Posted by
Andrews on Monday, October 06, 2008 10:55:13 AM
There is a point I made
in an earlier post I want to revisit. When we hear talk about the need for a bailout, people seem to forget we are talking mostly of subprime loans here, or subprime loans along with interest only loans and maybe a handful of ARMS on exceptionally overvalued houses. These are not blue chip stocks, gilt edged bonds, or even t-bills. They are usually bundled with other more stable loans, A and B credit ones, to present a well diversified portfolio, but the truth is, even without the government interference that made them unstable, these are loans that default on a regular basis. Even under ideal circumstances, most are "slow pay" loans. These are not the engines which drive the economy, and they are loans on which a high percentage of default are expected.
And that is what makes the bailout
particularly absurd. Yes, some investment banks and some originators were left holding too many poorly performing subprime loans, but, even if these loans had been performing better, they still would have been holding too many risky assets. It is not so much the bad loans, but the bad loans coupled with overly risky investment practices which brought them down. That you are holding enough high risk loans to be brought down by their failure is a sign you are investing poorly.
Let us look at the facts. Subprime loans probably have a double digit default rate at best. And it is always possible an economic downturn could inflate that default rate even higher. Nor are the properties securing them particularly desirable, nor easy to move quickly. In a good market, cheap housing may be snapped up for the rental market, but during a downturn, subprime loans often stick those who hold them with a slew of non-performing paper or, at beast, with a lot of cheap properties no one wants to buy. So, whoever holds enough subprime loans to be driven out of business by their failure is taking a pretty big risk even without the government meddling which created the current crisis.
All of which makes me wonder how much of this "crisis" is just media hype over a few bank failures. Of course, now that the media hype has set in, small investors are panicking and driving down stocks, which creates ripples that run throughout the market. But, are we, in reality, burdening the taxpayer with a massive future burden just to appease some nervous nellies who are being frightened by nothing more than an last minute effort to turn some bad government policies and bank failures into an Obama-promoting economic crisis?
Before you dismiss this as paranoia, don't forget that we have been having similar crises, according to the media, since 2000. Recall the "recession" before 9/11? And the pending economic collapse after? Recall the economic downturn and "worst economy in 5 years" in 2004? And 2006? The economy has been in a perpetual crash, according to the media, ever since Gore's loss was confirmed by the high court. And yet, we have managed to survive pretty well.
I ask that the Republicans in congress think about this a bit before they dive in with both feet and try to solve a problem that might not be anywhere near as dire as the media claims. I know they believe they have to do something, but that should be a clue that perhaps waiting is best. When people clamor for the government to "
do something" it is usually when the worst laws are passed. Often it is better to wait, let cooler heads prevail and see what happens. Sometimes, a swift and confident reaction is the wrong approach, and doing nothing is actually the best response.