No Bailout For Bear Stearns, Or For Any Homeowner For That Matter

I hate to raise my hand and risk being voted worst person in the world, but we have lost our way when it comes to the mortgage crisis and the credit crunch. Actually, we have not just lost our way, where we are, we can't even see the road anymore.

Seriously, we are talking bailing out millions of homeowners and Wall Street firms that got themselves sucked under water by the storm they helped create, I absolutely fail to see the need. A little economic trauma is exactly what this country needs for everyone to realize what the last eight years has done to this land, once the largest economy in the world, but no longer.

Maybe it's because I am not only a strong Democrat but am also a strong believer in free market capitalism -- a believer in the strength of simple economic principles, like supply and demand. In my lifetime, any time I observe the government stepping in and playing economic god, usually in the name of short term political gain, the long term mess simply becomes larger, worse and impossible to fix.

Take Detroit.

At some point, Detroit will have to learn to make decent automobiles at a fair price, if not, they will, and should, go away. That's called capitalism. Honda and Toyota make great cars, right here in America. The so-called "Big Three" don't. You picked up a Ford lately as a rental car? I have. And twice, the car I picked up at the rental car counter didn't make it back. In Arizona a few months ago, I didn't even make it out of the airport before the car, literally, broke down.

But we have funneled billions upon billions of dollars into Detroit for decades, all so they can never have to deal with their demise, and retool and rebuild. Lest you think I am picking on a place I am not from, I feel exactly the same way about the subsidies to the fishing industry in my hometown of Gloucester, Mass. The fisherman overfished with bigger and faster boats, the ocean is virtually empty and our solution is to subsidize this behavior. I don't think so.

Now, the two parts of the mortgage crisis. Perhaps I am jaded, bitter even, by having looked for a house in Boston for family and actually had good credit and 20% to put down. I have watched in wonder as prices went up and up and up. Who was paying for these properties? Why were people buying and selling six months later and expecting to gain 20%? If you buy and sell a piece of property in less than six months, you should lose money, not make money.

It turns out the 300% rise in prices in Boston was driven by two factors.

People buying houses they couldn't afford.

Companies, tapping into cheap money, selling mortgages to people to buy houses they couldn't afford.

Both parties are greedy, wrong and dug themselves holes they may, or may not, ever get out of.

Do I think it's tragic that people are losing their homes? Of course.

Do I think that the rest of us should pay these people's mortgages for them? No.

Let me take one example from Sunday's Washington Post.

A woman buys a townhouse eight years ago for $200,000 with a fixed rate of 7%. She earns $90,000 a year. This is a situation that should never, ever have gone bad. But it does -- why? Because she takes out a home equity line to 'consolidate bills' -- meaning, I assume, credit card debt and now, she owes more than $260,000 on the house.

Wait a minute.

Presuming she put down 5% on the house, this means she has accumulated over $65,000 in debt in eight years. That's $8,000 a year. Meaning she is living a $98,000 lifestyle on a $90,000 salary. It's worse if she put 10% or more down.

I fail to see where a government intervention is needed here. Financial counseling? Sure. But this woman was planning on the value of the house increasing to support an unsustainable lifestyle.

The company that was selling her the mortgages and lines of credit? Well, that's where Bear Stearns comes in. My sympathy with large, incredibly arrogant, pricks from Wall Street, I don't have any.

These so-called, self-proclaimed Masters Of The Universe have for the past few years been nothing more than Masters Of The Smoke And The Mirrors, paying themselves million dollar bonuses while creating financial tools that even Robert Rubin didn't understand.

Just like the woman in Maryland, they are paying the price for one part incompetency, and two parts greed. And we should not bail them out. Not one penny.

Will they fail? Absolutely. And they should. But oh no, we can't allow that and here is the latest news from the Bear Stearns debacle.

