Saturday, October 25, 2008

$700 Billion to Spend? Why not spend it on homeowners (Originally published Sept. 25th, 2008)

The proposal put forward is preposterous. After using clever schemes to make gold out of crap, the solution proposed is to underlie those very schemes.

So rather than have the companies eat their lumps, like a true “free capitalistic” society would have, Congress is being asked to buy-up the toxic securities, using taxpayer’s money. Then, the risk is shifted back down to the people themselves, who are trying to buy a car, a house, or put their kids through college.

I notice that Wall Street always announces it thus: “Money is needed to fend-off foreign interests who have decided that the game is over and they need to cash-in their chips.” The Government of the US always announces it this way : “In order to allow the average homeowner to keep his house, pay for his car and send his kids to college.”

Wall Street has it right: The $700 billion bailout keeps the business interests safe, and allows the current market to function, much more than a bailout of individual homeowners could do – in the short-term.

The World Money Market is addicted to a form of crack-cocaine known as derivatives and market-schemes. Repackage the underlying security enough, and it will give an instant high.

No serious economist today will deny that the root of the problem lies in how homeowner debt was repackaged and allowed. Everyone thought that they were safe because housing starts and second-owners would increase the value of property forever. This is personal debt, real people. No one will let their house be sold for less than they owe was the thinking.

Certain people did. Certain people realized that all is fine and dandy with your adjustable-rate and interest-only mortgage, until you lose your job, or have medical or other unexpected expenses to pay. Then you must rely on your hard assets: Your house, your car, or anything else you can put to market. And thus the distressed-sale marketplace takes place.

If you are Lehman Brothers, Goldman Sachs, Fannie Mae or Freddie Mac, and especially AIG the government bails you out by buying the assets at what is at stake. Not so if you are the average Joe or Jane. Then, you are left on your own and even blamed for the origin of the meltdown.

How about $700 billion available to those households in need of assistance? One of your children suffers an illness and you can’t pay the mortgage, the Government buys your mortgage and gives you a break. You lost your job, no problem, don’t put your house to market under distressed conditions: The Government will keep your creditors at bay. You’ll need to repay them (which you will likely do, since you are not a Wall Street gambler) but at least you’ll be given the time needed to do so.

As opposed to that scheme, we have what has been obviously dreamed up by investment bankers: Let’s put money behind our crappy schemes and let the foreign markets continue to sell us funds at low prices. Foreign markets realize that there is a thirteen trillion dollar US economy, most of which filters-up into the coffers of the Treasury by outlandish taxation of the working class. The well will never run dry!

Well, I think the well should. I herald a call to all those who are working on paying-down their mortgage to think of themselves as Wall Street investment bankers: When your balance-sheet is negative, call-out to the world and remind them of your significance to world-markets (AIG). Take a stand by allowing foreclosure (but refuse to leave the premises). Remind the Government now of your importance to the mechanics of the economy.

Using the very logic proposed to defend the bailout, if the underlying securities were more protected, there would be no crash. Why not defend the underlying securities?

By playing chicken, Wall Street got a $700 billion windfall.



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