Wednesday, December 9, 2009

So why do you want intrusive government?

When you look at this administration's major actions, it is difficult to find one that is targeted at the problem it alleges to address. TARP was supposed to buy the underwater assets of banks but has instead turned out to be a gigantic slush fund. Cap and trade was intended to save the earth from global warming. But most experts agree that it will do little if anything to reduce global temperatures. Rather it will also be a gigantic slush fund where the government choses who to tax and who to subsidize. Financial reform has nothing to do with the mortgage problem and asset bubbles. Rather it creates an all powerful single federal czar to oversee consumer laws and regulates hedge funds which had nothing to do with the crises. Health care reform was based on accessibility, the uninsured and costs. The legislation before the congress addresses none of these issues. Rather it allows the government to seize one sixth of the economy. The stimulus package was to stop the rise in unemployment. However, again it was nothing but a big slush fund that had no impact on unemployment. Get the picture? Its like Orwell's 1984 in which the government agencies are mislabeled, e. g., the Ministry of Peace conducts war and the Ministry of Information is the propaganda arm of the government. All of the efforts of the Obama administration are likewise mislabeled. The only thing that is consistent is that each is intended to expand the reach and power of the federal government. Personally I do not understand how anyone could endorse such an approach that has only demonstrated failure throughout history. The government is neither efficient, compassionate, understanding or even remotely consumer-friendly. Its one-size-fits-most rules are the opposite of what is produced by the market. From what I can gather, there are two types who favor the expansion of government. The first are those who think that they will be the rule makers and can impose their superiorness upon the great unwashed. The second is the group that benefits from the government's largesse. Those who receive more in transfer payments than they pay in taxes. However, the vast majority of us are not in either group. We are the ones who are imposed on, who pay for all of this, and who find our standards of living declining. The majority of the American people understand this and are opposed to the government increasing its reach. The result of the government imposing itself on us raises the bottom by pushing down the top. Yet by discouraging productivity and innovation, the economy as a whole becomes worse off with less growth and ultimately less revenues. Lastly what all the pro-government people don't seem to realize that one day those in the government may not be sympathetic to the liberal causes and start sending the favors over to those who are currently being punished by the liberals. Remember "what goes around comes around."

4 comments:

John in Ky said...

I have a theory on the bank bailout that I would love your thoughts on. The Community Reinvestment Act encouraged banks to make risky sub-prime loans. The govt. had Fannie and Freddie insure or own a large % of those mortgages to remove most of the risk off the lenders. This created the incentive to loan that brought about low-doc, no-doc, and the housing bubble. When the govt. had to bailout Fannie and Freddie first, I assume due to losses from paying out on loan insurance, they saw the trouble coming. If things were to continue as they should, F&F would go under or need constant govt. bailout, putting the focus on the CRA, F&F,and the dems largely responsible for the bubble. They came up with a plan to force banks to take money to shore up their books. This may be way off , but I wonder why the banks that were insured by F&F against loan default would have any major loss to worry about. Maybe you can explain how the F&F insurance works and what the banks are paying for when they buy it. Thanks and Merry Christmas.

H.A. Black said...

John, As you noted, when Fannie and Freddie bought the mortgages, they removed the risk from the originator and assumed it themselves. So Fannie and Freddie are not insuring loans on the banks' books. The only insurance is on the liability side (deposits) not on the asset side (loans). Fannie and Freddie's losses were not on insurance payouts (which they do not have) but on the surge in defaults which reduced the cash flow on the mortgages they had securitized. Keep reading and commenting. All the best, HB

John in Ky said...

Im confused. I've heard several people refer to f&f insured loans or f&f backed loans, what do they mean if its actually f&f owned loans. Also, what is the financial incentive for reputable banks to give loans to risky people during a property bubble. I mean,even I knew that property prices were inflated as far back as 05-06. How could the smart bank people allow their money to be loaned out at fairly low rates knowing there was a bubble that would burst and leave them vulnerable to default on an upside-down loan(due to the devaluation of the home). Seems too stupid to expect from a large bank, maybe its just me. Risky sub-prime loans seem like a bad idea in bulk unless there is some incentive(high rates,large down payment,undervalued property amount)or insurance against default to protect the banks money during a bubble. Basically, the story seems to lack common sense to me which always says to me that Im missing something. I know it's an old subject, and maybe too complicated, but maybe could you please write a blog about what happened to cause the housing crash?(looking back from what is known now).Thanks for your patience.

H.A. Black said...

John, What is generally said is that since the originators could pass the risk on to Freddie and Fannie by selling the loans, then they did not care how risky they were. When Freddie and Fannie package the loans and sell them to investors (securitize them), F&F guarantee to the buyer timely payment of principal and interest on the loans regardless of whether they are current. Perhaps this is what is meant by F&F "insuring" the loans. That is they are not insuring the loans to the originator but to the investors who bought the mortgage pools.