The Fed will provide special financing to JPMorgan Chase for the deal, JPMorgan Chase said. The central bank has agreed to fund up to $30 billion of Bear Stearns' less liquid assets. Risky bets on securities tied to subprime mortgages -- loans given to customers with poor credit history -- crippled Bear Stearns, the nations' fifth-largest investment bank.

Hell, no. $30,000,000,000 of our money goes to guarantee the purchase of Bear Stearns because they were incompetent greedy bastards and have 'less liquid assets'? That's just outrageous. Why are we providing our money to help one business acquire one grossly incompetent business?

We can't fund programs helping our veterans.

We can't fund programs that give children insurance.

But over one damn weekend, we find $30 billion to fund greed. It's ridiculous. Pathetic enabling crap.

And it's money wasted, completely wasted. Just like the billions poured down the gullet of Detroit. Because you pull the Band-Aid off slowly or quickly, we're trying to allow these people to feel no pain, when pain is exactly what they deserve.

In fact, if you want to see where we are heading, take a look at this remarkable graph created in the summer of 2006 by the smartest person in America when it comes to real estate, Robert Shiller.

Here are the highlights:

In today's dollars, a house that sold for $100,000 IN 1890 SOLD FOR $110,000 IN 1996.

That's right, one hundred plus years later, real value gain, 10%.

But then comes the 'real estate boom' and in ten years, it sold for $200,000.

Best estimates are that real estate prices have to fall another 40-50% before they reach the historical averages. And they will. It is, as we see everyday in the news, unsustainable to expect otherwise and our line of credit has run out.

They will move back to those averages quickly if we let the market correct, or slower and more painfully if we try to regulate the fall.

Quicker is better. Saving Bear Stearns at $2 a share is slower. And stupid.

Comments

[SamThornton]

According to President Bush, a well-established authority on just about everything, our economy is fundamentally sound and in the long run everything will be hunky-dory. Of course, in the long run we'll all be dead, but never mind.

President Hoover said something very similar both before and after the 1929 stock market collapse that gifted us with the Great Depression. Don't Presidents just say the darndest things?

[seawolf77]

Thank God I don't work for Bear Sterns. OUCH!!!!!!

[jdm58]

I agree in principle with the majority of this text. However, we must not oversimplify the players in this mortgage crisis as simply greedy. Many of the homes in foreclosure today are a result of people losing their jobs, or suffering from devastating illness that are underinsured, and therefore unable to make ends meet. Some sort of bailout is necessary, to prevent our entire society from tanking. But we are doing it from the top down, instead of the bottom up.
Every time the Fed lowers interest, I begin to fume. These interest boons have not been passed on to consumers, they are simply the rates that banks charge each other, not their customers. Credit card companies are still raising the rates on even their best customers, with no notice whatsoever. Mortgage rates for new home purchases have not adjusted downward with the new rates charged by the Fed. Every time gas goes up, it is not so much a result of OPEC pricing as it is commodity brokers lining their pockets by investing/selling oil futures on the Exchange. We have not even begun to see the prices recently set by the Exchange, oil is traded as a "future", not a present. Expect to see oil go over 4, even 5 dollars this summer in some places.
This "trickle down" approach to the economy is not working. Our Government is focused on it's investors- those with the big bucks who contribute to political campaigns. It is time the Government was forced to reckon with the people who do the actual voting, their constituents, instead of those who buy the votes. NAFTA is only one spoke on the broken wheel of this economy. Giving China most favored nation status, exporting the majority of our manufacturing jobs overseas, offering tax shelters to companies who move their headquarters offshore, allowing companies to invest, and lose, their employees retirement on the stockmarket, letting healthCOVERAGE companies dictate the amount and quality of our healthCARE, and the cost of the WAR, are contributors to the mess we are in, and must also be dealt with accordingly.

