Tuesday, September 30, 2008

Bailout Bill

I have never written about a political or economic issue on this blog. However, the gravity of the current situation demands clear responses. With all the fearmongering going on in the media, people have to see through to what the truth really is. So this will be a clear explanation of the current mess and how to fix it.
I. How did this happen???

It is fairly simple to explain how the problem has arisen. This is not a Republican or Democrat failure. It is a failure of Government PERIOD. There are three main causes of this problem. First, Congress (republican) and the President (democrat) in 1999 decided to allow insurance companies to be banks. There were very good reasons why these were separate businesses. These assets cannot be mixed. It causes huge conflicts... what if State Farm insures your house as well as covers it with insurance. What happens if it burns down? Repossessed? What if its your money in your savings account backing the insurance policy on your house? Conflict of interest at best, disaster at worst. Ask AIG.

That was a problem, however, a bigger contributor was Alan Greenspan. He began to lax the rules for lending for all lending institutions. Enabling people who had no business getting loans to get loans. Interest only loans for example were given to people or less than interest only. So, these people could actually owe more on the loan every month. Who could not see that these people would default on their loans????

Third and finally Fannie Mae and Freddie Mac. These institutions were/are implicitly backed by the government. Furthermore, they were also being manipulated by politicians. So what happened? These institutions were told to loan money to and buy mortgages from people who were at very high risk of defaulting. They were told at these institutions not to use INCOME as a determining factor on loans!!!!!!! Now after these institutions were fully governmentalized we are on the hook to service these bad loans.

II. Why is Wall Street freaking out???

When farmers over plant one crop and the price drops farmers want to be bailed out... instantly. Now because all this money is tied up in bad loans (one crop) Wall Street wants their money back instantly from the government to encourage them to continue making poor credit decisions. This is absolute madness. They do not want to live with the consequences of their poor decisions.

III. Can I still get a loan???

Yes and no... If you are a poor credit risk right now you cannot get a loan. This is a good thing. Hold on to your money, save it, wait, you do not need whatever you were wanting to buy anyway. Get yourself into a better position financially. If you have good or excellent credit you will most certainly get a loan. Do not listen to the doomsday predictors on TV. Someone will always provide money when their is an opportunity for profit. So, why are we so concerned that people who do not deserve loans are not getting them???

IV. Government Manipulation

The question is being begged at this point... If the government has been meddling thus far helping create this disaster how will more involvement from them fix the problem???
If you were asking yourself this question... good for you. They will continue to make it worse. Imagine this... four years from now June 2012. The economy is not doing so well and everyone in office wants to get re-elected. What will they do? Time to manipulate the mortgage rates and applications that the government now controls. People get houses they cannot afford... again. They economy takes off for awhile and then collapses for the same reason yet again. Only how will the government get bailed out???

V. Taxes

Where does everyone think this money is coming from to pay for this??? The government can either print money (Causing inflation), sell bonds (the rates are at a point where no one wants them right now) or raise taxes. Even if they other two options are used, the time will come when taxes will be raised to pay for the other two stop gap measures. In other words because of the bad decisions made by these institutions both public and private. Some because they were forced and some because they were allowed, we most certainly WILL be footing the bill for this bailout.

VI. Socialism

This is indeed a socialist plan. The government will control the mortgage market if this bill passes. Do not be naive. If they lay out $700 billion, do not think they do not want to control it, and control it forever. You will have politicians and bureaucrats forever deciding what is appropriate for you to pay for mortgages and perhaps whether or not you could even get a loan. Maybe you will be the wrong gender, religion, or skin color and they have quotas to fill. Plus when has the government ever run anything well? Imagine all the headaches you have now when you have to deal with the government... now imagine them controlling the largest asset you will ever attempt to own.

This is by no means exhaustive in describing the problem. However, hopefully it is enough to move you to write your congressman and tell them to vote NO if this comes up again. The solution is to leave this alone and it will correct itself and people who made bad decisions will remember not to repeat them because they have had to live with the consequences. You will only touch a hot stove once. The free market does work when it is truly free.