Common Sense Regarding The Bailout
Common Sense Regarding The Bailout
Rule One: If you reward bad behavior, you get bad behavior.
In the news this week and probably in the weeks to come is the financial mess that threatens the U.S. economy. I sincerely hope that all parties (Congress, Wall Street, & Taxpayers) will take just a little time to consider the common sense lessons that most of us know to be true. The most important rule in shaping behavior is that if you reward bad behavior you will get more bad behavior.
Once we look past the spin the election and media are putting on this issue, we will find common sense pointing to a clear violation of the basic rule about rewarding bad behavior.
For years and years, bankers relied on time honored rules concerning the lending of money for purchasing houses. These rules included the following:
· Never lend more than a borrower can afford to repay;
· Never lend 100% of the value of the home because it important for the borrower to have a financial stake in the purchase and if home value goes down in the short term the banker’s risk will remain secured; and,
· If a loan has any possibility of remaining as a bank asset, make damn sure the first two rules are followed.
The current financial mess clearly stems from numerous legislative actions that effected the latter of these guiding principles in mortgage lending. Historically, risk to the mortgage lender and to the borrower (the possibility of losing equity) had kept this system secure and rolling along for years.
Congress, a few decades ago, decided to tinker with the system and the result was that risk was shifted from where it belongs. The Community Reinvestment Act was passed in 1977 and bankers who might have wanted to expand were effectively required to make numerous loans in neighborhoods where the property values were less stable (more risk) and to borrowers who were less likely to be able to repay these loans (more risk). More and more regulations were passed by Congress that further added to this change in the amount of risk that banks were exposed.
Under this Act, bank expansions could be held up by complaints from community groups such as ACORN. This gave such groups enormous leverage to threaten and extort lenders into make riskier and riskier loans.
Then in came Fannie Mae and Freddy Mac buying up the questionable loans (sub-prime) and encouraging more and more lending in unstable areas, to borrowers of questionable means. Fannie and Freddy then bundled up the risky loans and resold them on the world market. Fannie Mae and Freddy Mac had rewarded the banks’ bad lending practices by assuming their risk. The banks seeing their risk disappear were freed of the historic check on bad lending practices – LOSS. You know the rest of the story.
Well actually, many will buy into the spin that Sen. Obama and the Democratic leadership are trying to put out – that all of these problems lie at the feet of the Republicans and their not wanting regulation. This is blatantly a distortion of the facts.
If fact, Republican leadership has for the past couple of decades have tried to reign in Fannie Mae’s and Freddy Mac’s irresponsible manipulation of the financial markets. In 2005, Sen. McCain was a co-sponsor of legislation that would have, most likely, prevented this crisis. However, this legislation was blocked by Democrats. Understandably, the media has been reluctant to give Sen. McCain the credit he deserves given that they are wholeheartedly supporting Sen. Obama.
Sen. Obama’s guiding principle of “Obama First” will not allow him to tell voters about the real story of Democratic responsibility for this crisis. Additionally, Sen. Obama has extensive ties to those who led Fannie Mae on its path to fiscal crisis and to ACORN, a group that put incredible pressure on lenders to make risky loans.
The shift in risk away from lenders primarily resulted from Democratic policy initiatives aimed at getting more home ownership in minority neighborhoods. However well intentioned, these initiatives are a root cause the financial crisis we are now facing. Congress was incompetent by not being able to recognize the predictable consequences of their interference with this industry.
So what does common sense tell us about the need for a bailout?
First of all, there is plenty of blame to go around:
- Congress created the shift of risk that occurred and rewarded the bad lending practices by allowing the purchase these loans by Fannie Mae and Freddy Mac.
- Bankers should have held fast to their understanding of sound lending practices and tried harder to resist Congress’s drive to riskier loans.
- Groups like ACORN insisted that banks make loans to borrowers who lacked the ability to repay these loans.
- Borrowers should have resisted making loans that they were unlikely to be able to repay.
- The media should have alerted the voters about the real situation at Fannie Mae and Freddy Mac.
- Voters should have voted out the people who caused this financial mess years ago.
Second, the House of Representative did a good thing voting down the bailout.
“The American people rejected this bailout and now Congress did likewise,” said U.S. Rep. Mike Pence
Many times legislation that is enacted is such haste will be susceptible to serious defects and inclusion of hidden provisions.
Third, a bailout that rewards bad behavior will get more bad behavior on the part of business. Executives of banks that are involved in this bailout should not be rewarded with golden parachutes. Groups like ACORN must not receive any benefits under any bailout or rescue package. Borrowers who were not misled by lenders and those who were involved in buying homes for investment purposes should take their loss and move on. Members of Congress who encouraged, facilitated and/or concealed the problems with Fannie Mae and Freddy Mac should resign or be voted out of office. A non-partisan investigation should be required to investigate the failure of Fanny Mae and Freddy Mac; and those who are guilty of wrong doing should go to jail. This is common sense.
Forth, any rescue package must require transparency and sound lending practices.
“It is now imperative that Congress come together and develop a response to the crisis facing our financial markets that reflects the American people’s belief in personal responsibility and fiscal discipline.” — Rep. Mike Pence, Republican.
Fifth, any package that is passed should not result in a Federal takeover of the financial industry. It is clear that the government and politics is the main culprit in the story of financial collapse and it should not be trusted to manage this industry in a responsible manner. Something along the lines of the extension FDIC insurance and loans to banks would be preferable. (After the Enron mess, Congress hastily required that assets be valued to market and this good intentioned regulation has exacerbated the current situation. When valued at today’s market, mortgages look worthless.) Allowing banks to value their assets in terms of what the market will be some time in the future could take some pressure off the markets and each individual bank’s portfolio. Politicians are not financial experts and many times they pass regulations that do more harm.
U.S. Rep. Jeb Hensarling, R-Texas, declared that the bailout might put the nation on the “slippery slope to socialism.”
Sixth, voters should be told the real story by the media.
Unfortunately, voters and tax payers will not be able to trust the media to provide accurate information. This election cycle has resulted in creating a media cheerleading section for Sen. Obama and Democrats. The media is refusing to look at any issue that may reflect badly against Sen. Obama.
The Media’s behavior thus far has been shameful. What about the allegations that Obama used cocaine and engaged in consensual gay sex with Larry Sinclair in November of 1999? Will the MSM stop taking sides in the election and do their jobs? Will they investigate Mr. Sinclair’s allegations? Will they dig into Obama’s past as hard as they have jumped on Sarah Palin? Will they look deeply into Obama’s relationships with William Ayers, Rev. Wright, Tony Rezko, Acorn, and all the rest? Will they look into the Democratic involvement in Fannie Mae and Freddy Mac failures? Will they call Sen. Obama to task for his possible violation of the Logan Act? Will they look into the allegations made in Berg v. Obama that he is not eligible to be President? Probably Not.
In conclusion, it is clear that something needs to be done soon. However, whatever is done must be based on facts and common sense; and not politics.