Thursday, August 23, 2007

Proposed Bailout for Mortgagees-Will Middle Class Welfare Program Collapse Us Financially?

The homewner bailout proposed by Senators Dodd and Clinton, and seconded by Sen. Obama and other pols eager to pander to the middle-class homeowner vote, got an additional boost from PIMPCO founder Bill Gross today, who appeared on CNBC to appeal for a bailout for beleagured home-debtors confronting foreclosure.

Additionally, here in Chicago, Mayor Daley is seeking ways to people who are upside-down on their mortgages stay in homes they obviously couldn't afford to begin with.

The bailout advocates are using emotionally loaded language to sell the public on the idea, usually referring to the poor homeowners who will be rendered "homeless" by foreclosure.

Aside from the dubious morality of creating an entitlement program for people who were greedy, deluded, or careless enough to borrow money they knew or should have known they couldn't repay, there is the even more doubtful quest to rescue the enterprises all the way up the chain of greed, delusion, and dishonesty that made it possible for so many underqualified borrowers to assume so many over-written loans. The links in the chain are the developers who are now seeing their construction loans foreclosed, the lenders who approved loans to people they knew were borrowing way beyond their means to pay, the hedgefunds and bond funds who bought the bundles of loans, the rating agencies such as Moody's and Fitches who assigned AAA rating to paper they knew or should have known was junk, and the quasi-government agencies such as Fannie Mae and Freddie Mac, who stood ready to absorb the crappy loans as fast as the mortgage boiler rooms could generate them.

Many people made massive fortunes from the speculative hysteria of the past five years. It paid for $40 MM mansions with 3 swimming pools and heated 10-car garages, paid for by the $100MM bonuses paid to top hedge fund managers and CEOs like Angelo Mozilo at Countrywide, as well as enabling a few million severely math-challenged consumers to live far beyond their means for a few heady years.

If a bailout is engineered, will people like Mozilo be required to fund it? Seems only fair, given that these guys and a few hundred other head honchos of mortgage providers, banks, debt traders, and fund managers were the chief beneficiaries of financial lunacy of the past few years, and the trillions of dollars of imaginary money that the Fed sent sloshing through the economy to fund it.

However, we know that will not happen. What we know is that this is one more situation where the profits are privatized while the costs are socialized, as the taxpayers are once more required to step in, because of the danger the bursting credit bubble presents to the economy.

The people who will help keep homedebtors whole and bail them out of the situations they created for themselves, and will keep people like Mozilo in their mega-mansions, will be the rest of us who did not borrow over our heads, including homeowners who live within their means and neither bought more house than they could afford nor used their houses as ATM machines to fund their expensive cars and foreign travel and outdoor kitchens. Another group who will help the poor, defenseless "homeowners" stay in their overpriced homes will be renters who sat on the curb and didn't chase the car , but waited patiently until they could either afford to buy on decent terms or until prices adjusted back to their proper level. These people will wait that much longer for a chance at membership in the "Ownership Society", while their taxes are jacked to rescue the feckless, the dishonest, and the delusional.

Worse, our national deficit will balloon to unsupportable levels. Given that the misguided and failing war effort has already brought us to the brink of insolvancy, what will four or five trillion dollars worth of bad mortgages accomplish?

It's a choice between bad and catostraphic. If we let a couple of million more homeowners go to foreclosure, the economic consequences will be bad, face it. 40,000 jobs related to the mortgage industry have been lost so far, with many thousands more in related financial to follow, in addition to those in other industries dependent upon the housing market. Consumers will no longer be able to tap house equity because they will no longer have any. House prices will trend steeply lower. There could be a deep recession while the bad debt works itself out and the housing and financial markets regain traction.

However, a federal bailout could collapse the entire country. As it is, we cannot afford to maintain and replace critical infrastructure, or properly fund Social Security. At this time, there is an estimated gap of $63 Trillion* between projected tax receipts and future expenditures; a recipe for financial collapse with everything that follows it: loss of credibility in world financial markets with attendant inability to attract foreign investment; inability to fund day to day operations of the government necessary to maintain national security, let alone critical infrastructure and services; and the bankrupting of an increasingly impoverished population.

If our legislators and policymakers can't grasp the economic implications of a bailout, they should take the temperature of the electorate. Most people are vehemently opposed to the bailout because of the raw injustice of it, which is something the Democratic candidates Clinton and Obama should think about, since notions of fairness and justice don't seem to weigh with them.

A petition against the bailout,Tax Payers Against a Wall Street and Mortgage Bailout, was generated by a man named Thomas Roach. If you are opposed to this new welfare entitlement, you are invited to sign.

* "Drifting Towards Bankruptcy", by Laurance J. Kotlikoff, The Phladelphia Inquirer, October 22, 2006. (Link would not install.)


KittyBowTie1 said...

Anybody who got an adjustable rate mortgage, an interest-only, bought property thinking they could flip it, bought more house than they can afford, and anything else that was irresponsible deserve no bailout. If anything, there should be a stupidity tax and they should pay it.

Now I would feel sorry for someone in foreclosure if they were hit in a car accident or had a lot of medical bills, etc., but not because of all of the recent blind stupid greed.

The North Coast said...

I feel sorry for anyone who is hit with one of life's nasty surprises, such as a car accident, or huge medical bills.

We need better emergency provisions for these people.

But I have no sympathy for the "victims" who signed suicide mortgages and bought what they could clearly see they couldn't afford. This group includes many well-educated people, and others with relatively high incomes.

Why should we bail out people who are better off that we are? Does anyone NEED a $500K house?