I heard that the Bush administration wants to throw $700 Billion dollars at the travesty of the banking industry collapse. It’s a travesty of epic proportions. Not a tragedy, mind you, as in an unforseeable event with terrible results, but a travesty – something that could have been prevented and was not because of greed, stupidity and a general disregard for concern or accountability of any kind.
In the most straightforward and basic terms possible, the banking collapse is the result of years of mismanaged funds and credit. Now you want to give more money to the corporations who have proved so obviously that htey are incapable of handling the responsibility? In a consumer arena, this is pretty much like a spoiled teenager buying a car, let’s say a sporty little Toyota Celica, and then never making a payment, but always promising to do so. And then, when the Celica is repossessed, saying to this kid “we’re sorry your car got repossessed. But even though you never made a payment, it’s not your fault it got repossessed. In fact, to make sure you can still get around and continue to live the life of freedom and irresponsibility you’ve become accustomed to, we think you should have this $250,000 Ferrari.” and handing over the keys.
Over at Consumerist, Freakonomics author Steven Levitt (along with two economists from the University of Chicago, Doug Diamond and Anil Kashyap) explained it this way:
The Fannie and Freddie situation was a result of their unique roles in the economy. They had been set up to support the housing market. They helped guarantee mortgages (provided they met certain standards), and were able to fund these guarantees by issuing their own debt, which was in turn tacitly backed by the government. The government guarantees allowed Fannie and Freddie to take on far more debt than a normal company. In principle, they were also supposed to use the government guarantee to reduce the mortgage cost to the homeowners, but the Fed and others have argued that this hardly occurred. Instead, they appear to have used the funding advantage to rack up huge profits and squeeze the private sector out of the “conforming” mortgage market. Regardless, many firms and foreign governments considered the debt of Fannie and Freddie as a substitute for U.S. Treasury securities and snapped it up eagerly.
Fannie and Freddie were weakly supervised and strayed from the core mission. They began using their subsidized financing to buy mortgage-backed securities which were backed by pools of mortgages that did not meet their usual standards. Over the last year, it became clear that their thin capital was not enough to cover the losses on these subprime mortgages. The massive amount of diffusely held debt would have caused collapses everywhere if it was defaulted upon; so the Treasury announced that it would explicitly guarantee the debt.
But once the debt was guaranteed to be secure (and the government would wipe out shareholders if it carried through with the guarantee), no self-interested investor was willing to supply more equity to help buffer the losses. Hence, the Treasury ended up taking them over.
One of my favorite local columnists, Holly Mullen, had this to say:
Paulson and Federal Reserve Board Chairman Ben Bernanke announced to America that this last resort at saving the economy was do-or-die. They tell us there is little time to debate their pitch, or to argue its merits. The program is laid out in three (!!) pages. Congress, and by extension, the American people, are supposed to trust these guys.
It feels like every one of us who pays taxes in this country has been pasted with a giant “Kick Me” sign on our back.
The rest of her article can be found here, and it’s worth reading.
And former presidential candidate Ron Paul laid it out pretty clearly in one of the congressional sessions today.
