The current credit crisis and its impacts on our economy and economies across the globe are now evident. The easy money period between 2001 and 2006 poured trillions of dollars of profits into financial services market participants and individuals alike. Trying to place singular blame in this situation is like trying to pin the tail on a herd of donkeys. Banks, mortgage banking companies, Wall Street invest banks, credit rating agencies, regulators, home builders and developers, the Federal Reserve and investors seeking to maximize their returns all share in this problem in one way or another.
Let me start by saying that I am an ardent believer in free market capitalism… period. I am also in full support and a cheerleader for individuals and companies alike to make as much money as possible by providing value and innovation to the customers and markets they serve. The conversations about CEO salary caps and the like smack of socialism at best and communism at worst and have no place in our markets or society.
I also believe that the fundamental right of individuals of age to contract and make decisions for themselves is at the very heart of our freedom and prosperity. Sometimes people are rewarded by their decisions and sometimes they are penalized for them but at the end of the day, if the transactions are entered into legally, morally and ethically by both parties the gain or the loss is the individuals to bare.
Privatizing Profits and Socializing Losses
What I do have a problem with is that these same individuals and all of these companies, having reaped all of the rewards from their activities and having all of the potential upside, are all now looking to the Government and to the tax payers to bail them out when their decisions have led to bad outcomes and even catastrophe. This event is not an “Act of God” as may be prescribed to Hurricane Katrina requiring public assistance. These are the results of millions of individual choices made by responsible adults of contracting age and private businesses.
These companies and the people managing them reaped billions of dollars in profits and compensation. Individuals made billions of dollars investing in mortgage bonds, buying homes, flipping homes and extracting the equity.
Now that it’s all gone bad what’s the solution?
The solution is a taxpayer bailout of massive proportions through the federalization of the mortgage and credit markets. The expanded use of the Federal Reserve, Fannie Mae, Freddie Mac FHA and just the outright handout of tax breaks and U.S. Treasury cash have put the substantial future risks and current losses right at the feet of the American citizen.
This privatizing of profits and socializing of losses shakes the very foundation of our professed beliefs and the very real workings of our markets in freedom of choice and free markets.
It stretches the imagination that if you go out and make a bad decision on a car purchase and lose money, make a stock investment that goes bad and lose money, or buy a lottery ticket and don’t win or gamble away thousands of dollars in Las Vegas, that these losses are and should be individual choices and outcomes but it’s somehow different because an individual bought a house. In the majority people not only buy a house for safety, security and that “feeling” that comes with homeownership but in the hopes of appreciation on a large investment.
If mortgage delinquencies and foreclosures spiked to 20% of the mortgage borrowing population 80% of this entire population of homeowners are paying their mortgages on time regardless of what is happening to the value of their home. If we’re handing out money why are we handing it out to the people that made the wrong decisions and not giving it away equally to “homeowners” en masse?
There are not many successful incentive programs built around rewarding the bad decision makers vs. the good decision makers that I am aware of. In fact if the incentive takes the risk out of future decisions then I will take more risks if I know someone will subsidize my loss. There is a severe lack of common sense, fair-play, balance and ethics at play here.
Don’t get me wrong. I feel badly for every borrower involved that has been hurt by this just as I do for people when the stock market drops and so many people lose so much money. I also believe that people that were fraudulently induced into their situation should have remedy, which they do in the courts, not through government.
Think of it this way… it would have been better at this point to have had a nationalized housing program that would take billions of dollars of taxpayer money and buy the houses outright for people that the government thinks are worthy but really can’t afford it.
People have a fundamental problem with significant, programmatic income redistribution like that when it’s “in your face” but don’t see it framed the same way in the disjointed, confusing web of “solutions” that have already been enacted with much more on the way. It is however, exactly the same.
Congress is at the very heart of this interference and manipulation. In their rush to appease and support major corporations and investors (contributors all), shrill customer advocate groups and some small segment of voters, they pile over one another to pour billions of hard earned tax dollars at the problem like so much oil on the squeaky wheel. They defer to experts at the Fed and others letting them make decisions that clearly stretch the boundaries of, or are just outright beyond the boundaries of their charters. The Fed jumps in with even more zeal and fewer restraints to “save the financial system from collapse” putting its protective, tax payer blanket over their constituents.
These are the same "experts" that helped create the problem in the first place. These are, for the most part, good people with good intentions, all with competing constituent interests, making cumulative bad decisions that put a cancer causing salve on a wound to stop the immediate bleeding today. The tumors are going to be popping up in places and at times that will be totally unexpected and will have to be dealt with more severity and more public money, in the future.
