One hundred and thirty-three million Americans filed individual tax returns in 2005, and I would imagine that the number of filers in 2007 couldn’t have exceeded an even one hundred and forty million people. If we look at the size of the bailout package that almost got rammed through the House of Representatives today, our CongressCritters were about to saddle these taxpayers collectively with seven hundred billion dollars of debt. Individually, that would have meant that each one of us who files a 1040 (or equivalent) would have been on the hook for $5,000. No, not the $400,000 that some emails I’ve gotten have alluded to (which would amount to $56 trillion), but five grand. Your five grand. They didn’t do it, thankfully.
Although corporate taxes would contribute to paying down this debt, those corporate tax costs are passed on to customers making them a net wash, another testament to the useless fiction that taxing corporations makes any sense. Yeah, they placate economically ignorant folks who want to make sure business “pays its fair share”, but those taxes end up coming out of our pockets, not those of some business. That five thousand dollar hit on our wallets, which we take through a mix of higher prices and higher taxes, is money taken from our families, from our retirement funds, and from the college funds that we hope to establish for our children. Its our money. We need it.
Last year’s federal budget totaled a bit more than $2.5 trillion dollars, making this proposed bailout program represent a 27% hike in federal spending. If you let your expenses jump 27%, how likely would you think your employer would be to handing you a 27% raise just because you went on a spending spree? Certainly not, which is why we, as the “employers” here need to give our “employee” the “hold on a minute, Bubba!” we would expect to get. Of course this is for a good cause, well, because every time the federal government wants more of our money they say it’s for a good cause. So just what is that cause?
The root cause is our own government policies. Chief among them is the Community Reinvestment Act (CRA), which sounded nice, but was really nothing more than a follow-on to liberal policies forcing banks to loan money to people who weren’t creditworthy. This piece of regulatory malfeasance required banks to meet specified targets for the racial and geographic characteristics of their customers, otherwise they would be prevented from participating in the mortgage business. In order to maintain the required “CRA scores”, banks had to continually chase more and more potential customers of decreasing credit-worthiness in these targeted groups not because they would be good customers, but because this would fulfill socialist goals for “affordable housing” and stopping “redlining”. Banks regarded this as a cost of doing business in this regulatory environment, and as banks competed trying to obtain the correct demographic of customers and maintaining “CRA scores”, underwriting guidelines were successively cast away.
For example, “a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers, according to a Congressional source.” The executives of government-backed mortgage giants Fannie Mae and Freddie Mac “eventually yielded to those pressures, effectively wagering that if things got too bad, the government would bail them out.” But they realized the risk: “In 2004, Freddie Mac warned regulators that affordable housing goals could force the company to buy riskier loans.” Ultimately, though, Freddie Mac’s CEO, Richard F. Syron, told colleagues that “we couldn’t afford to say no to anyone.” (source)
Easy money always causes a boom, making some folks think that everything was hunky-dory while all we were doing was creating a huge ponzi scheme with our credit markets. As long as housing prices continued to rise, houses continued to appraise for ever-higher and unrealistic amounts, and documentation requirements were gutted, if enforced at all, lots of people were in a position to make a lot of money during this artificial boom.
No one was taken greater advantage of during this boom than our recent immigrants. They didn’t understand what buying a house involved, and they couldn’t understand the documents they were being asked to sign, but they sure could understand what a dream it was to own a home. And there was no shortage of folks ready to “help” these newcomers have their piece of the American Dream. They “helped” them prepare their loan applications, encouraged them to take exotic mortgage products that weren’t appropriate for them, and provided the necessary fictional data elements required in order to have an application obtain approval. The level of fraud among these applications, much of which no doubt happened without any knowledge of the applicants, is stunning according to the real estate professionals I’ve talked to. Some of them, the honest ones, were completely surprised they were being foreclosed on, or that their adjustable mortgage would reset, or that they had to pay all this money in the first place.
