The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.
Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.
This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.
Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.
The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.
The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.
Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.
In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This “moral hazard” generates enormous distortions in an economy’s allocation of its financial resources.
Found by John Ligums.
Thank You, John for posting this. Let the losers lose like they should. Otherwise they will create a bigger mess that we will have to bail them out of.
LOL Harvard
I guess they don’t teach that at Harvard
http://www.slate.com/id/2109982/
Finally, someone who understands basic economics! Of course, he won’t be paid any attention by the powers that be. Expect some kind of bailout and new absurd regulation in the near future.
Talking heads on financial shows are showing bullet points on ideas for “bypassing Congress”.
So these a-holes are trying to bypass my elected representative?
I have a better idea. Let’s all start to talk about bypassing these TV financial shows.
F these self-interested companies.
Bravo, John!
@#5:
“THe current democrats in congress for refusing to allow any controls be put on Fannie Mae and Freddie Mac. ”
SO…
– The Democrats tend to refuse controls on companies.
– The Republicans tend to impose controls companies.
That’s a very interesting perception of reality.
Just one question:
What are you smoking?
And where can I get some?
(That’s really just one question when I participate in your version of reality.)
I agree, good idea.
I have yet to hear any reason why I (the guy still paying his mortgage) should put up my tax money to pay for this.
FOR THE PARTY ROBOTS OUT THERE: The Democrates started this whole thing and the Republican didn’t do sh!t to stop it. No one in either party is representing my interests in Washington. The Idiocracy marches on!
Bankruptcy may be part of the answer. The US needs a recession and higher interest rates. Too much of economy is focused on consumer (and government) consumption and borrowing to support it.
I’m guessing “the economy” will act without asking politicians first.
Amen!
#7
Lookup S.190. Or watch this video for more details.
I have been saying this for days now. The government “convinced” the banks to make these stupid loans back in the 90’s, and the banks said to themselves, “hey we can take on any risk we want, the government will come in and bail us out.” A few more investment banks in this country need to fail, the strong ones will learn their lessons and not do it again.
As for government, I have no idea what to do about them. The very ones responsible for starting all this crap back in the early 90’s look like they are going to be back in power soon, which is a bad sign.
That being said, the republicans didn’t do much to stop all this crap, and in effect became big spenders themselves once they learned that the best way to get reelected was to bring home the pork.
The best thing for us all would be for Washington DC to leave the market alone, its pretty clear that, that bunch of lawyers have no idea what they are doing.
I agree wholeheartedly with the bankruptcy idea. Let the bastards lose their shirts and then try to sell their multimillion-dollar mansions. That may bring a change to their way of thinking.
But anyone who thinks that the answer is to remove all regulation and supervision is only deluding himself. You can’t do that because anyone who makes it into the executive suite, regardless of talent or ability, is going to be in dire need of parental supervision (the “kid in a candy store” scenario).
One thing the free market theorists were never good at was understanding human behavior. That’s why their theories are so far off the mark. I’ve heard it said that a free market proponent is just someone who flunked Psych 101. That might be a bit extreme, but it’s close.
Keep calling your representatives! They don’t like hearing you won’t support them if they pass this! Persistence works!
It’s MY face; I’ll cut off my nose if I want to!
um,
guys?
your romantic notion of forcing the captain to go down with the ship neglects to mention that you personally will be left afloat in the ocean with only detritus to cling to. you mind saving your self-righteous crap for some other time?
if these companies are allowed to fail, i personally will be in a world of hurt — my credit card interest rates will skyrocket, the adjustable portion of my mortgage will skyrocket, and no one will be able to buy the house i have on the market.
oh yeah, my parents, due shortly to retire might be completely screwed too as their portfolio tanks, which then falls onto my shoulders.
as an it worker, my whole sector could tank if the financial sector craps out, leaving me worrying about paying my own mortgage, must less care for my parents.
go ahead tell me how it’s my own fault while your carefully culled savings account and IRA go down the drain.
Nobody said it better:
“Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains.” – Thomas Jefferson
#7, Fannie Mae is a quasi-government company, that is why the Republicans tried to put in controls, to keep the government from footing the bill, which they now are doing.
U.S. Treasury Secretary Paulson used to be CEO of Goldman Sachs, and he is a multi-millionaire.
Has anyone bothered to check how much he stands to personally gain from the bail-out? I think there’s a slight conflict of interest here.
Maybe when Paulson volunteers to pay the first $100 million of the bail-out from his own funds, then I’ll consider supporting the deal.
I think most (if not all) of the U.S. senators are also multi-millionaires (including McCain and Obama). So how about they each kick in $1 million each? That’s $100 million to start.
Can someone also explain to me why we need to spend $700 billion all at once? Why not start with $50 billion, and see what happens… Then in a few months, maybe another $50 or $100 billion.
