No bailout, no way

By Jim Scarantino

There’s one simple word to describe what the federal government should do about Wall Street’s bad bets on securitized mortgages and homeowners who recklessly or dishonestly took out mortgages they couldn’t afford. That one word: nothing.

Wall Street is always condemned for its greed, though greed is what makes the wheels of capitalism spin. But greed also drove decisions of homebuyers who willingly played along with “liar’s loans” by inflating their income on mortgage applications. Many of them also engaged in kickback schemes with brokers and walked out of closings not only with mortgages too big for their finances, but also with cash in hand.

Less culpable, but still culpable homeowners accepted mortgages they knew they had no business taking on. If they didn’t have the cash for a down payment, they found zero-down mortgages. They gambled that the abnormally low starter rates of adjustable-rate mortgages would continue unchanged for three decades. Their eyes lit up at the prospect of unending appreciation of real estate that had already shot to historical highs and far outstripped the rate of personal income growth.

Out of Washington come cries of rescuing these people from their own sins so they “won’t lose their homes.” But most of them have nothing to lose. They have zero or negligible equity in their properties. They’ve essentially been paying rent.

Is it heartless for government to leave these people to work their way out of their own, self-inflicted problems? A better question is why public policy should favor people who were reckless or dishonest over people who chose to live within their means or refused to lie on their mortgage applications. Or why the public should intervene to favor people who entered the housing market at its peak over people entering the market now. Or why the public should intervene in favor of those who overextended themselves during the housing bubble over renters who rode it out and now find more properties available to rent at lower rates.

Taxpayers caught in the middle

We don’t ask whether it’s heartless to bail out Wall Street. We ask whether allowing some Wall Street firms to fail will wreak such havoc on the entire economy that we have no choice. That is a much harder question to answer, since no one seems to have the answer.

The secretary of the Treasury and the Federal Reserve want us to authorize buying up $700 billion of bad loans. The simplest explanation of this approach is that by removing this weight from the books of troubled financial institutions we will free up unburdened capital to be injected through loans into the general economy.

From there it gets endlessly complicated. For starters, taxpayers, called upon to save the economy, would find themselves enriching people who speculated on subprime-loan securities. Those securities are not being sold now because the people that hold them won’t sell for what the market will pay. But they will very gladly sell all they can for a premium paid by the federal government. And that is how the bailout would work. Taxpayers would be paying better than market rates for bad loans. Quite a deal for us.

To further complicate matters, Congress wants to get in on the act by allowing the Treasury to buy up sour debts originating from credit-card loans. Congress also wants to “help Main Street” by allowing judges to rewrite mortgages held by people who obtained those loans dishonestly or recklessly. At one end we would be buying up bad mortgages, and on the other we’d be making them even less valuable by allowing the debtor to cut their payment to us. Taxpayers would be caught in the middle, taking fire from all directions.

Market forces are working

We’re not even assured this $700 billion bailout will work. We’re already hearing predictions that $1 trillion or more may be required. If the Treasury lays out this kind of money for bad debts that can’t be sold, and it does not prove to be a magic bullet, then the country will really be in trouble. As well as a ruined financial system, we will have a seriously weakened national treasury and a sinking dollar.

But there’s hope. Independent of Washington, market forces are already doing their job. Warren Buffett and others who avoided the subprime mess are buying up pieces of less-prudent competitors. Economists are raising valid objections to the bailout and suggesting less-dramatic alternatives. As the end of its session approaches, an overwhelmed Congress is divided. Deadlock, not a fantastical bailout scheme, may be what saves the country.

Scarantino has been recognized as one of the country’s best political columnists by the American Association of Alternative Newsweeklies. His work has been published in more than 50 newspapers. You can contact him at jrscarantino@yahoo.com.