When I and my wife, a legal alien, bought our house, the mortgage company told me that if my wife were an illegal alien, rather than legal, we would have qualified for certain loan programs with big banks. But because she was a legal alien waiting for her green-card (which she had recently applied for), we didn’t qualify. (source)
And there were some that just saw this as an open season on fraud. Among foreclosures in the area, the number of foreclosures where a payment was never made is shockingly high, and perhaps approaching half of all foreclosures. A straw buyer would get a zero-down mortgage on a property, fill it to the rafters with renters and collect their rent payments, never make a payment on the mortgage, and then strip the house of every appliance as it was being foreclosed six months later. If the market was still booming, the house would be sold if a profit could be realized, and the fraudsters would even be rewarded with a capital gain. The false identity of the straw buyer would be cast away, an new identity would be established, and as long as underwriting remained prone to fraud and abuse, there would be another round.
The companies offering mortgage insurance and dealing in default credit swaps (essentially inter-bank hedging of mortgage insurance risk) got hammered. Banks that ended up with properties that could not be economically liquidated and which took huge losses from mortgage defaults got hammered. “Government Sponsored Entities” such as Fannie Mae, which had lowered their guidelines in order to encourage loans for non-creditworthy borrowers themselves, ended up with billions of dollars in worthless paper from the mortgages they bought from loan originators. When this ponzi scheme collapsed, the “free money” that fraudsters walked away with ended up as a huge loss to the credit industry.
Any solution to this mess must end the practice of coercing creditors to extend credit to people who are bad credit risks. The Community Reinvestment Act has been demonstrated to be a complete failure that encouraged fraud, abuse and astronomical losses in the financial markets. Encouraging persons who should never qualify for a mortgage (including a troubling number of illegal aliens) to obtain them is beyond irresponsible when taxpayers are likely to end up paying the ultimate tab. The federal government can make up for the mess it has caused by providing some sort of insurance to creditors holding these bad loans, but these banks should hold these “assets” to maturity in separate off-balance-sheet accounts where they bear some of the risk for the decisions that they made, instead of having taxpayers purchase all this paper at a huge premium in order to provide banks with liquid assets. There are other means of introducing liquidity in the markets, some of which only require regulatory changes, and throwing taxpayer dollars in there to buy questionable assets is about the dumbest idea that spend-happy Congress could have ever come up with.
While the boom was ongoing, banks were happy to participate in this scheme rather than raise concerns that the rules they were operating under were putting them at grave risk. Now that the bottom has fallen out, they’re crying to the taxpayers for five grand each in order to let them off the hook. They willfully participated in this, and in order to discourage future shenanigans, they at least need to bear some portion of the consequences.
What we don’t need is additional regulations to “fix” the regulations that already caused this mess, we don’t need taxpayers assuming responsibility for the bad decisions of an entire industry, and we certainly don’t need illegal aliens unlawfully present in the country as a juicy target for predatory hucksters that will severely undermine our financial markets. We do need to take time to get this right and consider better options, and taxpayers absolutely must bird-dog our Congress to make sure they don’t start throwing around our money in order to fix the mess they were complicit in.
If we get this wrong, we’ll be right back where we started sooner than any of us would imagine. Are all of us going to shell out another $5,000 each next time, also?
UPDATE: Reader AWCheney found this fascinating analysis on istockanalyst.com and referenced it in the comments, but it deserves mention here:
The Fed threw $630 billion into the market before the vote, and yet the S&P 500 was down 40 handles anyway, and in fact tanked after the vote.
Note carefully - Paulson’s plan was $700 billion, and Bernanke spend $630 billion - almost the entire amount proposed - and failed to fix the problem.
Got it? Good.
Now do you see what I’ve been saying?
We were about to piss $700 billion into a tornado and lose it forever.
Go read if you want to find out about how what would have been a disaster was narrowly avoided, and what truly irresponsible malfeasance was almost foisted on the American taxpayers. Folks, when they dig through this I would not at all be surprised to see criminal charges get filed against those folks who originally came up with this plan and tried to sell it to Congress. This is shocking.
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