Connecting the Bailout Dots

Guest Article by Jack H. Swift

Jack’s too busy with real life to have a blog of his own, but he always has interesting things to say, so I occasionally publish a guest article by him on GNYD.

Does anyone wonder how $800 billion of bad debt in U.S. mortgages demands $3.2 trillion of U.S. loan guarantees to European banks? Why should the default of 5% of the home mortgages in the U.S. in any way compromise international banking? And how on earth does that lead to the failure of the world’s largest insurance company?

I read that roughly 50% of U.S. citizens are homeowners today (Clinton and Bush both take credit for that.) Roughly 50% of those do not have a mortgage at all. Of the 25% of our population with a mortgage, 95% are paying on time and are not in arrears. That leaves some 1.25% of our population threatening the solvency of the free world. How do you make that compute?

The official explanation is that there is a domino effect flowing from the restrained lending capacity of affected banks. There is less evidence of that than there was for the presence of WMDs in Iraq. GM and Ford were not compromised by the lack of funding for new car orders. They were compromised six months back by a lack of new car orders.

Understanding the problem demands the discovery of the connections. If there is a connector that links all these dots, we can perhaps understand.

The connector exists. It is another of these U.N. based treaties signed by our chief executive but not forwarded to the senate for ratification. This started with the U.N. International Convention on Economic, Social, and Cultural Rights. It was signed by Jimmy Carter (Nobel Prize winner) in October of 1977. It was not presented to the Senate for ratification. Rather, Carter presented the Senate with a Community Reinvestment Act which was adopted. The connector between the two appears in Article 11(1) of the signed but unratified treaty. That is the provision that there is a universal right to housing.

The CRA makes provision for a minimum percentage of mortgage loans to unqualified buyers. The CRA also makes provision for legal standing for Non Government Organizations to sue and complain under the act. Surprise, the U.N. Convention also provides for NGOs to have standing to appeal to the U.N. (ACORN is such an NGO, authorized and conceived under the CRA.) The bottom line of both the treaty and the CRA is that the government must provide a demonstrable level of “affordable housing” for those who cannot afford it. A socialistic something for nothing.

Implementation in the U.S. was undertaken through mandates (the CRA and oversight groups) requiring banks to take on a high percentage of bad risks (sub-prime). The pattern was followed in Europe. When a bank’s book of loans begins to develop too great a percentage of high risk investments, other banks and other investors hesitate to offer up their money. (Enter the credit squeeze.) This happened across Europe.

Troubled banks sought to insure their bad loans. (Enter AIG.) In the U.S., given the rising market in housing, it was not possible to lose money on a bad mortgage. AIG insured billions of dollars of bad debt for European banks, thinking it a good deal.

Then the housing bubble burst, and not just in the U.S. Foreclosures were suddenly a loss, not a profit. AIG could not take the hit and the feds had to step in, insuring the payment to European banks of their bad debts. (If AIG could not make good on the losses suffered, European banks would fold. — The level of bad debt investment in Europe was that high.)

The bottom line is that we are looking at yet another failed attempt at international socialism. The objective was to provide a basic right of housing (presumed under the U.N. Treaty) regardless of the capacity of the individual to earn it. (Economic rights don’t have to be earned. They are inherent.)

McBama have it all wrong. Greed on Wall Street did not cause this failure. The broker’s golden parachute did not cause the immigrant in Germany to default on his home loan. He defaulted because he couldn’t make the payment which was a foregone conclusion when the loan was made.

Milton Friedman once said, “There is no such thing as a free lunch.” He obviously had a better handle on the situation than the U.N., the European Union, the U.S. Senate, or Jimmy Carter.

The question for us now is do we solve this failure of socialism with simply more money invested in socialism? BHO wants to raise taxes, extend unemployment benefits, provide more food stamps, and guarantee that all these credit criminals do not lose their something for nothing. This will make us healthy?

Can we solve our internal problem of $800 billion in bad debt by transfer? The credit criminals’ debt became the banks’ bad debt. By way of the bailout, we have made the banks’ bad debt the debt of future taxpayers. How does this solve anything?

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7 CommentsLeave a comment

  1. Good post, Jack, it does not solve anything. Inflation and economic growth will whittle the relative value of this debt down over time, so in a sense it is delaying the inevitable and buffering the effects short-term, not necessarily a bad thing, just 1 one choice among many, and maybe the lesser of all the potential evils. The CRA needs to be tossed, though. I’d love it if McCain said “first thing I’ll do is cancel the CRA and establish a charity any American can donate to if they want to help poor people get a home loan.” Of course, they would not get many donations, but it makes more sense than making the US Treasury a charity for people who want money on credit but can’t or don’t want to pay it back. Let them beg. Anyone who cares will listen. Better yet, let them get jobs and earn what they get, much better for them, and much better for the rest of us.

  2. Markets rush to equilibrium. Even if they don’t know where that point of equilibrium is.

    While I have enjoyed the wealth effects of owning a home for which I am only paying against a portion of its market value–having purchased this home more than a decade ago on a fixed mortgage–the temptation to take a profit and “flip” seemed like a trap. If I believed–and I did–that housing prices were increasing beyond what I viewed as rational, how could I flip and not expose myself to the downside of a bubble releasing its gas?

    So, today, I am less wealthy. But I’m still able to cover the cost of my mortgage, and more importantly, my income is higher than when I signed my mortgage agreement. As a percentage of my income, my housing costs have actually decreased.

    If the housing market is currently over-valued, what mechanism now exists for the market to find its “new” value? Thanks to intervention by the Fed and Treasury, the market lacks clear guidance on what it can expect the effects of these massive intrusions of federal cash into the market will take. Who will be the winners and who will be the losers? Under current policy it seems there will be no losers.

    Ah, the promise of Socialism. A better world for everybody, and nobody pays for it.

  3. Socialism is the opium of the ignorant. It feels really good at first.

    Ask not what you can do for your country, ask what your country owes you. Obviously your country owes you health care, a life time job, and a big house. Even if you don’t pay taxes, you get a tax refund.

    You ask, won’t we run out of money doing all of this? Don’t worry, we’ll print more.

  4. […] presents Barack buys an election? posted at Divided We Stand United We Fall. Jack H. Swift presents Connecting the Bailout Dots posted at Government is Not Your […]

  5. As an expat in Spain, I can rubber stamp that opinion. This cash crisis I think will get worse before it gets better.

  6. Once again, your friend Jack nails it. The current economic issues are a creation of government, and the last thing we need is a governmental “solution”.

  7. I agree that a lot of the problems in the banking industry started in Government. My problem with not putting any blame on banks is this, First of all the banks are some of if the BIGGEST lobby groups. I find it hard to believe that they allowed anything that wouldn’t benefit them. If you find it hard to believe that they would allow this sort of thing to happen to their business ie; giving out bad loans, look no further than the credit cards. Giving out pre-approved credit to anyone under the sun and their pets? Then lobbying congress to reform bankruptcy laws to make it harder to get out of… something is not right.
    And also, where were the responsible bankers? I mean you can’t actually believe that there weren’t people in those companies that saw this comeing. Why would they sweep it under the rug? Maybe they allready paid someone to take the blame? Our Government no longer works for the people it works for the highest bidder.
    And then they want to put the blame on the irresponsible borrowers? Why is it that I have more of a background check to rent a house or apply for a job than i do for a home mortgage? Something doesn’t smell right.

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