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Thursday, December 06, 2007

Credit Crisis "Solution"--Just the latest betrayal by Bush

Unfortunately, far too few people closely follow our financial situation or the moves made by the Fed and the Treasury in their bungling attempts to manage the vast juggernaut called the American economy. If you're one of those knuckleheads, listen up. Here John Galt's dad clarifies the latest bit of news in the credit crisis:

"Since Hank Paulson's Super-SIV plan fell apart, he's got a new Wall Street Bailout in place: Mortgage lenders will fix ARMs at teaser rates for the next five years--but only for those buyers who are in default. Moral hazard, anyone? Perverse incentive? Bueller? Bueller?
So now, all the people who were late on credit card payments will skip a couple of house payments instead, so they can qualify for the "government to the rescue". I have not read a single analyst of the plan who thinks it will work.
Paulson and his pooch at FDIC, Sheila Bair, have not explained what they will do about the hundreds of $billions in CDOs and MBSs that will be pushed into defaulting on their yield streams when the underlying ARMs don't reset to the expected rates.
It will accomplish one thing: It will at least triple the number of mortgagees who elect to stop paying their house payments.
Oh yeah, it will ensure that Paulson's old job at Goldman will still be there for him when his Treasury stint ends next year.
Too bad about everybody else's job."

In case you don't know, Paulson is our Treasury Secretary. The FDIC stands for the Federal Deposit Insurance Corporation. CDO = collateralized debt obligation, and MBS = mortgage backed securities. SIV = structured investment vehicles. What's been going on? Briefly, under the leadership of that idiot formerly hailed as God, namely Federal Reserve Chairman Greenspan, the Fed has been devaluing the dollar (hence it's easier for the Federal government to repay its obligations) by the creation of money through expanding credit, by holding the key interest rates artificially low for way, way too long. With so much easy money available, bankers lowered standards on who could borrow for mortgages, issuing lots of mortgage loans to subprime borrowers. Not content to get paid for the use of their money through the mortgage, they then sold the loans (and other collateral backed loans, like car loans, etc.) to bigger banks, which bundled them into groups and sold them off as investment vehicles called CDOs, or MBSs, or SIVs. Many of the smaller banks bought into these investment vehicles themselves, as did pension funds (did you hear about the freezing of the Florida State Teachers' Pension fund recently? they got bit by the greed bug too, and bought into these so-called investments). Lots of entities borrowed against the value of these investment vehicles, leveraging them to buy yet more investments.

Now that we're finding that lots of people really couldn't afford that house they got through the use of an ARM loan (read, tax on people dumb enough to think they can predict the future and greedy enough to want to buy way more house than they can afford any other way), and there's real fear on Wall Street of massive, systemic bank failures as everyone figures out that these CDOs, MBSs and SIVs have next to no value because the underlying loans are headed to default in droves (have you seen Jim Cramer on CNBC's Mad Money lately? The horror stories he's being told by his buddies still on the Street are showing through in haggard eyes and sudden, dramatic aging), what do we get?

Do we get people enjoying the natural consequences of their actions?
Do we get a demonstration of how the free market is the best educational tool on the planet?
Do we get a chance for the housing bubble to properly deflate?
Do we get a chance to vindicate those who make smart choices and live within their means?

No. We get a bailout. We get massive interference with the workings of the free market on a scale so vast, there's still hope it will bankrupt the system and bring everything in this insane overconsumption party to a screeching halt. We get a Republican president putting one of the last, if not the very last, nail in the coffin of his party.

You heard it here: the Republican party will suffer from apathy among its base for many years to come, because it stuck by George W. Bush after it became obvious that he is not a conservative. Now that the majority of the population has decided it enjoys slopping at the trough of federal tax dollars, there's no chance for a "conservative" party that decides to diss the base. The Republican party didn't have much chance for success in the next couple election cycles anyway; now that Bush has alienated all true conservatives except maybe the nincompoops who think that being pro-life is the only issue of import, you can kiss that chance goodbye.

Here's hoping for the soon arrival of a living, breathing version of my namesake. I hope the whole creaking, stinking mass of this system the looters have built crumbles into dust in my lifetime. If it costs me every material thing I own, I'll still stand at the edge of the choking pit, cheering at the top of my voice.

2 Comments:

Blogger Force50 said...

Absolute madness! I don't know what's worse. De-valuing the dollar or inducing the moral hazard of a government bail-out. Our society must be able to figure these things out and do the right thing instead of the expedient and temporarily popular thing. Neither party is able to do that at this time. I know which party should be doing it.

12/07/2007 1:03 PM  
Blogger Mark said...

One little problem with your analysis - the freezing of the rates does not help those who are behind on their payments. It's precisely the opposite; only those who aren't in default, those who are current on their payments, will get the benefit. Perhaps they shouldn't, but there's certainly no incentive for them to go into default.

And since this program appears to be voluntary, and there's no federal money on the line, I suspect you overstate the moral hazard angle.

The blame for the scenario belongs to everyone involved; the greedy borrowers, the reckless lenders and the benighted investors who bought the MBSs, etc. And various people among all these groups are going to take it in the shorts. As well they should.

The S&L crisis was a different matter, since there were government guarantees because of the FSLIC. And since the government only has the money it takes from us, it was a perfect example of a moral hazard.

I will grant your premise on devaluing the dollar, though.

Best,
Mr. D

12/08/2007 8:07 PM  

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