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The Bailout Fails

29 September 2008

It may be true that the failure of the Pelosi/Reid/Bush bailout package will send us into an economic tailspin.  Things may get ugly and stay that way for a while.  But I have a surging feeling that the bill’s failure is the right medicine for what ails us, a stern corrective to our entitlement mentalities.

1.  Americans need to pause long enough to get educated on the vital role that collateral plays in sound economic decisionmaking.  Unsecured debt is the biggest part of this multifaceted problem.  We want to buy houses (beyond our income) without putting up any of our own assets that our creditors can take from us if we don’t fulfill our obligations to pay our mortgage payments.  But when enough of us do that (and when the political class requires its agents at Fannie Mae and Freddie Mac to facilitate – which means, etymologically, to make easier – these relatively unsecured loans), and if a big enough chunk of folks is unable to fulfill its monthly obligations, then the creditors have nothing they can fall back on; the asset value is, precisely, zero.

2.  Americans need a refresher course in debt, more broadly speaking.  Unsecured debt is pretty much the same thing as one of those easy MasterCards that shysters market to college freshmen in the hallways of the student union.  And the results can be tragic piles of debt, which the creditor can carry ad infinitum as long as the student never pays more than the monthly interest, never touches the principal.  The monthly minimum creeps up slowly, almost imperceptibly, but the debt itself does not go away.

3.  Americans need to be reminded that the solutions to the debt tragedy really fall under three headings. Either we (a) declare bankruptcy, which skewers our credit rating and keeps us from participating in economic growth for a long time, or (b) take our medicine, cut our losses, and sell enough of our assets to pay against principal, which hurts deeply in the short run but actually eliminates debt, or (c) borrow from our children in the form of long-term refinancing, which improves our short-term cash flow but extends our indebtedness farther into the future, putting our children on the hook for our excesses.

4.  We seem to believe that we are entitled to economic stability but that we are not required to behave – fiscally, I mean – in a way that is commensurate with our “entitlement.”  Part of the social compact ought to be that we don’t mortgage ourselves to the eyeballs, and we don’t support a government that mortgages itself (which means us) to the eyeballs.  But that is precisely what Freddie Mac and Fannie Mae have made possible.  Freddie Mac and Fannie Mae should be liquidated and their assets, such as they are, sold to the highest bidder.

5.  If we were to return to the days of requiring 20% down payments on houses, the housing market would slow down.  There’s no denying that.  But the resulting mortgages would be a great deal more solid, and we wouldn’t be facing the mountain of worthless paper that we’re facing today.

6.  There is no constitutional right to own a home.  The way you get to the point of owning a home is by deferring your gratification, sucking it up, working hard, starting small, and saving your money until you can afford the next bigger thing.  If your family wants to help you, great; but don’t get in the habit of expecting your fellow citizens to underwrite your lifestyle if it’s out of proportion to your income.

Sometimes we really just need to take our medicine.  This may be one of those times.  When money is cheap, the value of the dollar declines, which makes everything – including gasoline! – more expensive.  By defeating this monster bailout – which was essentially a massive redistribution of wealth, a plan to take from our children to fix our own mess – we may just end up in a better place in the long term, with a stronger dollar, a more sober investing class, and a future that our children will be proud to inherit. 

BTW, financiers like Buffett are saying we have to bail out the companies.  It’s pretty likely that he holds a lot of stock in those companies.  So I’m not sure we ought to listen to folks like him, who have the most to lose if we don’t do the bailout.  (It’s hard to distinguish what he’s saying from extortion.)  Maybe people like him need to feel it a little bit.  I know we’ll take a big hit, too, but somewhere, somehow, sometime, fiscal conservatism needs to make a stand for the sake of tough love.

(BTW, Dr. Walter Williams has a similar position, and far better credentials; add also to the short list Jeffrey Miron of Harvard University.  This article is preceded by a parenthesis that Miron and 165 other academic economists co-signed a letter opposing the bailout plan.  George Will, my all-time favorite columnist, has weighed in on the same side with some important insights.)

qb

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2 Comments leave one →
  1. Michael permalink
    30 September 2008 10:05 am

    QB – I have followed your opinions for a while now after picking you out of a crowd on Cope’s blog over the past year for your combination of intellect and your ability to communicate it. I think you are always spot-on (or maybe better put, I have always agreed with you). You have read more than I have and therefore have a wider perspective than me, which is why I’ve never commented on your posts…I rarely have anything to add.

    I’m taking a hiatus from Cope’s blog because it has become discouraging and fruitless (not so much the fault of Cope as his blog community). I’ll be coming directly to your site for a while. Thanks for your constant thoughtfulness and sharing your mind with the rest of us. Just curious. since we think so much alike…are you as sick as I am about the skeletons in Newt Gingrich’s closet? I don’t think there is a more qualified person available to sit in the Oval Office.

  2. queueball permalink*
    30 September 2008 10:12 am

    Michael, very kind of you to comment in that way.

    As to Gingrich…I share your disappointment that he has sabotaged his own incredible gifts. I remember 1994 very well, and our local Representative, Mac Thornberry (R), was a member of the Class of ’94 that swept Gingrich into the Speaker’s chair. (Incidentally, I believe Thornberry also voted against the bailout, FWIW.)

    All the best to you, and thanks for stopping by.

    qb

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