Bailout of Financial Institutions Rewards Risky and Greedy Investments by Big Business
by Rachel Alexander | View comments |
Print This Post
The Republicans are becoming more like Democrats than the Democrats.
The proposed bailout of failing financial institutions has the Republican and Democrat Parties looking like they are about to switch roles again as they did at the turn of the last century. In a sweeping move toward socialism, our Republican president, his Treasury Secretary Henry Paulson, and Republican Congressional leadership are leading efforts to try and push through the largest bailout of big business since the Great Depression. The Bush administration additionally wanted to exempt executives making millions of dollars a year from any ramifications, allowing them to continue to receive their gargantuan salaries – paid for by the taxpayers. Democrats in Congress rejected that provision. A bipartisan Congressional plan was crafted over the weekend to provide certain preferred failing financial institutions with $700 billion in taxpayer funds. The bill will go to the House today for approval, followed by the Senate on Wednesday.
Over the past eight years while Bush has been in office, Republicans have gradually became disgruntled with him as government spending increased at alarming levels – the biggest increases in history. This final slap in the face dramatically increasing spending and government regulation in the free market is the last straw for many Republicans, who wonder what happened to the conservative principles Bush ran for office on.
Let’s take a look at how we got to this crisis. Lenders like Fannie Mae and Freddie Mac chose to give loans to high-risk consumers; borrowers they knew were likely to default. 15% of their total mortgages went to “Alt-A” and subprime loans. They calculated that the government would bail them out if the homeowners defaulted. In 2004, Freddie Mac’s Chief Risk Officer wrote a memo warning the company that its problematic loans were endangering the company, but it was ignored. Like other financial institutions suffering collapse currently, Fannie Mae and Freddie Mac are now under investigation for misleading investors about their assets and pushing agencies to inflate their ratings. Last year, Freddie Mac was charged with securities fraud, resulting in its executives paying hundreds of thousands of dollars in fines and restitution.
There is talk of a “growing credit crisis” requiring this bailout. Do you see your friends losing their homes and going bankrupt? There is a relatively small number of people across the country going into foreclosure as a result of taking on mortgages they could not afford. Many of the homes going into foreclosure are owned by investors who made unwise decisions.
There is a prevailing liberal mentality that everyone in America is entitled to own a home. This entitlement attitude is what helped lead to this collapse. The vast majority of people around the world cannot afford to own their own home, and in third world countries are lucky if they even have a place to live with the amenities we expect in the western world. It’s unrealistic to expect every American to own their own home when there are millions of people elsewhere who would be grateful just for an apartment with working facilities.
As for the financial institutions, let them fail – another financial institution will buy them out, as always happens when a company goes under. Bank of America is currently making plans to buy out Countywide Financial, another lender which gambled in risky subprime loans. What is so wrong with allowing the wealthy banks and their shareholders to suffer the consequences of their poor investments? Isn’t the whole point of the stock market the risk of losing money in a gamble? According to Rep. Kay Granger, R-Texas, she is receiving hundreds of calls from constituents saying things like, “We pay our bills. Why can't Wall Street pay theirs?” An overwhelming majority of Americans oppose the bailout. Sen. Bob Corker, R-Tenn., said that of 3,500 calls his office has received on the bailout, only 95 said they support it.
Why did the government decide to bail out AIG, an insurance company, but not Lehman Brothers, a bank that has been in business for over one hundred years? AIG is currently being investigated by the FBI for fraud, for overvaluing its Alt-A and subprime mortgage-backed securities. Milton Friedman once wrote, and current Federal Reserve Chairman Ben Bernanke agrees, that the Great Depression was caused by the Federal Reserve’s manipulation of money – choosing to aid certain banks over others. This is strikingly similar to what we’re seeing proposed today – having the government bail out certain mammoth financial institutions but not others.
