Monday, September 22, 2008

Week of 09/22/2008

HTML clipboard

New Deal 2008: To Big To Bail
– by David Matthews 2

“Too Big To Fail!”

A scant two decades ago, that kind of idea would have been considered a vile obscenity in the minds of most Republicans.

Ronald Reagan’s GOP would have spat in the face of anyone who suggested that it was the government’s job to bail out failing corporations for making bad decisions. They remembered bailing out Chrysler in 1979 and they said that governments shouldn’t be doing that. They adhered to the liaise-faire mentality that businesses need to stand or fall on their own. That’s why they started dismantling all of the regulations imposed on business, because they believed that any kind of government action stifled growth.

It’s a good thing that former President Reagan is dead, because if he saw what the inheritors of his party have been doing for the past few years, and he wasn’t addled with Alzheimer’s, then he would be wondering if his beloved party had been subverted by the communists.

Fortunately for Reagan, he was hindered by Alzheimer’s, so he couldn’t see how the Savings and Loan institutions collapsed in the late 80’s. That should have been a harbinger of failures to come, but unfortunately our government is legendary in its shortsightedness.

“Too Big To Fail!”

That has been the mantra of the GOP of late. Screw liaise-faire! Save the businesses at all costs!

We got a double-shot of that mantra in 2001, immediately after the terrorist attacks of 9/11. While we were quaking under our bedsheets over the terrorists, our government under George W. Bush was telling us to go shopping. To hell with fighting the enemy, we needed to fight lagging sales!

And then, when people were afraid to fly and the price of fuel was climbing, the airlines DEMANDED to be bailed out as well. Airlines were going bankrupt, after all, because they supposedly “couldn’t compete” with low fares and rising overhead. So the Congress and the White House GAVE the airlines what they wanted. They got their bailout, because they were considered “Too Big To Fail”.

Of course back then nobody complained about that bailout, because the people that would were too busy worrying about terrorists, and part of the bailout involved needed changes to airport security. Who cares if a few billion more had to be spent to help the airlines if the plan also gets to make them a little bit safer, right?

But now we have more than just a couple of airlines looking for federal help. Now we have banks, lending institutions, even a major insurer looking for help. They made some stupid decisions and now they need help because they’re on the verge of collapse.

And they’ll get it too. They’ll each get help from the government, because they’re all deemed to be “Too Big To Fail”.

But not everyone that needs help will get it. For thousands of hard-working Americans, there is no help for them. They are the ones that were driven to failure even before the first institution showed signs of trouble. Sadly, they are the REAL REASON why these institutions are on the verge of insolvency in the first place… and our government doesn’t want to do anything to help them.

Let’s backtrack a couple of years. 9/11 happened, and our government tells us to spend like there’s no tomorrow. And to help make it easier for us to spend like there’s no tomorrow, certain rules are changed. Banking rules are changed so lenders can make more kinds of loans available for the masses. Interest rates were still low thanks to the mini-recession of 2000.

More people started owning homes and refinancing their current homes. Developers were building houses like crazy. Housing values skyrocketed. Times seemed good.

Then the interest rates began to creep up. And people suddenly realized that those new mortgages that they got talked into were the kind that REALLY began to get more and more expensive over time and as the interest rate climbed. They were owing more than their homes were worth, and for many of them, they were owning more than they could afford to pay.

Before long, bankruptcies and foreclosures happened. And along with the changes to banking rules, bankruptcy rules were changed so that people were stuck with the bad debt. The banks began owning a lot of these homes. A few houses may not be too bad, but when whole neighborhoods are getting foreclosed one after another, and housing values sink for those not yet foreclosed, that causes trouble.

And this is the point in time where we are told that the tragedy REALLY begins. Not with the thousands of hard-working Americans that suddenly end up with overinflated homes and mortgages that they can no longer afford, nor with the thousands of hard-working Americans that have either been foreclosed or otherwise forced to abandon their homes, but with the fact that the lending institutions cannot absorb the sheer volume of failures that they helped to create! And because you have investment groups putting their money into these lending institutions to help stock plans and retirement accounts, those too are in trouble.

THESE are the groups looking for some government help. And THESE are the groups that are going to get it too… because they are all deemed to be “Too Big To Fail”.

Not only will those “big guys” be getting help, but the White House is pushing for a HUGE honking all-in-one bailout of those institutions whereby the United States government will be absorbing all of those “bad loans”… the ones that already failed because the owners are already unable to keep up the payments… thus free up the burden being placed on the institutions that helped CAUSE the problem in the first place.

How huge? Adding in the bailouts already provided recently for Freddie Mac, Fannie Mae, AIG, and Bear Sterns, we’re talking a cool TRILLION. That’s a lot of zeros, and I don’t just mean numerically.

And the hard-working Americans? The ones that got pressured to get a mortgage or to refinance that mortgage and then get suckered into a raw deal that many of them didn’t have to take? Too bad! You still end up losing your money and/or your homes. You might try that 800-number the White House set up, but otherwise you’re on your own. You’re just not “big enough” for the government to care.

