Selective Bailouts: Help for Wall Street, Not Your Street

As the Roaring Twenties were sowing the seeds of the Great Depression, the chronicler of that age, F. Scott Fitzgerald, famously remarked, "The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function." By this measure, President George Bush's Treasury Secretary, Henry Paulson, apparently is an "A" student.

In the run up to the Federal Reserve Board's decision Sunday to essentially finance the takeover of collapsing investment bank Bear Stearns Cos. by J.P. Morgan Chase & Co., the president, Secretary Paulson, and other top Bush administration officials adamantly told us that aid to neighborhoods devastated by foreclosures would be an unacceptable bailout of lenders and would remove necessary market discipline from punishing the sins of "speculative" homeowners.

In fact, their comments suggested that the current free fall in home prices resulted mainly from excessive individual risk taking and bad bets by individuals--and these speculators should suffer the consequences of their decisions. In Paulson's March 3 statement to the National Association of Business Economists, for example, he spoke dismissively of government intervention.

"We know that speculation increased in recent years; a resulting increase in foreclosures is to be expected and does not warrant any relief," he said. "People who speculated and bought investment properties in hot markets should take their losses just like day traders who speculated and bought soaring tech stocks in 2000."

Just yesterday, on ABC News' This Week program, Paulson again dismissed as ill advised the growing number of proposals in Congress to head off rampant foreclosures, instead arguing that "what's going on right now is an inevitable decline, and a necessary decline, in home prices." Asked about help for homeowners, the Treasury Secretary was clear: "I'm looking very carefully at any proposal. But all the ones I've seen, which call for much more government intervention, raise more problems and do more harm than they would do good."

So it would be unthinkable, wouldn't it, for the Treasury Department to throw taxpayer dollars into the breach while riding to the rescue of one of the central players on Wall Street responsible for originating, promoting, and selling billions of dollars of speculative overvalued mortgages? And surely the disciplinarian-minded Bush administration would never agree to open the Treasury to benefit other Wall Street firms holding mortgage-backed securities on which they already made record profits? Think again.

Defending the Federal Reserve's dramatic decision Friday to guarantee 28-day loans by JP Morgan to Bear Stearns to avert a liquidity crisis, Secretary Paulson asserted without a hint of irony: "We're very aware of moral hazard. But our primary concern right now, my primary concern, is the stability of our financial system." He then backed up those words on Sunday when supporting the Fed's decision to guarantee the value of Bear's entire loan portfolio after JP Morgan agreed to buy the investment bank for only $2 a share, and then to throw open the Fed's discount window to the rest of Wall Street's prime brokerages.

An awful lot of normal finger wagging about the hazards of bailing out those who make bad decisions from their consequences melted away in the face of Paulson's primary concern--the health of Wall Street investment banks amid the greatest credit crisis since the Great Depression.

"The beneficiary of this bailout, remember, has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach," noted New York Times reporter Gretchen Morgenson. "And as one of the biggest players in the mortgage securities business on Wall Street, Bear provided munificent lines of credit to public-spirited subprime lenders like New Century (now bankrupt). It is also the owner of EMC Mortgage Servicing, one of the most aggressive subprime mortgage servicers out there."

Now Bear's "difficult to value" assets -- our mortgages repackaged in pools -- are guaranteed by the Fed, and ultimately U.S. taxpayers. Maybe it is not so mysterious, though, that the Bush administration could simultaneously scold defaulting homeowners for the sin of striving to join the "ownership society" promoted so vigorously by the president until recently, while reversing course to drop all pretense of personal responsibility when a large financial house is at the brink. It seems to be all a question of vision, of who matters in the end in the priorities of an ideology-driven White House.

Bear Stearns is too important to allow to fail, but millions of homeowners can end up on the street when home prices plummet sharply. The Wall Street holders of overvalued mortgage pools are too important to fail, but homeowners drowning in debt are told to keep paying not matter what.

Or consider that big oil company tax breaks are too integral to our energy plan, but relief for millions of drivers squeezed by rising gasoline prices would be bad economic policy. Or that eliminating the estate tax is promoted as tax fairness, but vetoing the expansion of health care to millions of children through the State Children's Health Insurance Program as too expensive is prudent budgetary management. The list goes on and on.

