Tuesday, July 1, 2008

Congress Set To Pass The ‘Incompetent Banker Relief Act of 2008’

It looks as if Congress will pass a housing bailout bill to provide $300-billion worth of mortgage loan guarantees. But rather than benefiting homeowners, as the politicians claim daily on cable news talking head shows, the main beneficiaries will be the incompetent bankers and fraud artists who issued mortgages during the housing bubble that are now going bad by the bucket-full. The government will save these bankers billions by guaranteeing new loans that will pay off the existing loans at considerably above their market value.

Congress is running to the rescue of the bankers because, unlike autoworkers or people toiling in a dwindling number of textile plants, bankers have real power. When an autoworker or textile worker faces the prospect of losing their job, house and ability to put their kids through school, the politicians will feel their pain. They might even give a few good speeches. But they will not create policies that actually help US workers keep good-paying jobs.

The economists and people who imagine themselves to be economically literate will tell you that the basic story is that there is nothing that can be done. In a globalised economy, they say in stentorian tones, there simply is no place for the sort of high-paying jobs in manufacturing that tens of millions of middle-class workers held in decades past. The best policies they can produce are temporary adjustment assistance or other measures that can help acclimate these workers and their families to a lower standard of living.

(Yet, largely unnoticed, a large carpet manufacturer in North Carolina has proven the economists wrong, and kept good paying manufacturing jobs in the US. It required a new business model, genuine management and worker co-operation and meaningful profit sharing, but it does work. Why other companies in other industries haven’t followed their suit is beyond understanding.)

So, instead, when it comes to workers pain, we are told there’s nothing that can be done. What about the pain of incompetent bankers and fraudulent mortgage brokers? Well, we can't let incompetent bankers or mortgage brokers suffer. Congress, the president and the Fed will move heaven and earth to make sure that the bankers are not allowed to sink just because of their bad business decisions.

That was why Ben Bernanke was so quick to tell the creditors of the major investment banks not to worry that Lehman Brothers or Citigroup might follow Bear Stearns in going belly up. He promised that the Fed would throw out as much money as was necessary to make them whole. There was little concern for moral hazard or the incredible waste of taxpayer money to bail out the extremely rich. And despite what pundits say, guarantees are real money – if anyone ever tells you otherwise, ask them to sign a guarantee note for your mortgage or student loan.

The guarantees plus the below market loans from the Fed's discount window was just round one. Round two is the bailout package that is about to pass Congress. This bill is being sold as a bailout of homeowners. The big problem with the story is that the government guaranteed cheques go to banks, not homeowners. Furthermore, the banks get to decide which loans get placed in the programme.

This is simple Econ 101.

Banks are sitting on hundreds of billions of dollars of really bad loans. They can foreclose but this is costly. In addition, house prices have fallen so much, and the market is so glutted in many areas, that they will be able to recover relatively little of the original value of their mortgage through foreclosure.

So, along comes Congress with a big bag of taxpayer money and offers to guarantee new mortgages that will allow the banks to recover a much larger share of the original value of their mortgage. Who knows? With an exaggerated appraisal, they may even be able to recover most of their money. Oh. Wait a minute. Weren’t exaggerated appraisals one of the reasons we got into this housing mess in the first place?

Of course Congress sells this as a bailout of homeowners. And we all know homeownership is the American Dream so anyone who raises questions must be some sort of al-Qaida loving Communist.

Well, no one expects politicians to have any backbone. But where are the economists? These are the folks who get apoplectic about a 20% tariff on steel imports. Why are they so quiet about the much larger waste associated with this bailout?

The bottom line is that economists can be every bit as corrupt as politicians. They are happy to use their arguments about economic efficiency to beat down uppity autoworkers or textile workers, but when the gainers from inefficiency are the rich and powerful – like bankers or big pharma and health insurance industries – don't look for economists to be making arguments about economic efficiency. In such cases, the economists are happy to just salute the cult of home ownership and then go out and look for some union to beat up.

In short, the next time an economist whines about the threat of some form of protection that is designed to help ordinary workers, it would be worth asking where they were during the bank bailouts of 2008. If they weren't yelling at the top of their lungs, then their objections are based in their desire to aid the rich and powerful, not any genuine concern with economic efficiency.

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