Democrats are scrambling to get Republicans to vote with them for the bailout, hoping for cover when the voters realize down the road that it was a bad idea. Democrats know the bailout isn’t going to do any good, but when the economy inevitably rebounds, they can point to the bailout as the reason why and take credit.
President Bush said in a speech to the American public this week that the bailout wasn’t just about helping big business, but was necessary to help out families affected by the big firms’ losses. This is a false dichotomy, since it assumes there aren’t other resources available to help out homeowners in danger of foreclosure. In reality, today there are plenty of consumer credit programs, churches, charities, and solid lending institutions willing to step in on a micro or macro level to ameliorate the losses.
Now we’re finding out that the bill includes a clause that directs 20% of any profits from the bailout into a Democrat slush fund – the “Housing Trust Fund” which funds such groups as the anti-American National Council of La Raza and ACORN, considered by many to be the most corrupt voting registration organization in the country.
Rep. Mike Pence from Indiana and Sen. Richard Shelby from Alabama are two of the House Republicans leading the opposition to the bailout. Former Speaker of the House Newt Gingrich is also speaking out, suggesting that a loan instead of a flat giveaway would be better. Gingrich has called for Paulson’s resignation. Rep. Ron Paul is all over the airwaves saying “I told you so.” According to WorldNetDaily, at least 165 economists have signed a letter addressed to Congress warning of pitfalls in the bailout plan, regarding its fairness, ambiguity, and long-term effects. We can only hope that cooler heads in the Republican Party, perhaps McCain, prevail and Congress backs off from this foolish plan. The economy always rebounds in a free market society - it was government that caused the Great Depression.
rachel@intellectualconservative.com
http://www.intellectualconservative.com/rachel-alexander-archives/
Read more articles by Rachel Alexander
Ms. Alexander:
One of the additional problems with the (pardon me while I use the phrase) "bailout" is that it does not address the original legislation passed in 1977 or modified in 1995 (Community Reinvestment Act). As long as the legislation remains in place, the cause (Federal Government mandating banks to lend to less than credit worthy individuals) will simply occur again, as soon as the "toxic loans" are removed from the equation.
Without a removal of the original problem (and the mandate that FANNIE MAE and FREDDIE MAC buy these not-so-good-loans) it appears we will simply be right back on the path to where we are…right now.
Comment by hydroexcavation | September 29, 2008
Could not agree more with hydroexcavation! But wait there's more! Bill Clinton put the above mentioned program on steroids when he started fining institutions that wouldn't make enough sub prime loans. Republicans aren't acting like Democrats, they tubed the bail out. Government and Democratic failed social policy is the problem. Great motivational speech by Pelosi, HA!
Comment by jcscuba | September 29, 2008
Professor Murray Rothbard also wrote in "America's Great Depression" that the crash of 1929 was caused by government manipulation. If the Community Reinvestment Act is not removed from the system, or banks given the freedom to use the old, reliable methods of verifying income, credit history and employment, we can kiss our financial industry goodbye.
Comment by Steven D. Laib | September 29, 2008
I skimmed the failed bill this morning and noticed one thing: the mention of multifamily units. That lead me to wonder, are they talking about condos or rental apartments? If it is condos I understand and agree they should be treated the same as single family homes. If it is rentals then it seems we are paying to bail out landlords and speculators. Not a good idea!
On the other hand the stock market lost more than a trillion $ yesterday with more to follow. If $700B can prevent losses of Trillions it seems like a good idea.
The voting groups in congress seem to be divided into three. Those voting for; those voting no because the bill was not socialist enough for them; and those voting no because the bill was too socialist. None of this is being presented by the MSM.
Comment by Ivan Ivanovich | September 30, 2008
Ivan,
I have to wonder, if not for Congressional tinkering and the uncertain outcome of a Presidential election, might not the market be less volatile? The market was falling before Bush called on Congress to intervene, but now it is holding its collective breath awaiting a bailout. The Democrats jumpstarted the normally market-damping campaign process a whole year early. Negative market results are played up by both sides to underscore the failings of opponents, with the result investors hear nothing but negativity in election years, and tend to reflect government policy rather than ride it. Democrats are especially bad at discouraging and manipulating the market because sour markets play to the class neuroses of their base. Couple that with a Republican administration they can blame for "8-years of failed economics" over a 22+ month campaign season and we have a sure-fired formula for stampeding every market slump into recession.