The Fed and the U.S. Treasury are playing the same game of chicken the originators were back in 2006 only with much more power, more sophisticated tools and controls and doing it with tax payer, not private money.
It goes something like this… If the government shifts the burden of risk to itself the credit markets will regain confidence, liquidity will return (the money will flow), the markets will “normalize”, the risky assets we’re now backing with tax payer dollars will come back to a higher value and voila; we’ve avoided the pain. Sound familiar?
There seems to be this consensus that the failure of many of these major banks would collapse the entire financial system here and around the world.
I find this difficult to imagine with the Trillions of dollars of capital flowing through global markets everyday and many financial institutions (i.e., Wells Fargo, J.P. Morgan and Bank of America) on solid footing because they made better decisions during the boom period in balancing their risks.
The other glaringly obvious argument against this is the ability for bank and non-bank financial institutions to re-capitalize (get more money) even in light of the severity of their problems. Investors foreign and domestic are looking for opportunities to own in the upside of these now troubled companies and have invested billions to shore them up for that chance. Sure it’s at a fire sale price, certainly it’s painful, and yes there will be companies that can’t find enough money or find it in time and go out of business. And yes, it will put a strain on the financial system. That’s the definition of free market capitalism.
Bailing everyone out from start to finish in this thing has not only shifted the private losses to tax-payers but sent a huge signal to future actors that the ultimate downside risk isn’t so ultimately bad after all.
We might as well create a new national corporate and banking “Federal Lost Investment Insurance Program” we’ll call “FLIP” that is the bigger brother to the FDIC deposit insurance plan. The FDIC plan insures depositors their money back for up to $100,000, if one of their insured banks fail. The new FLIP program is the Federal Reserve and Congressional guarantee that if the investment losses are big enough and bad enough then these “too-big-to-fail” players will be guaranteed and saved by the Federal government.
Being FLIP – The New “FLIP” Program
The model for the FLIP program is a little different however; the FDIC actually collects insurance premiums from the banks whose deposits it insures. FLIP wouldn’t have to involve itself in pesky matters like that because ultimately the premiums to “flip” losses onto tax payers backs are already collected by the IRS.
The mortgage and housing markets have been transformed over time from a fairly simple business of bank balance sheet borrowing and lending to a highly sophisticated and complex web of instruments, market participants and global interactions.
As in so many areas of society, the speed of technological innovation has exceeded our ability to control these dynamic forces. While allowing wonderful and beneficial innovation it also brings a false sense of security to its users and rather than migrating in our experience and waiting for historical results, we fly full speed ahead with our models like so many unproven test aircraft as if they were already proven ready for fleet deployment.
These innovations have been extremely beneficial to borrowers and market participants alike providing more access to more capital. The massive amounts of money that flow through this system and the profits for individuals and companies alike are astounding and everyone would like to participate and wants as much, as fast as they can get it. This is as it should be.
The issue is not that we won’t have problems. This won’t be the last asset bubble that collapses leaving a path of destruction in its wake. It is the price for pioneering and moving forward. The issue is how we learn from what happened and improve our ability to balance controls and free markets in as close to the right formula as possible.
One thing is for sure, if we allow individuals and companies the freedom to make their own financial decisions they should be left with consequences of those decisions, good or bad, or they, and we, would have learned nothing or certainly far less than we should.
It should be clear how there is a direct link from the tax payer wallets to their pockets now that things have gone bad. It is as if billions of dollars in salaries, bonuses, profits and borrower gains were made privately and now that these same players are having trouble and we can’t ask them for the money back to pay for this mess, we will give them more and save them with tax payer dollars.
This troubling mix of government and public policy integrated with private practice and wealth creation makes for bad bed fellows. The Federal Reserve is a real influence over these events, creating them and trying to fix them, and does a poor job of both.
Our policy makers use the “potential failure of the banking system” as a reason to prop up private interests and to throw billions of dollars at the problem. Some with very real and calculable ramifications, but the majority of them will bring incalculable impacts and distortions that will only be evident over time.
The bottom line is that if we are going to allow private profits, then private interests should be allowed to fail. If this notion of private interests being so intertwined with the failure of our financial system is as real as they would have us believe i.e. Bear Stearns and all of the counterparty risk, then we have no more significant public policy issue than unwinding theses financial entanglements with maximum speed and getting on with business. This is what Congress should spend its emergency time on and not figuring out how fast they can hand out money.
If this truth is supposed to self evident, that we believe the public must prop up private interest, then let’s quit acting as if we have a free market economy and start socializing profits and put government controls over these sectors since we are already responsible for the losses.
It just feels more honest to me that way.
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