Mae, in particular, has been aggressive and creative in stimulating minority gains." All well and fine on the face of it, but like everything else financial, don’t get carried away! Under the Clinton administration the federal government pressured banks to grant more mortgages to the poor and minorities. Clinton's man at HUD, Andrew Cuomo, proposed that 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate income borrowers. Instead of looking at "outdated criteria," like the applicant's credit rating or ability to make a down payment, banks were “encouraged” to consider nontraditional measures of credit-worthiness, such as having a good collection of unpaid bills I presume. Threatening lawsuits, the Federal Reserve demanded that banks treat welfare payments and unemployment benefits as valid income sources to qualify for a mortgage! (I wish they’d have done something like that for me!) Worse yet, the Republicans went along with it!

The housing bubble collapse and the eschewing mortgage crisis could have been, and often was, predicted by just about anyone who bothered to look at the greatly overvalued real estate prices over the last few years. There are always people around with “more money than brains” however, who will pay an exorbitant price so that they can have a second home in a rustic setting, or perhaps something “with a great view”. Well and fine if that’s what they want, and can afford it. But to pay for that expensive view, the homeowner probably had to go out and borrow the money, usually from a bank in the form of a mortgage. Banks like to trade those mortgages around, pretending they’re cash instead of a debt, and it doesn’t take long before some really big outfit called an “investment bank” holds thousands of them after having borrowed a few billion dollars here and there to buy all that questionable paper. They plan to get rich as people slowly pay off the loan on their individual properties. This often results in one bank or another having borrowed a whole lot more money than they really should have, and is sometimes called the “greed is good” form of business as they work the cash flow and lie to their stockholders in trying to stay afloat, and not incidentally paying the CEO and his cohorts some fantastic wages.

Now we get to the fly in the ointment. If the homeowner’s income is reduced, say perhaps because of a general business downturn or his perhaps his welfare check got cut, he may be forced to default on that mortgage loan because now he can’t make the payments, or even sell the property at its inflated price. As the downturn continues or worsens, the investment banks find themselves in a jam as those defaulted mortgages start piling up, and their monthly income isn’t showing up as scheduled. Meanwhile, back on Wall Street, the folks that made those huge loans to the investment banks are demanding their money back. Now, when the mortgage company can’t make their payments on time they go bankrupt. The repercussions of all these financial shenanigans then echo through the entire economy, and with today’s economic globalization those echoes are heard around the world. This leaves the super rich people out a few million dollars each, while a good many small potatoes investors find their stock portfolios aren’t worth quite what they thought, and their retirement incomes are going to be a lot less than they had figured on. And all because the housing bubble burst and far to many food stamp based mortgages collapsed.

This time around it’s not just a case of keeping Chrysler or the Saving and Loan industry in business either. This is the fifth bailout this year, as we’ve already handed Bear Stearns, Fannie Mae, Freddie Mac and AIG a lot of money, and now we’re looking at another seven hundred billion dollars which is supposed to save our (and the rest of the worlds), economy from falling apart! The next logical question is, just how much is $700 billion? Quite a lot really, or not that much, depending on your viewpoint. With about 300 million men, women, and children living in the United States the bailout will cost us roughly $2,300 per person, or slightly less than our average personal tax burden of $2,432. In other words, about twelve times the total worth of Bill Gates, or half the combined wealth of the Forbes 400 list.

Skeptics are calling this $700 billion rescue plan for the U.S. financial system "cash for trash" as the current plan is for the US Government to buy many of those defaulted mortgages in the hope that someday they’ll get our money back, which is a rather questionable assumption I’d think. The scary part is that the Treasury Department wants a free hand from Congress, or rather they want seven hundred billion dollars to do with as they wish, with no congressional oversight and no legal constraints! This crisis could have been avoided if the federal bank regulators from the treasury been doing their jobs and enforced the rules. They’ve also been telling us how great everything was going for the last couple of years. Now, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson insist they’ve got all the answers and we’re supposed to blindly “trust” them without any guarantee that their plan will even work!?

Unfortunately, this economic mess is going to severely effect the upcoming election as well. Remember what happened in the aftermath of the 1929 stock market crash? The Democrats blamed everything on Herbert Hoover and the Republicans instead of the of the financial industry that caused the problem in the first place. FDR got elected president, the American people got the “New Deal” crammed down their throats, and we’ve been fending off rampant socialism ever since! Here however, we have the Democrats' affirmative action lending policies starting the fire, and sure enough they’ll happily blame the Republican administration instead of their own failed “bright ideas”. Thanks to political correctness, and if this last ditch bailout flops as it very well might, we can soon expect to see the Mother-in-Law of all financial crashes!

According to political cartoonist Robert Ariail, the new motto at Treasury is, “From each taxpayer according to his abilities, to each investment banker according to his needs.”