I have no doubt the Community Reinvestment Act started the chain reaction, but both the negative election atmosphere and the Bush overreaction hoping to stop it are only helping to fuel it.
Comment by Bob Stapler | October 1, 2008
I may not be as politically savvy as many who have commented here, but from the viewpoint of the average person, this whole situation is ridiculous.
I agree completely that this bailout serves as a reward to all of the members of "greedypeople.com" — the logic being used to justify giving money to businesses who mismanaged their affairs while at the same time allowed their executives to take home multi-million dollar salaries is a slap in the face for every taxpayer who is being asked to foot the bill.
Comment by sunevalightfoot | October 2, 2008
Bob
I agree completely. The Democrats have been harping about a recession for years. It’s part of the BDS as in Bush Lied, People Died and No WMD, etc. The sad thing is that it shows a complete disrespect for the country in that it does not matter to them how Americans suffer, because the suffering promotes a feeling of revolution. It is a tactic used by despots throughout history.
Sunevalightfoot
You are also correct, but I heard a good analogy on CNN. Let’s assume you are on the Titanic. A moment ago, you were happy to be on this comfortable ship, but now an iceberg has torn a hole in the ship. The lifeboat does not look very comfortable, but it’s better than a sinking ship, so you get in. The Captain appears at the rail offering to go down with the ship. Do you say “Yes, you bastard, stay with the ship because it was your fault!” or do you say “No, please come with us in the lifeboat because we don’t know how to navigate to safety”
Comment by Ivan Ivanovich | October 3, 2008
Ivan,
Suppose the Titanic's troubles were not caused by hitting an iceberg, but rather by crew members who threw dynamite into the coal furnace. Would you put that same crew in the engine room of a new ship with a fresh load of explosives?
Passing this asinine bailout just so we can say we "did something" is silly. We need to fix the problem, not compound it. The Bush/Paulson/Barney Frank plan will not correct the credit crunch; in fact it only encourages a repeat as the moderating effects of the risk/reward system are once again skewed.
Government caused this problem by meddling in the free market; it cannot correct the problem by meddling some more.
Comment by Jeff Osonitsch | October 3, 2008
Dear Jeff
In the first place, the story was not mine. I simply said it was a good analogy. In the second place, your "new ship" idea is a non sequitur as it assumes the lifeboat returns safely before making the new assignment.
On the other hand, I do object to the provision in the bill that allows a downward adjustment in not only the interest rate of sub-prime mortgages, but also the principle. Several congresspersons have argued this morning that this is necessary because people of color hold 35% of the sub-prime loans and 62% of those are in default. I suppose they think this is an argument for the bill, but it’s not for me. Maybe this provision can be fixed when we get safely back to terra firma.
Comment by Ivan Ivanovich | October 3, 2008
Ivan,
One does not put out a fire by dousing it with gasoline.
This problem began when the US government pressured lenders to reduce lending standards and spiralled out of all control when Fannie and Freddie eliminated Wall Streets downside risk for such risky loans. The financial industry went on a binge because they thought they were making risk-free money. This bill encourages more of the same.
Moreover, under this bill Treasury's oversight is entrusted to Democrats like Barney Frank and Chris Dodd who are inextricably linked to the current mess. And soon we may have a new treasury secretary appointed by Barack Obama - a Marxist who is also bound up with this mess.
Not only will we get more of the same out of Washington, but Dems will be in control of all branches of government and can prevent any real investigation from taking place.
This bill is bad economically, philosophically, and politically.
Comment by Jeff Osonitsch | October 3, 2008