Tuesday, September 23, 2008

On the Bailout

Ok, seriously now, y'all have to stop this Bailout from ever happening. This is the most ridiculous shit I've ever seen in my life. Let's review this for a second:

1) You have a consumer-based economy that relies totally on consumer's wealth, which means that it relies on home-ownership wealth, because that's where the american people have their wealth concentrated, in their homes.

2) You have a stagnating economy where everyone told you that the only safe bet is investing and flipping houses, and that one can make millions doing just that without much effort really. So many people start buying houses they can;t afford thinking that they will be able to flip them to other people and make a quick buck in the process, and they are aided in that with banks making mortgage taking very easy.

3) You have banks and lending institutions that wanted to raise their revenues, but no serious economic or manufacturing expansion was being sought out by the industry leaders (with industry moving to India and China and all) and thus no business loans, so they start focusing on giving out personal loans and mortgages. Realizing that there are so many real eligible homeowners out there, they start to give out mortgage loans to people they know can't afford it, hoping that most will eventually be able to afford them and that this will somehow diversify the risk and give them some method of hedging against any economic crisis that may occur if the bubble bursts. But just in case they can;t do that, they will lump a couple of those mortgages together, call them "financial instruments" or "derivatives", and then will sell them to Insurance companies, making the cash now, but with the gurantee that they will collect the money for them and cover the loans that fail to keep making payments. They figured, hey, how many of those could exist anyway? And then they took that money and gave it out as more bad loans, because, what's the worse that could happen?

4) The Insurance companies realize that they have a lot of money, and they need to invest it in order to be able to pay the insurance premiums for those customers who died, houses burned, whatever. So they take the cash they collect from their customers and decide that they need to invest it in something profitable, long-term and secure. Where to invest, where to invest? Oh boy, I know, the housing markets. And those Banks are offering to sell us those financial instruments comprised of hundreds of mortgages on a discount, and will promise to cover the loans if the customers failed to pay up. That sounds like a great deal, and a very secure one at that. And no, we won't check to see if those mortgages are good or bad, after all, the banks must've did their homework on this. They just don't dole out money to anybody who asks. Right?

5) And so far we have the making of the housing bubble: People who want to make a quick buck start buying houses they can't afford and sell them to other people for profit, who in turn buy them on mortgages they really can't afford, and take them and try to sell them to other people for profit, who in turn buy them on mortgages they really really really can't afford take them and try to sell them for profit, until that is no longer possible because the price has hit a ceiling and no one is willing to pay that much for that house anymore. So those plucky home investors find themselves facing one of two choices: 1) Either face foreclosure on the house, and thus lose whatever money you made on it, and the bank ends up with a piece of property that no one wants to buy at its current price anyway, and the investors's credit rating gets fucked and possibly affects all his other loans and mortgages, or 2) they sell the house at a loss, take a second mortgage on their own home, which they they really can't afford now, so they start getting behind on their payments, face foreclosure, lose their own house to the bank and become homeless. And when that happens, they will look at you with sad eyes and say "I don't know how this happened. They told me that house prices always go up".

6) And now the banks are freaking out, because they now have lots of overvalued property- thanks to all those bad loans- and little cash, so they start going after those who have been paying their mortgages on time and up their rates, cause, hey, we gotta make our money back one way or another. So those who have been financially responsible start getting fucked, many of them unable to make those payments now either, so they also lose their houses, and the bank ends up with more property no one wants to buy, and thus faces bankruptcy and possible shut down.

7) And now the insurance companies start to freak out because the banks are unable to collect the mortgage payments, and are unable to cover the price of the house and are entering the arena of going concern- i.e. they might just get bankrupt and shut down. So they start going through their books to see how many such bad mortgages they have bought in those financial instruments anyway, and low and behold, it's in the billions. They better start calling other financial institutions for help, quick. Wait, everyone did this? Fuck, I guess it's time to ask the government for help. They have money up the ass anyway.

8) The executive branch of the government realizes that the people paying their campaign contributions are about to go bankrupt, and shut down. So they freak out. They also freak out more when they are told that when this will happen, those companies will bring down the stock market, which will bring down the whole world economy, unemployment will rise and everyone will suffer. So those companies, regardless of their reckless behavior, need to get bailed out immediately. How much of a bailout you say? 700 billion dollars? That sounds about right to me. Send it to congress!

9) The nice people in congress are divided over the Bailout: Should they give it to the companies that were irresponsible in their lending, buying bad mortgages and not really checking them? Or should they bail out the people who knowingly took out mortgages they can't afford in order to make some quick profit and never saw this logical end coming? The question of the day becomes "Which irresponsible group should we help out?" , instead of "Why are we helping those irresponsible people anyway?" or "Ain't 700 billion dollars just a tad too much money to spend on failing irresponsible financial institutions, especially that this is the taxpayer's money we are talking about here?"

10) And finally, there is you, the good ole responsible working American, who didn't try t make a quick buck and who took only mortgages he/she could afford. Suddenly you find that the rates on your mortgage went up for no reason, so your house is in jeopardy, followed by an announcement by your bank that it is going bankrupt, and those savings you've put in there? Ehh, might not be there anymore dude. Oh, and the part of your savings you've put in the stock market or let those financial institutions invest for you in their mutual funds (part of which, naturally is invested in the housing market), well, that's going to shit as well. But don;t worry, the government will take the money you gave them, and give it to all of those people instead of spending it on government programs- such as education or road maintenance, or medicare- like they told you they would. And if they can;t afford to make such a payment, they will issue bonds to other countries which you later on will have to pay anyway. Don't you just feel blessed to live in the greatest country in the world now?

People, wake up. Fuck the financial institutions, let them fail. Fuck those people who gambled with your future, let them be homeless. And fuck the government that wants to bail them with YOUR MONEY, it's your money anyway, and having it used to reward stupidity and recklessness is surefire way to waste it. There is no averting this economic crisis, it's here to stay and it will be a while before it goes away. Deal with it, and move on, because all of this bailout talk is nothing but a short-term solution to a long-term problem. Just do nothing, and let the market correct itself. Trust me, you will be better off, in the long run, that way!

2 comments:

Ghafari said...

A Great and simple explanation that I waited anyone to write for days.

Thank you

Tantor said...

SM,

You're waxing a bit hyperbolic in the beginning but you came to the sane conclusion: Let them crash and burn. The last thing we should do is subsidize incompetence.

A few points:

Sure, Americans are big consumers but our buying doesn't depend on the equity stored up in our homes. Only idiots converted the equity of their rising home values and bought toys with them.

Only one out of two hundred mortgages are shaky. That's not exactly a crisis, unless you've specialized in speculating in those mortgages, in which case you deserve to be burned. Those speculators are shouting that the sky is falling, but it's only the sky in their particular world.

The banks can't arbitrarily jack up the rates on your mortgage. There is a contract and you can always refinance to another mortgage at a better rate. The market dictates the rate, not the banks.

For those boneheads who took an interest-only mortgage in the belief that home prices would escalate forever, they are getting a lesson in how trees don't grow to the sky. The folks who sat out the bubble can now dine on their misfortune, picking up their homes for a song.

Some manufacturing may be moving out of the country but only because Americans can do other jobs more profitably. In some industries like steel-making, the industry has down-sized in labor but makes more steel than ever with fewer people. Even if you are a mercantilist, America benefits more from outsourcing than the countries to which it outsources.