Ripples in the Sub-Prime Bailout Pond …

Business, Common Sense, Entitlements, Individual Responsibility, Taxes

Peter, a recent commenter here at Blue Collar Muse on the topic of Sub-Prime mortgages and the bail out of those who tossed the dice in that game and lost, got me thinking about the issue again.

My principle break with his position is that I do not believe, as he does,

The government is largely responsible for the subprime problem with the MINORITY AND LOW INCOME HOME OWNERSHIP PROGRAMS and the reduction of LENDING STANDARDS.

Nor am I in agreement with his assessment that

The banks were just doing the fed’s bidding and are responsible for the poor assessment standards that inflated house values in loan sizes and profit margins.

The current Sub-Prime mortgage crisis is exactly that, a Sub-Prime mortgage crisis. The government isn’t in the Sub-Prime business. While Fannie Maes and Freddie Macs are government programs, they are not Sub-Primes and are not facing default and foreclosure rates beyond what they normally expected.

Neither are the banks. Banks, by nature, are much more conservative than other lenders. They run from such loans. The real culprits are mortgage companies who made such loans for the profit involved and/or subsequently sold them as investments. Companies like Country Wide for example. There isn’t a single bank I can think of that is in danger of going out of business because they made Sub-Prime mortgage loans. There are a host of mortgage companies that have done so and may yet do so.

Where banks have been hurt is in the narrow segment of the market where the bank is large enough to have several divisions, one of which is for investments. Those bank investment divisions, CitiBank for example, who speculated with high risk loan portfolios did take a hit. But not because banks were in on making these sorts of loans. Their involvement was after the fact and unrelated to the wisdom of making such loans.

Peter suggests resolving the crisis by instituting a number of government programs. In my opinion, this is precisely the wrong approach. The market is already dealing with the issue. Mortgage rates and money for conventional loans are abundant and available. Qualified buyers are able to get all the money they want for chasing that part of the American Dream that is home ownership. To reiterate, there isn’t a Mortgage crisis, there’s a Sub-Prime Mortgage crisis. But if we fail to allow the market to spank those who gambled and lost; if we prop up the bad decisions of both companies and individuals; that is where we will fail our nation. The danger is not in failing to step in and prevent damage to people and companies for bad business decisions. If we bail out bad lenders and borrowers, that is where we will threaten the economy with serious, long term damage. If we take away the risk, penalty and consequence for bad financial decisions we take away the most effective tool the market has - punishing failure - and we threaten to expand governmental influence in our daily lives even more.

Anyone familiar with Economics understands that you get more of what you pay for. In fact, that is a financial tool often used to gain specifically desired ends. Pay for what you want. It’s market based and it works. Unfortunately it works even if the payer is the Government.

Government bailouts pay for bad financial judgment. If we do them, we’ll get more of it. That’s not really debatable from an economic standpoint. That government does it using our own tax dollars is reprehensible but par for the course when it comes to government! The entire process leads directly to three of the things that ought to be fought by every America - bigger government, higher taxes and curtailed liberty.

To bailout those hurt by their choices in the Sub-Prime market, the government will have to grow by creating the bureaucracy to administrate the program. Peter actually openly calls for such growth. Tax money will have to be spent for the expansion and to fund the bailouts. When has government ever cut spending to afford new growth? Finally, people will have their freedom curtailed. Once we allow the federal camel nose under the tent to bail us out, the entire camel will inevitably wind up IN the tent, telling us when, how, where and why we can buy and sell our homes. Not only is that a frightening scenario for personal liberty, the related threat to private property ownership in the nation is horrible to contemplate.

I understand Americans are a good and compassionate people. We want to help. Bailouts seems like such a correct and such an easy choice. The problem is, as it always is, that all of our choices have consequences. The consequences to choosing to bail out those who made bad choices of their own is that eventually such a choice will destroy not just the people involved but the nation itself. And trust me, there won’t be anyone around to bail the country out in that all too possible scenario.

Let the market do what it does best. Let the people learn from their experience. While it sounds harsh and it may have its downside, it’s the best course and the country and the economy will be better for it in the long run.

Blue

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Blue Collar Muse @ March 8, 2008