Before We Give Away Money
For this post I would like to address how we got here. The best way to decide if the bailout is a good thing is to first figure out what happened and why it happened. If we don't know that, how can we make an informed and logical decision on what to do next. So, how did we get here.
It could get deep and hard to understand but I will do what I can to present something I only loosely grasp in plain English. The hard stuff first. There are these entities called government sponsored enterprise (GSE). They come with no money alloted guarantees, but many are implied. They get a fair amount of tax breaks though. They also take a fair amount of input from the federal government on their business practices. Then there were insurance companies like AIG that helped spread out the risk associated with the lending industry. By “risk” I mean there are people out there who will not be willing or able to pay off their loans. Lending businesses assume "bad loans" will make up 5% of the industry, but the profit being made off the other 95% will way more then cover it. (Please see the old adage about 'assume'ing.) AIG tells a GSE like Fannie Mae, “on years where it goes over 5% we will cover it as long as you pay a billion a year premium.” So these little companies that you would get offers from in your mailbox to give you a mortgage for, “no money down, low monthly rates, and great starting interest rates.” have no real risk at all. Many people accepted the offer. Immediately their loan was sold to a bigger company like one of these GSE. The “mom and pop” loan company got their money and the risk was absorbed with out checking by the GSE and its insurer. Well what happens when those estimated 5% doubles blooms into 10% that don't fulfill their obligations. "a billion here and a billion there, pretty soon you are talking real money. If it continues there is going to be a whole lot of hurting going on.
Alright that is the tough stuff. One might ask, “why would the government support a business like this.” More inportantly, "why would they want to help them out. Many of the individuals got really rich off this pyrimid scheme." The answer to that is one basic understanding and one reality. The US uses "capitalism" as the method for wealth distribution. Capitalism requires one thing prosper. That one thing is “consumers”. We need people to buy stuff and services to keep people employed so that they can buy stuff and services, so that people can be employed. So the government aware of this situation felt it a good idea to inspire the credit industry. With a credit and loans one can buy stuff that they wouldn't otherwise be able to buy right away. That highlights the reality. Since it is every persons desire in government to get re-elected, and by inspiring the credit industry, more people will buy more stuff and more people will be employed, and more people will think the current government elected are doing a great job. Hence the interest in not concerning oneself with the affects of interest.
One needs to look back only as far back as the current retires people bought most things with cash. You remember that stuff, green, cloth like, found in a wallet or even a
So here we are stuck with our capitalism of the late 20th century and early in the 21st. We are addicted to credit. We pay 6 years for a car that lasts 5. We pay 30 years for a house that ends up costing twice its sale price and half the value of that money if we had actually invested it, and call it a “good investment”. The government forces us to pay for insurance for accidents that we might get into, then again we might not. We in the US have achieved a negative savings rate. That means we spend more money then we make. Since the money going into the economy is mostly credit money, what happens when we can't even afford to pay monthly minimums? Right. The Credit companies start going broke. That means they can no long offer credit lines and mortgages. That means less people are buying them. That means less people are being employed by these purchases. That means more people are going to find it difficult to make their monthly payment. And the downward spiral continues.
Now if dumbing down of America, target marketing, and unregulated capitalism wasn't a bad enough situation to begin with, The Bush administration along with the republican held congress put pressure on the GSEs to lend to more risky people to buy houses. A policy was developed called “the ownership society”. Using more backing and back room deals they nudged the credit industry into offering loans to an even more at risk sector of the economy. What do you do when you buy a new house? Do you sit in the middle of it and stare at the empty walls? No! Even if you couldn't afford the down payment, you go our and max out the credit cards buying furniture, paint, and a pudding tub. So the instant that the economy took a downturn, these weaker financial links fell like dominoes.
So that is how we got here. And now I see them screaming for a bailout. Just so you understand who "they" are. Here is a link to the top CEO's of '06. You might recognize some of the industries, you will definitely recognize some of the organizational names. If anybody has ever known an addict. They know that when the drugs run low, the addict's anxiety is whipped into a frenzy and they plead with you to help them right away or they will suffer terrible consequences. Often your help will cause more damning consequences. So will the bailout do more harm then good? Some drugs cause mild discomfort from the withdraw sickness. Other drugs the withdraw will kill you. So what effect will the bailout have, well that will have to wait for another post.