Thursday, September 18, 2008

It's The Mortgages, Stupid!

So now, the backpedaling on bailouts has begun. John McCain was "firmly" against them, as the "fundamentals of our economy are strong." However, now that the Fed is having to bail out AIG to keep them from taking down their sector of the market, now perhaps they're a good idea.

I could go on raking McCain over the coals for this, but Obama has been hedging on the issue as well, not wanting to "second guess the Fed" on the need for these bailouts. The fact is, Obama wants tighter regulation to keep this from happening in the future and McCain wants to continue to deregulate and let the market take care of itself. Given that the current level of deregulation led to this crisis, guess which plan would work better in my estimation?

But I don't want this to be a political diatribe. Instead, I want to point the U.S. Government's attention to the actual problem here. As usual, those in power cannot see the forest for the trees -- the failure of banks and brokerage houses is not the cause of the problem, but a symptom. The cause of the problem is the mortgages that the banks handed out that were invested in by the brokerage houses. Those mortgages are in foreclosure at an ever-increasing rate, sucking resources out of these large firms as they try and stem the bleeding. This is leading to problems for Bear Stearns, Lehman Brothers, et. al.

The solution to the problems on Wall Street has little to do with pumping up these failing companies. Conventional wisdom says that these firms made these mistakes and they should pay by failing, but that is a short-sighted view, given that these firms and their investing is the backbone of our economy. That said, the government should not simply be pumping money into their coffers. Instead, the government should have started trying to avoid the problem entirely by helping the people in danger of foreclosure.

As the title goes -- it's the mortgages, stupid!

Now, all these banks and mortgage brokers shot themselves in the foot by handing out no-doc, sub-prime, adjustable-rate mortgages like so much Halloween candy, to people who in many cases were clearly going to be unable to support them. They front-loaded the mortgages with low rates and low payments to get people on the hook, and then were shocked to find out that when the rates (and thus the payments) went up, suddenly people couldn't afford to make them anymore! And so around 18 - 24 months ago the great wave of foreclosures began, leaving banks holding title to thousands of homes with no owners, who were paying no money for them. And as the inventory piled up, the booming housing market hit the brakes hard, causing this pileup on Wall Street, since somewhere a few years back, someone thought it would be a good idea to issue securities tied to this debt.

So now we see Wall Street giants being felled by the stupidity and greed of some mortgage brokers and bankers. And it didn't have to be. Because when the crisis was beginning, Congress could have throttled it but good by taking the money they are now throwing away on bailouts and instead pumping it into these rotten mortgages to prop them up. I'm not saying they should have paid off everyone's sub-prime mortgage, but they could have stepped in, paid one-third say, and then told the mortgage holders to refinance the remainder. In the worst of cases, perhaps they could have paid the mortgages down to a higher degree, or swapped them out for FHA mortgages. In any event, taking some prudent steps before the crisis grew too much would have saved time and money, and Wall Street would not be wandering around with a dazed look on its disheveled face.

So now more hard-earned taxpayer money, instead of directly benefiting the taxpayers, is going into the coffers of Freddie Mac, Bear Stearns, AIG, et. al., where it will keep these entities afloat but benefit you and I not one iota, unless we have significant investments with them. They will allow the tottering, badly regulated system to keep operating while at the same time putting very little onus on those who created the mess in the first place. And Congress will hem and haw and harrumph over stricter regulation, all the while being lobbied by firms hired by the very same firms that have been bailed out, to keep the regulations from being too strict.

Because it's not like this will ever happen again? Right?

1 comment:

  1. Did you see this article?

    Apparently the governor of Georgia foresaw this problem and moved to act. Ultimately he was prevented from having much effect by lobbyists representing Freddie Mac.