[Oldchef]

This makes me furious. If I opened a restaurant and ended losing money because of bad decisions or paying myself big bonuses, the government and the big banks would laugh if I asked for a bailout! These bastards pay themselves huge bonuses and brag about how smart they are in designing mortgage backed "securities" (remember the "Junk Bonds"?) and now they cry "we're too big to let go down the tubes"? Screw 'em! Let 'em fall! and, unfortunately, those who were too stupid, ill-informed, or riding the greed bubble, along with them. It's shameful to expect the taxpayers to bail them all out.

[Henry]

Could'nt agree more. What gets me is this: Where is Rush "the fix" Limbo? Where is Bill "phone sex" O'Reilley? Where are all the progenitors "market discipline" brand of snake oil? They need to have this rubbed in their face. And where is cocaine George, the man who "was not" going to bail anyone?? Think "anyone" in the press will have the balls to hold his feet to the fire? There is one thing that is clearly bankrupt here, (it's obviously not Bear now) and that is the principle of the republican party.

[k6007]

This didn't JUST start with the latest Republican Administration. To deny this, could prove detrimental to the future recovery and sustanibilty of our national economy.

I'm no economist. (In fact I hold them largely responsible for the caboodle we find ourslves in today).
But, I know what NAFTA has done to practically every working class community it has touched, both foreign and domestic. It may have been GHW Bush's Glimmer, but it was Bill Clinton's Baby!


GREED!!!!!

[montemalone]

Don't forget that $30 billion is about $1000 for EACH person (man, woman, child, illegal alien) in this country. That's a whole lot more than the big rebate the IRS is sending to some, not all people.
How much did the executive staff get in pay and bonuses at Bear Stearns this year? JPMorgan?
These guys are creaming over this meltdown. The players will all get richer. They'll declare huge tax writeoffs on top of the bailouts. Meanwhile, I have to pay for it.

[Henry]

I think that "No-Brain" John McCain needs to be confronted, fully confronted, directly and straight-on in this campaign season about "what the hell" the Republican party has been doing "bailing out" , "nationalizing" investment banks! How???? Why???? Does he, John-the-hero-of-incarceration, support this? Does his party stand for this? We are not looking for ducks and dissembling, we are looking for answers! I doubt that he will be able to give any answers to this. Little George looks the joke he is, but then (for anyone who pays attention) he always has.

[WorkingClass]

You can "believe" in the invisible hand if you want to. Or the easter bunny. But that doesn't make them real. The economy is not slowing, it is collapsing as we speak. The people who did everything right are just as screwed as the people who did everything wrong. "Free" markets are the CAUSE of this disaster. Capitalism is only the engine of prosperity. It will ALWAYS crash without regulation which provides the steering and the brakes.

Gotta go now. Gotta dig out my torch and pitchfork. About a hundred million of us are going after Greenspan.

[BBackSoon]

Viva la Revolution.

[JacobSinger]

Spot on!

Hey, if time allows, on the way to the revolution, can we stop and pay Milton Friedman a visit? You bring the rail, I'll stop for tar & feathers....

[clr2]

I agree. We shouldn't bail out these people. They took the risks they knew what they were getting into. No they need to learn a hard lesson from their choices.

[RabidRightRebel]

Having been involved in corporate recovery, I can say for a fact that the real beneficiaries of this deal are the multitude of financial institutions that had outstanding liabilities from Bear Stern. Usually in cases like this those institutions are lucky to get half of their money back. So JP Morgan who has the biggest outstanding obligations to Bear Stern would have been looking at perhaps a $5 billion loss.

Compared to the $250 million purchase price this is nothing. If any thing the $250 million can be looked at as a token insurance premium for a government guarantee on its debt. Not only that throw in a few billion dollars worth of buildings and some (clearly not all) excellent staff and you have the deal of the century for JP Morgan.

All thanks to the American taxpayer the will now have to foot the bill for the financial stupidity of the whole industry. In the political context, while the new Republican motto might be "Bailout for Billionaire" no real Democrat should support this effort. Let the wealthy accept responsibility for their mistakes just as the poor are expected to accept responsibility for their mistakes.