Bailout Watch, keep Congress on speed-dial
February 25, 2008 – 12:51 amOver the weekend, the New York Times reported that Bank of America is floating ideas for a much larger housing bailout than has been imagined heretofore.
So far, the Bush administration should be congratulated for exercising restraint, for refusing to funnel more taxpayer dollars towards housing in a quixotic effort to keep prices from falling.
Yet as so-called “experts” realize that the bottom may still be far off, many with skin in the game are suggesting government rescue efforts must be more aggressive lest the financial markets come tumbling down.
The schemes pitched by B of A, Credit Suisse and JP Morgan come disguised as “rescue” attempts for homeowners at risk of foreclosure. But peel back the onion just a bit and it’s clear the real beneficiaries of any large scale government bailout would be the banks themselves.
And the losers are taxpayers.
The basic idea being pitched is to create a federal agency that “would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.”
“Foreclosure” is a scary thing, but in the age of the zero-down mortgage, it’s not the homeowners who have the most to lose. Mortgages are non-recourse loans, which is a great protection for borrowers against banks. It means that, unlike other forms of debt (like alimony for instance) a lender can’t go after a debtor’s other assets if the debtor refuses to pay.
The bank can’t compel you to pay your mortgage. Historically, they incentive for people to do so was the significant equity stake in the home that they would lose in foreclosure. If a buyer puts down 20% of a home’s value, he has his own skin in the game. A borrower with zero down has none. If the house’s price declines below the value of the mortgage, why bother paying it? Better to mail your keys to the bank and go rent.
In this scenario, it’s the bank that loses. It ends up owning another foreclosed home that it must turn around and sell.
Banks, remember, are in the lending business, not the real estate business. They make money when borrowers take out loans (and repay them). If borrowers walk away, banks not only lose interest income, but–in the case of falling home values–they often have to write down the value of the loan.
So banks need borrowers to keep paying their mortgages. To do that they have to prevent borrowers from going “upside down” on their mortgage. [That is, the condition when the principal value of the mortgage suddenly becomes HIGHER than the value of the home.] And to do this, they need prices to stop falling. With the huge and growing supply of homes in excess of demand for them, prices have to keep falling. It’s the law of supply and demand folks. When supply exceeds demand, prices fall.
Banks are hoping government intervention will at least slow the bleeding. Have taxpayers, er, the government buy up troubled loans so that banks don’t have to deal with them. Have them refinance the loans at lower (taxpayer-subsidized) interest rates so that at-risk homeowners keep making payments.
You see my point: these rescue plans aren’t meant to help troubled homeowners. They’re meant to rescue banks that made poor lending decisions.
I find it highly ironic that anti-corporate Dems, like Hillary Clinton, are some of the loudest advocates for homeowner rescue plans. Do they not realize that their housing bailout plans amount to one of the largest corporate giveaways in the history of the U.S.?
How can Hillary and the Dems criticize Wall Street fat cats yet still propose that your tax dollars be used to bail them out? If the system is just left alone to sort out its own problems, you’ll see that the biggest banks will continue to suffer mightily.
Any large-scale government invention is nothing more than an attempt, at taxpayers expense, to control prices. Ask the folks in Zimbabwe and Venezuela how well price controls have worked for their economies.
The fact is, the only way for the housing market to repair itself is to let prices fall. And to let banks fail…..
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One Response to “Bailout Watch, keep Congress on speed-dial”
So the banks get very creative with their financing schemes, putting themselves at risk of ending up in the home selling business. Then, when they do end up in that business, they say that home selling is not what they do and they shouldn’t be put in that position???
Now the guys at the top of the banks when they were doing the creative financing are “fired” and leave with great wealth, no admission that they did anything wrong, no condemnation by their successors, and soon they pop up somewhere else raking in more dough.
Meanwhile, those who worked at the bank carrying out the orders of the ones directing the shenanigans, or working in other departments of the bank, see the bank as a company, their employer, at risk for decisions they had no control over.
So we have people creating risk then escaping the consequences while others take the hit. The system invites this because of the nature of limited liability. There has to be protection of personal wealth from the results of business activity in order for there to even BE business activity. But here we see how it can play out, shielding those who run the show while leaving everyone else subject to the consequences.
Enter Uncle Sam to pick up the pieces, especially if there are lots of people who can be hurt financially. It IS infuriating that we all seem to end up getting the bill for the results of what a relatively small percentage of the population does but isn’t that the nature of the system we’ve created?
If you fail and you are at the top there are essentially no meaningful consequences. You were fabulously wealthy before and you remain so. You lose a job, but from your impressive personal network you are soon back in action. This invites dodgey initiatives. It’s what we expect, what we promote because we want creativity to create wealth. We see the down side of it now. Some people are paid to take risk but are put beyond it by the system we have.
Joe Average is definitely not put beyond risk, yet he takes it on in keeping with the times. Been through the Depression? Keep money in a mattress, spend the absolute minimum and never take a loan for anything. Common sense, everyone is doing it. Spent your whole life in a credit culture? Don’t think twice about taking on debt and pay little heed to the fine print above the line where you sign your name. Common sense, everyone is doing it.
So Joe Average, as a mortgage owner or a rank-and-file bank employee wants limited liability too, just like the big guys, and there’s Uncle Sam to offer it. Democracy and a free market are not compatible. For them to coexist the tensions between the two must be resolved. America has been a study of how this can be done, but there is no guarantee it will work out in a stable or long-term solution
By Clif on Feb 25, 2008