Everyone is for free markets when times are good — borrowers, lenders, builders, investors, manufacturers, retailers. As long as they are making money, they want the government to stay out of their affairs. Cut regulation and taxes, and they are happy. But the moment someone goes bust, money gets tight, or the economy slows, people start screaming for a bailout.
Never mind if they knowingly made a risky investment.
Never mind if they collected healthy profits until things went south.
Would the taxpayers be so kind as to cover their losses?
Chrysler squeezed a loan guarantee out of Congress. Washington provided a massive bailout of the savings and loans. The big banks ran to Washington when their deadbeat Third World borrowers couldn't pay. Now a gaggle of homeowners, mortgage lenders, and investors are marching, their hands eagerly outstretched. The once robust subprime mortgage market has collapsed. As long as housing prices were rising, home loans seemed like a sure thing. A poor credit risk? No problem. Some lender would find a "creative" way to finance your house. Get into financial trouble? Just sell or refinance. Everyone still came out ahead.
So investors started buying subprime loans. Not just big name hedge funds, but common mutual funds. With money to be made, no one seemed to worry much about the risk they were running. But home sales cooled, prices fell, and foreclosures rose. Suddenly homeowners can't pay their mortgages, lenders are stuck with hard-to-sell houses, and investors are taking a bath. The losses could run $100 to $200 billion.
Once upon a time Americans would have accepted responsibility for their mistakes, taken the painful financial hit, and moved on, wounded but wiser. No longer. If money wasn't made, it must be someone else's fault. Thus, those at risk are telling elected officials: If I'm losing money, there's a crisis, so do something! Unfortunately, politicians are listening. For instance, Massachusetts Gov. Deval Patrick has created a $250 million bailout fund that will refinance bad loans, putting the taxpayers at risk. Proposals abound in New York, Pennsylvania, and elsewhere to follow suit.
With the stock market taking a hit from the burst of the subprime market bubble, bailout advocates are now making a run on Washington. Some want to turn the nonpartisan Federal Reserve into the housing industry's political piggy bank.
William Gross, head of PIMCO, a giant bond mutual fund, has called for creation of a "Reconstruction Mortgage Corporation" to toss money hither and yon.
He poses as the defender of helpless homeowners, who otherwise would "be thrown to the wolves." But the investment portfolios of his clients likely weigh more heavily on his mind. And nothing is too good for those paying his fees, especially if the bill for helping them goes to the taxpayers. The mortgage meltdown is painful, but just one in 20 loans are "creative," and only some of them are going bad. A decline in housing prices reduces Americans' paper wealth, not their living standard, since their home doesn't change. And those who would reap the gains from a rising market cannot complain when prices fall.
William Gross and others nevertheless paint the subprime lending mess as a crisis, but that's not true. Although no one likes to lose $100 or $200 billion, the U.S. economy is $13 trillion and growing. One of the advantages of living in a wealthy society is that one can better weather economic storms. America is not Bangladesh. We will thrive even if housing prices stall. Perhaps the worst consequence of a subprime bailout is to set the stage for more bailouts in the future.
Gross himself cites the Chrysler and S&L bailouts as a reason to cover housing losses. In turn, the victims of the next bursting economic bubble — information technology, perhaps, or health care, or machine tools, or whatever — would cite any subprime bailout. America's capitalist system is the envy of the world. But the U.S. economy works so well only so long as the government lets the market adjust, no matter how painful the process is for some people.
Participants in the subprime market took their profits when prices were rising. They should accept their losses now that the market has gone bust. If Joe taxpayer has to play by the rules, so do those who profited handsomely from the mortgage business who now have their hand out asking to be rescued.
Congress and the president should hold firm against those lobbying for a taxpayer financed bailout of Wall Street.
Lew Uhler is president of the National Tax Limitation Committee headquartered in the greater Sacramento area.
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