Any decent financial manager will tell you that if you have a chunk of cash to invest, you don’t throw it all into the market at once – you buy in small, easily managed pieces.
The Democrats caused this debacle.
The Republicans made vague, listless attempts to stop it from happening.
In the meantime, both parties have done nothing good for our financial stability. Both parties are chock full of people who believe that OUR money belongs to the government to spend as they see fit. They believe it is their choice as to how much of our money we get to keep.
They take your money and spend it, for your own good. That makes sense on national defense, highway systems, regulative agencies, interstate commerce…and anything that invokes the “free rider” problem. That doesn’t make sense hardly anywhere else.
The Federal Government should read the 10th amendment again.
#17 – you should have thought of all those things when you got the mortgage in the first place and your parents shouldn’t have been so stupid to put everything into portfolios when there are far safer (but less greedy-profit making) ways of investing for their retirement.
Now I’m NOT saying its your fault. You were lied to by the powers that be about the best way to manage your money and property, but you should still have looked into less greedy ways to achieve your goals rather than plunge headfirst into the swimming pool of debt with a grin on your face.
I too am paying off a mortgage and my father has just retired, but we both have zero credit card and no other kind of debt, except my house, and we’re both sitting comfortably while others are pulling out their hair in anguish, simply because we didn’t make the decision to live beyond our means and borrow beyond our ability to repay. Sure, we probably have fewer dinners at fancy restaurants and drive older cars than many, but its a small price to pay.
The Boston Globe called on Barney Frank to resign decades ago. Any chance it will happen now that he blocked the reforms that would have prevented this mess?
#22 Zybch:
hear! hear! My family has also lived frugally, even during the boom years. Our reward for this is that we’re loosing far, far less money than most right now.
#17: I was always told to NEVER get an ARM, because that means you’re buying something you can’t afford. Same with the credit cards. Boo hoo.
Bravo! But….
My house is paid for, I have no debt, I’m out of the market. Can you point me to a safe bank where I can stash all that cash till this blows over?
If you are stumped on that last one, then you understand why “Bankruptcy” is not a sufficient answer. That is where the whole thing falls down. If prudent people don’t have a safe and convenient place to keep money, then our economic system has failed. Best have a few defensible acres somewhere in the country, and something valuable to trade (food, booze, bullets).
Hoping beyond hope, possibly those holding out on the bill are trying to do the right thing and reverse the incredible stupidity and greed that got us here in the first place.
We do need to get some type of assistance in place, but one which does not throw out the baby (Capitalism) with the bath water (the financial crisis).
I must be on drugs…
To our government and legislators,
If you want the American public to approve this assistance package, you had better take the time to educate us on exactly why it is needed and how much it will ultimately cost. We, the people, no longer blindly trust your judgment. It is our money and you work for us.
“Washington – The Senate on Friday blocked a $56.2 billion economic stimulus package that would have extended unemployment benefits, increased food aid and funded new construction projects to create jobs.”
http://www.truthout.org/092608T
#22 & #24
that’s exactly the smug kinda crap i expected to hear.
the wife and i can weather the dual mortgages, or the parents, or being laid off, not all three, that was my point.
just sayin, don’t sprain your shoulder patting yourself on the backs.
btw, my parents life savings came from the same frugal lifestyle you espouse, as they are children of depression-era parents as well.
bottom line is that even for debt-free folks:
you think your money in the bank is safe?
Business LIVES by the RULES they created.
IF the RULES FAILED, or they didnt FOLLOW Proper Practices…DOWN THE TUBE they go.
EVERY small business knows this, so does the SBA(small business association).
If the rules apply to SMALL business, WHY the HELL are we being Favorites to LARGE CORPS and BANKS??
MOSt of the money will go to WAGES to keep them alive for a few months or “ROB PETER to PAY PAUL” and KEEPS the DEBT the same.
NOW if the money was to BUY INTO THE BANK with at least a 25% share…That could be cool..EXCEPT its not going to happen that way. The money will go into the bank and be sent to SHARE HOLDERS to bump up the Stock price, THEN ALL THE MICE WILL RUN, and watch the building Crumble.
what would be interesting would be to BUY the DUMPED stocks up, and give them to the PEOPLE, as a SHARE in the bank.. WHICh may force the price UP, and Make them Solvent.
that is actually an interesting concept.
The only issue I see with that is, that there are three parties involved: the creditors, the investors and those who have mortgages to pay to those companies.
If they go bankrupt, there will be a huge number of foreclosures, which cannot be in any public interest, and that’s where the bailout makes sense.
It’s true that the main benefit of a bailout will go to those who created the mess in the first place, but is there a way to punish them, satisfy (partly, at least) the creditors and not create a major social problem with the homeowners?
pj