Wednesday, September 24, 2008

The Current Financial Mess, Again Reconsidered

I spent some time today emailing back and forth with a couple folks, trying to assimilate the reality of the bailout. Father Dan explained to me the downside of the Leahy Doctrine (which states, "Better a sin of omission than a sin of commission"). And Bush actually did a fair job of explaining the situation in the financial sector to me:

  • Banks were encouraged (or forced, if you believe talk radio) to offer loans to high-risk borrowers.
  • These high-risk mortgages were packaged as financial funds and traded on the market. Because many of the mortgage-backed instruments were bought and backed by Freddie Mac and Fannie Mae, there was unusual and unwarranted confidence in their solvency.
  • Bank executives made bonuses hand over fist by making money through continually growing assest based on these mortgage-based instruments, among other things.
  • Cornerstone number one was pulled out when housing supply exceeded demand.
  • Cornerstone number two was pulled when the high-risk borrowers (as some analysts in Freddie Mac and Fannie Mae warned) defaulted, undermining the solvency of the assets based on those mortgage-based instruments.
  • To stave off further losses, banks have tightened up credit, refusing to loan out more money.
  • This slows down the ability of private individuals and businesses to borrow money to expand, make purchases, or obtain lines of credit or other loans.

So, again, what's the solution, if it isn't a $700B bail-out? We could, perhaps, address the individual problems rather than pay out huge sums of money:

  • Executive compensation: This could be solved via the private sector, by tying bonuses and stock options to short-term and long-term performance. If you allow the government to set a ceiling on executive pay, then you're empowering them to set the wages for everyone. Maybe you. Do you want someone in Washington declaring that people in your particular profession will no longer be allowed to make more than X dollars per year?
  • Tight money: The Fed could keep interest rates low to ease "tight money" policies by banks. This does not require action by the U.S. Congress.
  • High-risk lending: Allow banks to tighten up requirements on borrowers, do background checks (God knows I got a thorough one) for people pursuing first-time mortgages, or eliminate interest-only, zero-down loans. This is a matter of reducing government regulations, not increasing them, while allowing the private sector to increase businesses' borrowing requirements. This is starting to happen already. Though it'll make car buying a little tougher, it'd still be easier to deal with than government actions would.
  • Mortgage-based instruments: How many of these things are there? Again, what can the private sector do to prevent banks from investing in these types of things? This is a matter of corporate governance, not government action.
  • Market corrections: If the market is reacting to a fall in housing prices due to increased supply, this is a normal market function. Gasoline prices are going up because of an increase in demand without a concurrent increase in supply. The government's "solution" for this is to try to force consumers to reduce their demand by cutting back their energy use, lifestyles, or economic activities rather than allow oil companies to increase supply, which would dramatically reduce the price. Obviously people in Washington understand supply and demand when they chose to. Rather than interfere with the market, why not just leave it alone?
  • Individual responsibility: What could be done on an individual level to punish the guilty without spreading the misery? I don't know on this; I can't even guess. And I fail to understand the congressional Democrats' demand that people who defaulted on their mortgages be allowed to keep their homes. I fully expected that, if I didn't make my apartment/house/condo payments, I would get thrown out of my home. However, I do make the payments, do maintain my credit rating, and stay in my home. Why can't defaults be enforced, rather than rewarded?


I spent my drive home this evening screaming at the radio, especially when Bush said that "Democratic capitalism is the greatest system that has ever been created," and I replied incredulously, "Then why try to fix it with socialism?!??" Sigh.


Let this be a lesson to my Republican brethren: a "neo-conservative" is someone who, if they are willing to go overseas and remake other nations' societies, are just as willing to remake the society back home. A conservative wouldn't try either.

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