The White House is spinning this to be akin to Franklin Roosevelt’s “New Deal” for the 21st Century, a way to kick-start the economy and keep the money flowing for the “big boys”. I, however, see this differently.

Let’s get brutally honest here… what we are being railroaded into accepting is nothing short of a RAW DEAL, not a “New Deal” for America. It’s a RAW DEAL because it bails out the perpetrators of the problem instead of helping out the REAL victims.

There is a lot more going into this whole meltdown crisis than just bad loans. The bad loans are only the tip of the iceberg when it comes to the kinds of problems our economy is being forced to burden.

We have developers that have over-developed. Here in the Atlanta area, this commentator is just within walking distance of several major construction projects that have been pushed on through to completion, even though there been little or no interest in occupying those projects. Stores and office complexes that go up empty and stay empty. Subdivisions that are so desperate for residents that they will offer free gasoline and free furniture leases. That kind of problem will not be resolved through this bailout.

We have those thousands of hard-working Americans that have ALREADY lost their homes that will not be able to get them back, and thousands more that will lose theirs in the near-future. There’s a lot of talk about saving the LENDERS, but this commentator doesn’t hear anything about trying to convert the risky loans that are not yet bad but will be soon. There’s no talk about SAVING the homes of those affected the worst by this. The banks are getting their money. They lose little compared to those who stand on the verge of losing their HOMES.

Let’s think about it this way… by the time the loan is considered “bad”, and thus within the radar of this all-in-one bailout, the family has already been forced out of the house. They’ve lost any kind of equity that they put into the home. That has an impact on the surrounding neighborhood, and surrounding homes start to lose their value too, further complicating the issue. That’s not something that our government tries to “save”.

But if you think about it… our government is USED to spending big money to bail out overinflated things that they deem to be “Too Big To Fail”.

Think about the billions they spend on trying to “fix” programs such as Social Security, Medicaid, and Medicare. Programs that they believe are “Too Big To Fail” simply by the very nature. They will move to save these programs at all costs, even if it means driving the United States further and further into debt.

Even when we’re not talking about money, our government seems hell-bent on protecting anything it deems to be “Too Big To Fail”, even if it really cannot fail to being with. Think about all of the times when our government claims to act on behalf of the “institution of marriage” or for various religious institutions. They act as though those institutions are on the verge of collapse when they rush through dictatorial moralistic laws, but in truth the only thing threatened is the power-hold some of those self-professed “champions” have over society. That too is considered to be “Too Big To Fail”.

And what is it that truly makes these financial institutions “Too Big To Fail”? It’s not really the money in as much as it is the influence it wields.

Ordinary people like you and me are small players in Washington. Too small for them to notice. But lending institutions like Freddie and Fannie and AIG and Bear Sterns can afford to hire lobbyists. The same groups, and the same lobbyists I might add, that were responsible for encouraging Washington to change the rules just five years ago are now pushing for bailouts. They’re looking for help, and they’ll get it too… because they are so big that they can hire people to make the case that they need it more than the vast majority of Americans that are truly in trouble.

And what do the ordinary Americans get out of this deal? People keep on talking about accountability when it comes to the petty criminal, but the perpetrators of this kind of mess will get away with it. We won’t even see the kind of frog march spectacle we saw with Enron and WorldCom. Nobody responsible for this mess will be inhabiting Martha Stewart’s old prison cell anytime soon. The only people being forced into accountability are the ordinary taxpayers.

There is a word that has been carefully removed from the discussion when it comes to the “big boys”. That word is RISK. For the average American, there has always been the risk of losing everything you own. Even a small business owner knows about risk. But the large institutions… the ones that can afford to hire lobbyists and sponsor campaign fundraisers… there really is no risk involved, and they have known it for quite some time. They know that if things go bad all that they have to do is petition the government to bail them out, and they’ll get it… simply because they are considered “Too Big To Fail”.

The question that nobody wants to ask, though, is when “Too Big To Fail” drives US into failure. There are plenty of people that say that we are pretty much there already.

If we really want to help ourselves and help out ALL sides of the equation, then we need to bring RISK and accountability back into the discussion… and tie it closely to the bailout plan. The ordinary people who file for bankruptcy are made to feel like dirt when they go through the process. So too should the institutions that get bailed out. They should have the Mother of All Audits visit their businesses. Every executive decision, every deal, and every arrangement carefully scrutinized. People up on top need to lose their jobs, as well as their golden parachutes.

And more importantly, those businesses leaders pushing for bailouts need to know that if they screw up again that there will be no government help for them afterwards. That their next major financial screw-up WILL be the last. That “big” or not, they WILL FAIL!

This whole problem started because the WRONG people were bearing ALL of the burdens of the business. And as long as the WRONG people continue to shoulder ALL of the burdens, the problem will not go away, no matter how many bailouts we provide. That’s the REAL spirit of the Reagan Era sentiment about business. As long as that imbalance exists, governments will always be pressured to step in.

No comments: