What’s Wrong With This Picture?

I’m so disgusted with the $150 billion “economic stimulus package” that I’m choking on my own thoughts, unable to express them coherently. First there are the rebates. But wait, I’ll save that for later because everybody’s blogging about that and, no doubt, everything I have to say has already been said and said again. (Not that our oh-so-wise policy makers are listening, of course…) But there’s another part to this package that’s tucked away discreetly beneath all the fanfare over the rebates. And that’s the part that addresses the subprime mortgage crises. After all, it’s the mortgage crisis that got us into this mess.

There are two contributing factors to the subprime mortgage crisis.

  1. Fiscal irresponsibility on the part of borrowers.
  2. Fiscal irresponsibility on the part of lenders.

The Democrats want to ignore the first factor, and lay all the blame on the lenders. They call the lenders “unscrupulous” and the borrowers “victims.” But the fact is that record numbers of Americans are going bankrupt and losing their homes because record numbers of Americans overextended themselves during the real estate bubble, taking out variable rate loans with low/no downpayments on houses that were well beyond their means, or taking out second and third mortgages to finance their whims and treat themselves to luxuries they couldn’t afford. They are not the blameless lambs the Democrats croon over. And, if they really were that financially naive, they had no business buying a house in the first place.

Owning a house isn’t a right; it’s a responsibility. A house is the largest investment most people make in their entire lives. Many people never own their own house. Anybody contemplating such a significant, long-term financial commitment ought to have the sense to do a little research and understand what they’re getting into, because they’re betting their family’s future and financial security on their ability to meet this commitment. This is truly a situation where, if you don’t know what you’re doing (and you’re too lazy or complacent to learn), you’d best not do it.

The lenders were irresponsible, too. They should have known that lending more money to people than their credit rating would justify was a stupid thing to do, — especially people who were such bad credit risks that they could only qualify for subprime mortgages. Whatever were they thinking? IMHO, if the lenders were actually putting their own money on the line, they would have exercised better judgement. But, under our current system, the natural incentive to protect their interests is mitigated by the fact that they’re not actually lending their own money. All loans get bundled and bought up by larger financial institutions, so the original lender who makes the decision to lend the money isn’t the one at risk if the borrower defaults. 

And who’s at the top of this lending pyramid? Fannie Mae and Freddie Mac, sponsored by the U.S. government, are by far the largest mortgage loan aggregators. And then there’s the FHA, whose role it is to insure these loans and guarantee that everybody has an opportunity to buy way more house than they can afford (backed by the full faith and credit of the U.S. taxpayer). 

So that’s how we got here. Now that we’re here, the Fed has come up with a plan to “fix” this mess, as part of the economic stimulus package. How are they going to fix it? By doing more of the same, of course. Here are two interesting articles, published three days apart.

Reuters, January 22, 2008

The largest U.S. housing finance companies, Freddie Mac and Fannie Mae, may report $16 billion in write-downs for the fourth quarter due to the falling value of  their subprime mortgage investments, according to Credit Suisse analysts.

Chicago Tribune, January 25, 2008

The stimulus package contains several features designed to improve the troubled housing market.

It would increase the Federal Housing Administration’s loan limits from $362,000 to $729,750 and those of two federally sponsored entities, Fannie Mae and Freddie Mac, from $417,000 to $729,750

The measure would also enable the FHA to become more active in dealing with the direct impact of the housing crisis, permitting more borrowers facing defaults to refinance subprime loans through the federal agency.

Is it just me, or is there something really wrong with this picture?

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26 CommentsLeave a comment

  1. “Whatever were they thinking?”

    They were thinking what they always think…let’s take these people to the cleaners. We’ll give them a loan that we know damn well they’ll never be able to pay back, then sell the loan to someone else & it’s their problem then. We’ve got our money…now screw everyone else. To lay the blame at the “top of this lending pyramid” & at the feet of the federal govt. is silly. You’re just showing your anti-govt, bias again IMO, but what else is new right?

    “Is it just me, or is there something really wrong with this picture?”

    No, it’s not you…it’s greed.

  2. It’s funny how you call out the Democrats for blaming only the lenders, but make no mention of the every-man-for-himself Republicans.
    It’s all moot anyway, because it doesn’t matter who’s to blame; we’re in the situation and we’re all going to feel the effects, so we all have to act to correct this mess.

  3. […] we can blame a lot of people for a lot of different things, but I don’t think that matters so much. Not Your Daddy wrote a blog saying that everyone is to blame for the subprime mortgage crisis (although he does […]

  4. Ryan, it isn’t all moot. — Not when the government is providing an “economic stimulus package” that only aggravates the problem by enabling more people to get deeper into debt by raising the limits on borrowing for people who are already defaulting on their subprime loans.

    Do you think that’s going to solve the problem?

    And I emphatically did not say “everybody” is to blame for the mortgage crisis. Most of us had nothing to do with it. What I object to is forcing everybody (i.e. the taxpayers) to foot the bill, instead of holding those who are actually responsible accountable for their own mistakes.

  5. No, I do not think that is going to solve the problem, but I don’t think pointing the finger will do anything either. As I said in my response to your comment on my page, putting the blame squarely on the shoulders of the borrowers while ignoring the preying of the lenders is the same thing as arresting drug addicts while ignoring the dealers and growers/makers.

  6. First you accused me of blaming “everybody.” Now you accuse me of blaming “only the borrowers.” What I actually said is that we should hold both the borrowers and lenders accountable for their own bad judgement, and don’t force the rest of us to bail them out.

    Yes, housing prices will continue to drop until they hit their true market value, determined by the natural law of supply and demand. A lot of people will lose a lot of money. But, they’ll learn a valuable and necessary lesson, the economy will eventually stabilize, and everybody will behave more sensibly in the future, knowing that they can’t rely on the taxpayers to bail them out when they take stupid risks.

    But that solution requires us to hold individuals responsible for their own actions, and we’ve gotten to the point in our society where the majority of people seem to be actually appalled by that idea. Why?

  7. So, who’s actually going to pay off all these loans if we “hold those who are actually responsible accountable for their own mistakes.” No one? Then the banks are going to be stuck with a massive amount of real estate with no one to sell it to, I think. That doesn’t sound like a solution to me, but I’m no banker.

    I also don’t think that equating “natural law” with the free market has anything to do with anything either.

  8. As I said, the banks will be stuck with the consequences of their irresponsibility, and they’ll no doubt lose a lot of money — as they should! As for having no one to sell it to, when the price deflates to its real market value, there will be buyers.

    WRT equating natural law with the free market, I addressed that in this post. How Do You Repeal a Law of Nature? Enjoy. :)

  9. Unless I missed it on your post and in the comments, there is nothing mentioning the aspect of the borrowing of $150 billion dollars to “subsidize” this welfare handout.

    The USA would most likely be borrowing from China (Bonds)and then the recipients would be spending their welfare handout on Chinese made goods.

    Bottom line: The Stimulus package is Idiotic, a loser for the USA, and a win-win for China.

  10. I’m not up on who owns how much of our national debt these days. Back when I was a kid we’d always bash Japan for owning too much of it and America too. You could make the same arugument that another main “winner/beneficiary” in the War in Iraq (or whatever other effort that we’re borrowing and spending on) is China as well.

    How is it a “welfare” handout if you only get so much money according to how much money you’ve made previously? Generally, the more money you’ve made, the higher your rebate check will be…up to a point. What really sucks about those checks is that we’ll have to declare it as income on the taxes that we file in 2009, just like the last rebates that we got from Bushy Boy in 2001.

  11. Mister G,

    Those who pay NO-Zero Income taxes are slated to receive a “rebate”, IE: Welfare check.

    The so-called “Stimulus” is based on those who also pay only in payroll taxes (social security)and would be rebated.

    The Social Security system is already in deep doo-doo and should not be tapped with welfare handouts.

    I’d just as soon Bush & his two new friends, Stretch Pelosi & Harry the Body, lower the income tax rates and forget this “stimulus” nonsense.

  12. On second thought, I really don’t think that your blind ideology to the free market fixing all problems applies here. It’s unpractical to just flush a good chunk of the financial industry and consumers down the toilet.

  13. SS will be just fine for a number of years to come. It won’t be the end of the world to fix it for the long-run either. It will be there if Americans want it to be IMO.

    As I said, the rebate checks are dependant on how much money you’ve earned previously…not on how much taxes you’ve paid. I’m pretty sure that you’d have to have earned at least $3000 to get any check (http://www.nytimes.com/2008/01/24/washington/24cnd-econ.html?hp) under the current scheme.

    Anyone who earns money in this country pays taxes. Payroll taxes (SS *and* Medicare taxes) hit lower income people harder than income taxes do. It doesn’t sound to me like this is a “hand-out” to someone that hasn’t earned any money recently (I.E. – the “usual” Welfare crowd). Try again…

  14. M-G,

    Nah…I’ll take my handout and put half of aside for the tax liabilty it causes me for ’09 and donate the rest to charity and write it off as a wash.

    Bottom line: The “stimulus” doesn’t stimulate me one little bit.

  15. Well, it’ll at least stimulate that charity that you give it to. Actually, pretty much anything that someone does with it will help out I think…short of putting it under your mattress…

  16. “Unless I missed it on your post and in the comments, there is nothing mentioning the aspect of the borrowing of $150 billion dollars to ‘subsidize’ this welfare handout.”

    RW, I mentioned at the beginning that I’m not even going to broach the rebate issue because it’s been covered in other blogs (not to mention because I’m still spluttering with incredulity and can barely bring myself to discuss it coherently). There are so many things wrong with this plan. And, in fact, the entire stimulus package is going to cost a lot more than $150 billion dollars. That figure only includes the actual rebates — it doesn’t include the interest incurred by borrowing the money or the overhead involved in distributing the checks, let alone the costs associated with the rest of the stimulus package.

    Were you aware that the estimated overhead expenses for sending out the kicker checks in Oregon (not including the value of the checks themselves) is $23 million? Oregon’s population is about 3 million people. The U.S. population is about 300 million people. So the overhead alone at the federal level is bound to run into the billions. Sure, a few extra billion here or there may seem trivial in comparison to $150 billion, but how many people actually realize how much even one billion dollars really is? It’s mind-numbing to even think about.

    And, of course, it doesn’t include the amount of money it’s ultimately going to cost us, the taxpayers, to cover the costs of insuring all those defaulted loans, now that the FHA is going to start insuring people who are already in default and faced with foreclosure!

    “O judgment, thou art fled to brutish beasts, and men have lost their reason.” — Shakespeare

  17. rinowatch said: I’d just as soon Bush & his two new friends, Stretch Pelosi & Harry the Body, lower the income tax rates and forget this “stimulus” nonsense.

    I’ve come to appreciate this reasoning. I was under the misconception that this was a rebate of “excess” taxation…..like Oregon…

  18. The thing that strikes me about the “stimulus” package:

    It seems like personal finance experts are always telling us things like Americans don’t save enough. But it feels like the government is giving away this money with the expectation that it will be spent. Isn’t the government sending the wrong message?

    Personally I plan to save every penny.

  19. Bad Wiggles, bad! You should do as your president tells you to. Saving is bad. Spending is good. And debt is even better!

  20. The govt. has been sending the wrong message for quite some time IMO. The govt. spends more than it takes in…why shouldn’t the people do it then? It’s bad all around…

    Even if you save the money…that is not only good for you, but it’s good for the people and businesses that will be able to use that money in the form of loans from your banking institution.

  21. It’s an election year and neither side wants to appear “uncompassionate”.

    All the more reason we need Ron Paul.

  22. What is really annoying about bailing out the sub-prime loans, is that those of us who have been responsible buyers and savers will be the ones who have to pay for the irresponsibility of those who bought way more than they could afford and those who helped them do it.

    Personally, I am angry because I scrimped and saved to buy my first little house, and by scrimping and saving, my husband and I now have our dream house. But we did not do it by taking out second mortgages to satisfy our every whim. Why should I have to now use our nest egg to pay for those who did? It seems that bailouts will punish the prudent and reward the foolish.

    Don’t they teach “The Little Red Hen” in grade school anymore?

    And to the commetor who said: “…we can’t just flush a chunk of a whole industry down the toilet…”
    Generally, government intervention into the workings of the market tend to make things worse and for longer. We are not flushing them down the toilet–they jumped in and pulled the lever. They chose the situation and the pain will go away faster if they are allowed to go out of business, while the more prudent lenders get more business as houses come down to realistic levels.

    Houses will sell again when the prices comes down to a realistic level.

  23. Very well said, Elisheva. I couldn’t agree more. It’s too bad our elected leaders lack even a fundamental understanding of economics.

    I hope you’re teaching your kid(s) basic economics as part of your homeschooling program. It’s never too early to start learning about supply and demand (and personal responsibility). I just wish they would teach it in the public schools. If they did, we wouldn’t be in this situation now.

  24. No one’s out to take away anyone’s “nest egg” as far as I can see. Look at what happened recently to that major bank that went under…the people that might get flushed down the tiolet if this crisis is allowed to persist is us.

  25. We got to this point by government manipulation of the free market. Now the government is trying to manipulate the market even faster to get us out.

    I don’t think that’s a viable solution. If investments are overvalued, they will eventually crash. Pumping more money into the system can forestall it — but ultimately, when the bottom falls out, it’s going to come out of the taxpayer’s wallet, and the more they pump it up, the bigger a bang it will make when it bursts.

    This is why I’m against government manipulation of the marketplace. Everything they do to try to fix whatever the current problem is has long-range unanticipated consequences somewhere else. Let the free market find it’s natural equilibrium. Yes, there will probably be a disaster. But government meddling won’t avert it. It will only, ultimately, make it worse. IMHO.

  26. […] subprime mortgage problem. The first is Sometimes Nothing is the Right Thing to Do. The second is What’s Wrong With This Picture?. NotYourDaddy makes the claim that “There are two contributing factors to the subprime […]

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