I try very hard to be a fair-minded person, and I won’t just sign on to (or reject) a particular idea simply because that idea was generated by, for instance, one political party or another. So when, yesterday, I watched in fascination as a near-to-completion deal on the Wall Street bailout got scuttled by House Republicans eager to float a plan of their own, I didn’t get too worked up about it. After all, I don’t like the idea of $700 billion being just handed over, any more than anyone else does. It’s a rotten solution to a rotten problem that only has rotten solutions. So if the House Republicans had a better idea, then hell yes, let’s slow down that train and give their idea a fair hearing.
Trouble is, details are very sketchy and all I ever learned about their plan is that it involves, essentially, insuring the Wall Street financial firms against their losses from at-risk mortgages, rather than the government simply buying those mortgages from them in toto. It sounds like it would be a variant on the FDIC structure, which has worked spectacularly well since the Depression.
Case in point: the failure of Washington Mutual, the nation’s sixth largest bank, today--before the FDIC, the rumors of WaMu’s impending demise would have, without question, led to a run on that bank by thousands of its depositors. But with the FDIC, people felt secure that their money wouldn’t vanish, so they kept their cool and although the bank has failed, the awful consequences of a bank run were avoided. A very good thing.
On the surface, then, this idea of a new insurance program sounds pretty good. With government-backed insurance standing behind all those mortgages, Wall Street firms would feel they are on firmer ground, and could begin extending credit again, which is of course the engine that fuels the rest of the economy. It sounds fantastic, actually—the government doesn’t just hand over money willy-nilly, money is only spent when an individual account fails, thus spreading out over years, probably, any government responsibility for these bad mortgages.
But think about it a little harder, and suddenly it becomes clear that this is in fact a terrible deal, and here’s why: it rewards Wall Street for its bad behavior, fails to curb the shenanigans that got us into this mess in the first place, and in the end still costs the government unknown billions of dollars with no chance of recouping any of that money.
See, the FDIC isn’t actually a good example because it isn’t an analogous situation. The FDIC insures depositors, not the banks themselves, and as I understand it, House Republicans would like to insure the Wall Street firms against their losses, not the individual families whose mortgages are at risk. Thus, Wall Street is rewarded for doing awful things to our economy, and with no penalty, there’s no reason for them to stop doing those awful things to our economy. Sure, the government wouldn’t be handing out a $700 million blank check, which sounds great to irate taxpayers, but the thing that people are really angry about--the manipulation of the system on Wall Street and the idea of rewards to the very people doing the manipulating—would be ignored.
And since the government would be insuring rather than buying those mortgages, there would be no ownership of anything. Wall Street gets to keep the profits from those mortgages that are successfully paid off, while government incurs the expenses of the mortgages that fail. And with no way to tell how much money would have to be spent to insure all those mortgages, in the end it could be $70 billion or $700 billion or even more, with no eventual upside to taxpayers at all.
Plus, and worst of all: one of the attractions of the idea of the government acquiring those at-risk mortgages is that the government can afford to be more patient with mortgage-holders. In other words, they won’t be in the same kind of quarter-to-quarter rush to show profits, and can work with mortgage-holders to try and ensure that they don’t get kicked out of their homes. Keeping thousands of people from being shoved to the curb, and allowing them to perhaps pay their mortgages a little more slowly, for a little less money per month, means fewer defaults, therefore much less loss for the system to absorb--not to mention fewer homeless people who used to be productive homeowners.
Spectacular profits for the Wall Street robber barons. Uncountable billions of dollars in added debt for the federal government. No help whatsoever to struggling homeowners, and a giant sucking black hole in our economy that never gets fixed. The very definition of a bad deal and, once again, we see that politicians claiming to represent the desires of their angry constituents are in fact working very hard to make sure that those constituents get royally screwed.
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