Posted by
Andrews on Friday, January 30, 2009 6:43:21 PM
I don't usually like to quote lengthy chunks of my own old posts, but int his case, I stumbled across something in my post "
Perception and Reality" that bears repeating. Explaining why the liquidity crisis was growing worse, I explained that the bundled mortgages, which could remain viable instruments, though probably trade at a discount, had suddenly become worthless, largely thanks to government bailout activity:
A second reason there is probably exaggeration of the crisis is the
possibility of government involvement. For example, the big three auto
makers. They are now applying for a bailout. Why? Did they hold a huge
number of subprime mortgages? No, they are in the same financial
straits they have been for some time due to overly demanding union
contracts and a weak market during hard times. Though the market is
slowing, and prices are dropping, union escalator clauses work in only
one way, and the auto makers are suffering for it. But that has nothing
to do with the current subprime problems. Yet they are trying to cash
in on the general bailout frenzy.
And that is why so many companies are crying poor. Let's face it, the
government is going to be throwing money around, so why would you want
to present a realistic picture of your net worth? Why not say you are
on the brink of bankruptcy if it might get you a couple billion in free
money? Granted, there are companies hurting, especially in the
financial sector, but I have a feeling there are even more playing up
the weakness of their position in hopes of grabbing a slice of the $700
billion, in the same way the automakers came, hat in hand, to DC for a
little government charity.
This is also causing a lot of the inactivity in the mortgage market.
Back when the bailout was first proposed, and it was thought the
government would be buying up mortgages directly, mortgages became a
hot commodity again for a short time. Now that it seems the government
is going to deal directly with the banks, simply providing handouts in
exchange for equity, the mortgages themselves have become worthless
again and many are facing liquidity crunches thanks to this. As the
bailout appears to be less and less tied to holding of mortgages, and
as the general panic mindset has made mortgages almost impossible to
trade, they have simply dropped to a value close to zero, despite the
fact that many continue to perform and have some real value.
Actually, there is one other possible reason mortgages are becoming
even less desirable to hold. As the government continues to talk of
"helping borrowers" it is quite possible laws will soon arise to
immunize buyers against any ill effects of default on subprime
mortgages. If the mortgages no longer allow repossession and government
removes most ability to collect, mortgages, at least subprime mortgages
may become truly valueless, and that fear is certainly making them ever
less desirable to hold.
What makes this interesting is that the new Obama bailout also does not purchase the loans, but just throws money around, continuing the trend of rendering the loans worthless. In addition, because it is almost certain a Democrat controlled congress and White House will enact "borrower protections" even those inclined to bottom fish for undervalued loans will not do so because of worries over the loans becoming impossible to collect due to new laws. On top of that, as money is being paid out to all and sundry regardless of exposure tot he nonperforming loans, it has become a free for all, a grabbing by anyone and everyone for bailout money, which can mean nothing but the bailout will cost many times what is projected, as politicians will all fight to "find" funds for their favorite recipients, for their favorite lobbyists, and for the employers in their district, making the bailout bloat to many times what was first projected.
Now, I am not suggesting the government buy up the mortgages in order to keep up the values. I would prefer to see the government get out of the way, as I describe in "
Beware When Politicians Agree", or a long while ago in "
Face The Music, Don't Try to Buy Votes", "
A Final Comment on the Futility of a Bailout" and "
Clarification of My Opposition to the Bailout". However, if the government feels it must intervene, it seems it would be much cheaper, and much less intrusive, for it to do so simply by repeating what it did with the FSLIC, set up a fund to buy back non-performing loans, perhaps limited to those sold by Freddie and Fannie, or which qualified for the CRA. If it combined that with allowing a general rise in interest rates and a cut in deficit spending, we would be back on relatively sound economic footing. Not as good as if they allowed the economy to self-correct and clear out all the inflationary deadwood, but still pretty good.
Instead, we are getting a massive bailout which is, in the process, making the financial firms' situation worse and still doing little to help the overall economy. This is not liberals throwing money at a problem. This is liberals throwing money at something other than the problem.
POSTSCRIPT
A comprehensive list of my posts on the financial crises, both the housing bubble bursting and the collapse of the subprime loan market (and subsequent deflationary crash), can be found in the postscript to the essay "
History Repeating Itself". More recent comments can be read in "
Smaller Government , Fair Weather Friends and Special Cases", "
Excuse Me?", "
The Reagan Lesson", "
Congressional Madness", "
I'm Fed Up", "
CNN's Keynesian Nonsense", "
Nationalization Rumors", "
Why?" and "
I Should Not Watch Financial News".