Paul Krugman discusses the proposed $700 billiion wall street bailout in a recent column, “Thinking the bailout through,” printed in the New York Times. Krugman urges, “Let’s not be railroaded into accepting an enormously expensive plan that doesn’t seem to address the real problem.”
Krugman says, “The plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that’s the real plan, Congress has every right to balk.”
See Krugman’s article here.
This mortgage crisis reflects capitalism and deregulation run amok, starting with
1. The idea that debt is equivalent to wealth.
2. The idea that you can finance consumer spending and run the economy by means of debt.
3. Concentrating the world’s wealth in the hands of the wealthiest few, who don’t need to spend it on things and so they start looking for investments with higher and higher yields. Too much money chases not enough real wealth, essentially bidding up the price to ridiculous levels, first in dot coms, then in housing. Where will it go next?
4. An incentive system that paid loan originators off the top to make bad loans and then sell them “downstream” to investors without accountability. Most of the loot was gotten away with by mortgage salespeople and secondary market securitizers, who took advantage of borrowers and investors alike.
5. Paying originators large sums out of proportion to any work they did, up front, to make bad loans and get paid regardless of whether the loan is good or bad.
6. The innovation of securitization, which inflates the value of assets by separating them from the activitities of the loan makers, then divides the proceeds in incomprehensible ways among “waterfalls” of “tranches” that are then swapped, collateralized and no one understands what all. This allowed brokers and originators to get rid of bad loans with impunity until the bubble burst. This is essentially a Ponzi scheme attempting to thrust unsustainable levels of short term profit into a long term future. The inventors may have been the smartest guys in the room, but the urban proletariat would not have invented these complex securitizations, and that would have been a good thing.
7. A corporate system that allows shell corporations to be conduits that lack financial responsibility to make good for the wrongs they’ve done. Mortgage lenders and brokers just go bankrupt leaving their loans behind.
8. Loan products and investment products that are too complicated to understand, leaving people to rely on trust, faith and fantasy in a world where trust was neither wanted nor forced.
9. A dysfunctional morass of laws and regulations that allowed the lending industry to get away with it. Most of it is at the federal level and is politically attributable to Republicans, although Democrats went along, and to our money driven political system that leaves those of modest means helpless when pitted against the wealthy.
We should not blame the victims. Despite the media belief that lenders went out to homeless shelters and street people giving mortgages to people who don’t deserve help, most borrowers are homeowners who are only guilty of believing the experts, not being able to understand complex documents that confuse lawyers and are only understood by insiders, and having too much optimistic faith in the future. Most could have handled a decent mortgage loan but were handed a bad one.
Who we need to bail out are all the homeowners who were talked and tricked into making bad loans by the sophisticated, unregulated and commission driven mortgage industry. America’s homeowners are as important to the success of America and America’s economy as all these market players. And what good comes from foreclosing on millions of homes and destroying the lives of millions of families, along with their neighbors and their communities? Legislatures and regulators must be criticized for waiting too long to act and for being too protective of the secondary mortgage market, which too many saw as a goose laying golden eggs.
But to restore confidence in the economy, the government should buy the bad loans, but only at a deep discount that will make borrower relief possible. It should then modify them (at least for owner occupants rather than speculators) to get rid of “toxic” features. They need to eliminate all the upward rate adjustments from the initial “teaser rates,” reduce loan principals to the real appraised value rather than the bogus appraisals the originators purchased and eliminate other predatory features. This needs to be done on a mass basis as neither borrowers nor industry can handle intense case by case examinations. Once loans are modified to sustainable terms, they can be sold to the private sector and the taxpayers can recover much of their costs, as was done with Home Owners’ Loan Corporation during the depression.
Since the securitization eggs may sometimes be too complex to unscramble, we also need to allow bankruptcy courts to modify untenable loans and save peoples homes, eliminating an industry loophole. Actually the whole bankruptcy act should be redone to eliminate all of the provisions the lending industry purchased at the height of Bush’s popularity, and give people who get over their heads due to medical bills, the bad economy and attemtping to finance the consumer economy a chance for a fresh start.
Congress also needs to fund the staffing of loan modifications, provide counselors and lawyers for homeowners assistance, and keep an eye on the process so it’s not just giving a blank check to the lending industry in one last big ripoff .