Bailout a bad solution for subprime mortgage mess
December 21, 2007
Things were going great there for a while when everyone thought you could make a fortune flipping houses.
I watched my own house almost triple in value over a period of six years. I started thinking maybe I should be jumping on that bandwagon, selling off the house and buying another, moving again once it gained enough value, etc., and on and on until I was rich enough to retire to the tropics.
Everyone was cashing in. It seemed too good to be true.
And it was. Fortunately, the urge to sell my house was not enough to overcome my aversion to packing everything up and moving. That and noticing that things in the housing market were starting to look very similar to the Dot.Com bubble.
Two years ago, I saw a stat that blew me away. It showed that 47 percent of the mortgages issued in California in 2004 were adjustable-rate, interest-only deals. It was obvious that almost half the buyers were betting on the prices going up to cover the higher bills headed their way. When you have that much speculation, you know the game is coming to an end.
We are just now starting to see the effects of the housing bubble bursting. Nationwide, home prices are dropping by record amounts, at the same time foreclosures are hitting all-time highs. As the low introductory rates on those mortgages come due over the next year or two, there are a lot more foreclosures on the way.
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And the more foreclosures, the more lending institutions get pummeled with bad debt, and the more CEOs jump ship with their golden parachutes.
But don’t worry, the government is here, and they want to help.
There is actually some bipartisanship coming out of Washington on this problem. No politician wants to see his voters kicked out of their homes during an election year. Both sides want to offer a bailout to the banking industry that handed out loans like candy at Halloween, and the homebuyers who gorged on that candy until they were sick.
While I can feel for all those people and businesses that are taking it on the chin, I don’t think they deserve a bailout, especially when we would have to borrow the money to do it.
Handing over taxpayer money to excuse people for their bad financial decisions is not just stupid, but harmful. This wasn’t a natural disaster, but one of their own making. It’s their mess, so let them clean it up.
I’m not saying that people should be thrown out on the streets and left homeless. There should be a minimum safety net to catch those who are in dire financial straits. But this doesn’t mean the government should pay off their mortgages, or help those troubled financial institutions remain solvent.
If the government bails out these bubble riders, that will only encourage people to jump on the next bubble. And each time the bubble bursts, the fallout is worse, and the bailout bill is bigger.
Of course, there should be ways to help prevent these bubbles from getting out of control in the first place.
The Federal Reserve is already taking some action in this regard, to stop some of the shady lending practices that contributed to this mess. Too bad they were, at best, asleep at the wheel when the bubble started, if they didn’t in fact help create the mess.
There also is a structural problem that needs to be addressed. The people selling these loans didn’t care a bit whether their customers would pay them back. Once the loans were made, the sellers collected the commissions and sold off the notes to other institutions in schemes so convoluted that even the financial experts are having a hard time keeping track of just out how much bad debt is out there. A system like this is ripe for abuse.
Businesses don’t like regulation, but it’s necessary if they want to stay in business. Greed is what makes the economy run, like fire makes the motor in your car run. When properly regulated, everything purrs along just fine.
Take away those controls, and the engine blows up.
The housing market has just blown up, and could very well lead to a recession. The only thing worse would be to allow the very politicians who allowed this to happen to pander to the voters by pretending to fix it.
• Kirk Caraway’s weekly columns appear in newspapers in Nevada, California and Colorado. He also writes a blog on national issues at http://kirkcaraway.com.