There are many good reasons, of course, to act to avert a Bear Stearns bankruptcy when one considers the ultimate impact on millions of Americans and around the world of a Wall Street collapse. But the reasons are no less compelling when the devastation hits individual Americans directly -- home by home, block by block, neighborhood by neighborhood -- instead of mainly in the boardroom circles in which F. Scott Fitzgerald traveled, and which have changed so little since the Roaring Twenties.

It's time for President Bush and Secretary Paulson to widen their vision and see the root causes of the problems afflicting Wall Street--under-regulated, bad lending practices that have left homeowners overly in debt. There is still time to act to correct the problem at its source, while doing something worthwhile for both American families and the financial markets. Averting a worsening global credit crisis requires action to restructure bad mortgage loans, put families into sustainable mortgages, buy up foreclosed properties that are ruining solid neighborhoods, and rebuild communities--not just seeing everything through the world of finance.

This post originally appeared at americanprogress.org.

Comments

[ORSunshine]

The thing that strikes me the most about all of this is how convoluted it is. There is the subprime lending but let's not forget the hedge-fund investment­s... combined, these two titans of our recent "economic climb" caused the current catastrophe. The best part is, the average 'Merican (ya know, the ones that voted for Bush, twice) doesn't understand how it all works. So they just go "Huh, well it looks like the government is taking care of it. I'm so excited I get $600 in May."

This is all corporate cronyism and deregulation benefitting the richest 1% who have made out like bandits and who have sold all their stock when the price was high, causing the dramatic decline in the stock market, and leaving 401k and IRA mutual fund investors holding the bag.

[Novista]

Well, hmm, the mortgage crisis did not start in 2001. I have no statistics but, I have no doubt a good many good mortgages were sold on in recent years. That's the problem with derivatives, no one is quite certain what is in them! Nonetheless, given that 'subprime' was only peaked at 6.3% of the total pool, it is quite likely some if not many of the suspect assets are quite sound.

Liquidity was never the answer, though they tried that, and the answer was "Fail!"

Now that the Fed has its grubby paws on some of that paper, they should dissect it, sell what mortgages in whole they can find, back to the originating banks; put the funds derived into an escrow fund on behalf of the CDO (or whatever) in case it someone does get passed back to the financial borrower.

[Rule Of Law]

David, well spoken, but you and I both know that the Bush Regime has no intention of helping anyone but the one percent! And more to the point, this entire economic charade and subsequent blow up have been planned since before day one of his rule, and the true intent is to damage the Middle Class as much as they possibly can. No "bailouts" for home owners...i­t wouldn't be "moral."

[Henry]

I've a simple additive to move towards the correction of this sort of problem and that is this: No entity can make a loan, any loan that is speculative in nature. Pretty simple. It would have to work around "margin" loans for stocks which are "speculative". But we've been here before, we'll be here again. As soon as financial institutions make loans for speculation that drives asset prices up, you get the bubble. And when the bubble pops, you get what you get. No real estate loans that have "speculation" as their purpose. (when you live in a house, it is not speculation)

I read that half of the current problem (or so) is the investor type speculating on house prices. And of course, they're sorry now...but how, oh how were they to know?

[hopeless277]

Dude, you're talkin' about Bush here, not some bleeding heart LIBRUL. This catastrophe was seen coming by the Repubs. Just like Sept 11 was seen coming. They were warned repeatedly of both occurances. They let both occurances happen. Why? Disaster capitalism. Where there is disaster, there is opportunity. Republicans could not care less about home owners. They are too busy shoveling money from the Fed into their front doors while shoveling it right back our their back doors and into the pockets of their CEOs and board members. Trust me, this is not a bailout, this is a bank heist.

[philistine]

Your observations are absolutely correct. Corporate Welfare is just Tinkle-Down Economics for bad times, and it works about as well. In case it hasn't been obvious to most people for eight years, the foxes are guarding the henhouse. By the time they're done, we will be in deep trouble--and they'll be in Paraguay.