Thursday, July 10, 2008

The Definition of Insanity is...

I’ve been writing who ever I could for days trying to raise awareness about H.R. 3221 and it’s 300,000,000,000 bank bailout plan, and while I haven’t received a response, someone I asked to get involved in my lobbying efforts has. Here is an excerpt from a response from Senator Maria Cantwell’s (D WA) office.
“Each foreclosure can impose damages up to $80,000 to the surrounding community, including the loss of property taxes, the damage done to the prices of neighboring properties, and the cost of foreclosure related services performed by the government.
While I understand your frustrations with what appears to be a "bailout," I believe that we must closely evaluate every proposal and consider the best path forward that will stabilize our nation's faltering economy. The housing market is an integral component of our economy's health. Without action, over three million homes are likely to be foreclosed upon in the coming years, and approximately two million families affected. With such grave financial consequences, the coming foreclosure emergency must be addressed head-on, and Congress must take appropriate action.”
Mrs. Cantwell is right to be concerned about the affects of these foreclosures, but her response to the situation is misguided.

In a previous post I pointed out the evidence of moral hazard, investors, thinking the government won’t let these larger institutions fail, are doubling down on bad bets. This will exacerbate the problems we are facing.

We need money to go toward the smarter investments, not those that the government is backstopping because they are falling apart.

These interventions create market confusion and destabilize the currency. Prudent investors are left hanging. Markets need capital infusion, in order for that infusion to occur investors have to be able to discern what it is they might invest in.

In an April speech to congress Dean Baker laid out how H.R. 3221 will prolong a housing decline,and hurt homeowners. Homeowners end up in a worse position because they are unlikely to accumulate equity under the program and they end up paying more than they could pay otherwise. It makes home ownership less affordable, new buyers will less able to enter the market.

...doing the same thing over and over again expecting a different result.

Mrs. Cantwell expresses a concern about the problems cities are having with these foreclosures, I would submit to her that the money is better spent being sent directly to the cities. Doing a simple calculation with her own numbers shows that tax payers could save over $60,000,000. But that isn’t even necessary, shut down these institutions, and bring in smarter investment.

These banking institutions have already shown that they are incapable and inept. They are almost insolvent, don’t bail them out, shut them down. After shutting them down, repackage these mortgages into transparent securities so that new investment can make better decisions and infuse capital back into the system.

Allow these banks to die so that better entities can learn from their mistakes and help grow the economy again.

It’s transparency and confidence that we are missing. These problems will not be resolve by allowing more of the same behavior, with the same institutions.

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