I ran across this James Boyce article this morning and it stirred my own hostility towards the hypocrisy of those favoring an "unbound and unrestricted" market. The purveyors of this vision, anti-liberals really, spout anger about entitlements and claim, like our president, that private industry can solve our problems. Yet whenever one of the companies or industries that underpins the market gets into trouble, the government bails them out. Without ever paying the price for really bad policy, we have created a system where great risk - with OPM (other people's money) - can be taken free of consequence. In fact, only really big risks with OPM can be taken - it has to be big enough so that a failure in the stability of the entire market makes you immune from reality and the American tax payer - via a debt to China - gets stuck holding a big bag of crap to stack next to all the other big bags of crap they've been sold by the same snake OIL salesmen preaching the perfection and wisdom of the free market.
No Bailout For Bear Stearns, Or For Any Homeowner For That Matter
I hate to raise my hand and risk being voted worst person in the world, but we have lost our way when it comes to the mortgage crisis and the credit crunch. Actually, we have not just lost our way, where we are, we can't even see the road anymore.
Seriously, we are talking bailing out millions of homeowners and Wall Street firms that got themselves sucked under water by the storm they helped create, I absolutely fail to see the need. A little economic trauma is exactly what this country needs for everyone to realize what the last eight years has done to this land, once the largest economy in the world, but no longer.
Maybe it's because I am not only a strong Democrat but am also a strong believer in free market capitalism -- a believer in the strength of simple economic principles, like supply and demand. In my lifetime, any time I observe the government stepping in and playing economic god, usually in the name of short term political gain, the long term mess simply becomes larger, worse and impossible to fix.
Take Detroit.
At some point, Detroit will have to learn to make decent automobiles at a fair price, if not, they will, and should, go away. That's called capitalism. Honda and Toyota make great cars, right here in America. The so-called "Big Three" don't. You picked up a Ford lately as a rental car? I have. And twice, the car I picked up at the rental car counter didn't make it back. In Arizona a few months ago, I didn't even make it out of the airport before the car, literally, broke down.
But we have funneled billions upon billions of dollars into Detroit for decades, all so they can never have to deal with their demise, and retool and rebuild. Lest you think I am picking on a place I am not from, I feel exactly the same way about the subsidies to the fishing industry in my hometown of Gloucester, Mass. The fisherman overfished with bigger and faster boats, the ocean is virtually empty and our solution is to subsidize this behavior. I don't think so.
Now, the two parts of the mortgage crisis. Perhaps I am jaded, bitter even, by having looked for a house in Boston for family and actually had good credit and 20% to put down. I have watched in wonder as prices went up and up and up. Who was paying for these properties? Why were people buying and selling six months later and expecting to gain 20%? If you buy and sell a piece of property in less than six months, you should lose money, not make money.
It turns out the 300% rise in prices in Boston was driven by two factors.
People buying houses they couldn't afford.
Companies, tapping into cheap money, selling mortgages to people to buy houses they couldn't afford.
Both parties are greedy, wrong and dug themselves holes they may, or may not, ever get out of.
Do I think it's tragic that people are losing their homes? Of course.
Do I think that the rest of us should pay these people's mortgages for them? No.
Let me take one example from Sunday's Washington Post.
A woman buys a townhouse eight years ago for $200,000 with a fixed rate of 7%. She earns $90,000 a year. This is a situation that should never, ever have gone bad. But it does -- why? Because she takes out a home equity line to 'consolidate bills' -- meaning, I assume, credit card debt and now, she owes more than $260,000 on the house.
Wait a minute.
Presuming she put down 5% on the house, this means she has accumulated over $65,000 in debt in eight years. That's $8,000 a year. Meaning she is living a $98,000 lifestyle on a $90,000 salary. It's worse if she put 10% or more down.
I fail to see where a government intervention is needed here. Financial counseling? Sure. But this woman was planning on the value of the house increasing to support an unsustainable lifestyle.
The company that was selling her the mortgages and lines of credit? Well, that's where Bear Stearns comes in. My sympathy with large, incredibly arrogant, pricks from Wall Street, I don't have any.
These so-called, self-proclaimed Masters Of The Universe have for the past few years been nothing more than Masters Of The Smoke And The Mirrors, paying themselves million dollar bonuses while creating financial tools that even Robert Rubin didn't understand.
Just like the woman in Maryland, they are paying the price for one part incompetency, and two parts greed. And we should not bail them out. Not one penny.
Will they fail? Absolutely. And they should. But oh no, we can't allow that and here is the latest news from the Bear Stearns debacle.
The Fed will provide special financing to JPMorgan Chase for the deal, JPMorgan Chase said. The central bank has agreed to fund up to $30 billion of Bear Stearns' less liquid assets. Risky bets on securities tied to subprime mortgages -- loans given to customers with poor credit history -- crippled Bear Stearns, the nations' fifth-largest investment bank.
Hell, no. $30,000,000,000 of our money goes to guarantee the purchase of Bear Stearns because they were incompetent greedy bastards and have 'less liquid assets'? That's just outrageous. Why are we providing our money to help one business acquire one grossly incompetent business?
We can't fund programs helping our veterans.
We can't fund programs that give children insurance.
But over one damn weekend, we find $30 billion to fund greed. It's ridiculous. Pathetic enabling crap.
And it's money wasted, completely wasted. Just like the billions poured down the gullet of Detroit. Because you pull the Band-Aid off slowly or quickly, we're trying to allow these people to feel no pain, when pain is exactly what they deserve.
In fact, if you want to see where we are heading, take a look at this remarkable graph created in the summer of 2006 by the smartest person in America when it comes to real estate, Robert Shiller.
Here are the highlights:
In today's dollars, a house that sold for $100,000 IN 1890 SOLD FOR $110,000 IN 1996.
That's right, one hundred plus years later, real value gain, 10%.
But then comes the 'real estate boom' and in ten years, it sold for $200,000.
Best estimates are that real estate prices have to fall another 40-50% before they reach the historical averages. And they will. It is, as we see everyday in the news, unsustainable to expect otherwise and our line of credit has run out.
They will move back to those averages quickly if we let the market correct, or slower and more painfully if we try to regulate the fall.
Quicker is better. Saving Bear Stearns at $2 a share is slower. And stupid.
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