It's Time For Financial Dinosaurs To Die

If governments had been around 65 millions years ago, they would have used taxpayer's money to save the dinosaurs from extinction. This comment comes to mind while watching the government trying to save the Wall Street financial giants from falling into oblivion.

While explaining what is happening, financial experts tell us that Wall Street has super smart people that have created very complicated securities, which became monsters that nobody has a handle on ("Morning Edition" on NPR, emitted on Sept 19, 2008). On the same program, Michael Bloomberg, talking about complexity of these securities said, "My theory is that most people could not understand them, [that is the] people who worked in the firms. I don't know that management of these companies really understood the risks and the volatility."

Really?

When a mortgage broker sold a low interest, one or three-year arm, mortgage to a person of shaky financial standing, he knew that that person would barely be able to pay monthly installments on the low interest loan and would be even less capable paying them when the rates went up. However, it was not his headache; he cashed his commission. A banker in the bank accepting this mortgage knew the same; therefore, as soon as possible he got rid of this hot potato by selling this loan to a bigger bank; and cashing his check. The big bank grouped together many loans like this one and moved them further up. Those securities were then shuffled around endlessly. Opposite to Mr. Bloomberg theory, everybody knew perfectly that in order to make money on these thirty-years obligations one should not hold them longer than thirty days. As long as inflated housing market kept fueling this system with sales of new mortgages, to some naive, from afar, this house of cards appeared to be of bricks and mortar. Maybe it was not a classic pyramid scheme, however - taking away all the baloney that Wall Street experts are feeding us - it looks like one.

Every time when those dud loans changed hands, someone collected a commission. While banks were accumulating worthless papers, bankers were getting richer. John McCain got it wrong when saying that someone in the current administration fell asleep at the switch. When such stunning cash is floating around, people are not sleepy. Sometimes, some are getting paid to look the other way.

Some financial institutions on Wall Street became financial dinosaurs. Original dinosaurs died out because they could not adopt to the climate changes that happened to them. Wall Street giants cannot even survive in the environment that they created themselves. The government is panicking, and trying to save them arguing that they are so big that their demise could quake the whole banking system. Paradoxically, this is exactly the reason that the government should let them fail - we should not have banks so big that the downfall of a few of them could throw the country's economy out of balance.

Instead of pouring cash into saving giants that are doomed for extinction, the government should use these funds to assist people and institutions that could be affected by the Wall Street turmoil. Giving this cash directly to homeowners that could not pay their current mortgage makes more sense. Let say that defaulting homeowners could receive a government backed loans up to six mortgage payments. Some people may use his cash to restore their solvency. Many would spend this extra money unwisely, so eventually we would need to write off many of these "loans". However, these taxpayers money, regardless how spent, would deliver continued employment and cash to other people that eventually would use it wisely. The fear of Wall Street collapsing tomorrow would be delayed for at least those six months, and - in the meantime - the market would find the best way to accommodate to this new situation.

Change is needed on Wall Street; this is where the meat is. Politicians will never tell us that the real change means pain to many if not to most of us. Without enduring this pain, there will be no progress. Both presidential candidates have voiced opposition to pumping taxpayers' money to save Wall Street dinosaurs. However, firm opposition to the bailout plan may result in banking turmoil that might be unpopular with voters. It will be interesting to watch, which presidential candidate will succumb as the first one, and will concede to the definition of "change", as changing of methods used by the government to protect the Wall Street dinosaurs from extinction.

This week OffTheBus is publishing a variety of stories that cover the policy differences between Senators John McCain and Barack Obama. If you have a policy expertise and would like to participate, please see Calling All Policy Gurus.

Comments

[Kafkaa]

excellent description of keeping the profit/passing on the risk game...ultimately to us...this is the way these bubbles work and ultimately fail...dutch tulip madness forward....and backward as well...this is a fault of the watchers deliberately not watching...too busy sucking up their own lobby money,etc...crying fowl when the bush(not a fan) admin wanted to rein in freddie/fannie,etc....all part of the greed/profit/make others pay culture....barny ponzi should be in jail by now...yeah, democrats this time.

[kaski]

Let them fail along with the privately owned commercial bank called the Federal Reserve. Owned by 12 American families such as the Rockefellers, Morgans, Warburgs... Let's get back to real and true capitolism.
"Fascism should rightly be called corporatism for it is the merger of state and corporate power." Benito Musolini

[Nahnmon]

I couldn't have said it better.

The currently proposed plan(s) are so flawed that they will provide exactly the intended purpose, namely to socialize most of the debt, and to 'accommodate' just enough concessions by both sides to leave a new tangle of messes to obscure the real problem. This, in turn will create a bunch of new cottage industries in the way of 'managing' the bailout (guess who will get the fees for that? Why the bankers, of course, duh) Then there will be the inevitable corruption and attendant litigation with those fees and costs.

Too big to fail is just another word for 'we really need their campaign dollars.'