The Wall Street Bailout Is Wrong!
The government bailout of the Wall Street derivative mortgage security fiasco is absolutely wrong. Many Americans believe that the Federal government has a literally endless supply of money. Unfortunately the reality is that the financial resources of the United States are finite. The estimated cost of the bailout just begins at slightly under a trillion dollars. When in the history of any government program has any amount initially funded ever been enough? This trillion dollars will now be the single most expensive item on the government budget costing more than Medicare, Social Security, or National Defense. Even its proponents estimate that the average American family will have to pay $2,000 dollars to fund this program. If this passes there will be no tax break unless the government severely slashes other government programs like Medicare. If the government keeps all current program funding and proceeds with the Wall Street bailout some authorities have estimated the tax rate will need to be increased by 55%.
Both political parties and the heads of Wall Street corporations are responsible for this mess. Washington had a head in the sand attitude hoping that continued real estate appreciation would somehow avert a disaster. The Sarbanes-Oxley Act of 2002 that was specifically passed as a bipartisan measure to stop corporate corruption was ignored by the corporations in this current crisis by forming new companies and financial instruments in the dark that were immune to regulation. As was discussed in a previous blog entry, these corporations have engendered political favor with the Democrats by funding so called “noble” liberal causes in return for patent obvious ignorance of their financial abuses.
Many Republicans have favored the concept of non-regulation assuming that there were controls inherent to the structure of corporations which would avert problems. A large part of this disaster is the ever increasing diminished power of stock holders over corporate government. Many times stock holders are diluted in mutual funds for example so that it takes just a small percentage sometimes as small as 5% ownership to control a corporation. In addition, the courts have upheld the rights of corporate executives to withhold information from minority stockholders.
The Security and Exchange Commission, the Federal Housing Authority, the Federal Reserve, the Congressional Committee Chairmen, and the President should all have taken action some time ago. To imagine now that we would trust the government and the leaders of Wall Street to solve the problem with tax payers’ money is insane.
A government buyout will not work because they are going to pay “cash for trash”. Everyone in the real estate market knows that the residential values are severely overpriced. This overpricing was the result of conscious conspiracy of real estate agents, city governments, lenders, and buyers to constantly fuel an abnormally high appreciation rate. There is no way families making less than $50,000 a year will ever be able to afford mortgages for homes of $400,000 which became a common occurrence in Nevada, Florida, and California. Even though many people are victims of high interest rate adjustable loans, the fact is that the vast majority of people facing foreclosure are in homes they should never have bought. Lenders knew that foreclosure would likely occur when they made the mortgages but figured wrongly that the continued appreciation would protect their investment. The sad thing is that they convinced many people to be pawns in a pyramid scheme.
Some have talked about buying equity in the firms that have caused this problem as a way of getting back capital when this trash is sold. The reality is that stronger institutions will avoid being involved in the program so that only the worst most useless mortgage funds will remain. There is no way imaginable that this trash will sell for anything except pennies not on the dollar but pennies on the hundreds or perhaps thousands of dollars.
Heads of corporations need to be sued and charged with criminal conspiracy. The testimony of the head of the SEC before Congress today hinted that some action may be forthcoming but I remain doubtful until arrests are made. Most Americans and most financial institutions can survive if Congress does not bailout Wall Street. The only way things will really change on Wall Street is to force them to deal with the chaos they have brought on America. Unfortunately a significant group of Americans who made bad decisions about borrowing money are going to suffer but we cannot afford to bring the whole country to a halt. Japan made the same major mistake and ten years later was still in financial shambles.
Our Rio Grande Valley has been spared a major direct hit from this crisis because those major lenders offering sub-prime mortgages did not operate extensively in South Texas and also because the rate of land appreciation has been restrained. Fortunately the City of McAllen has also shown restraint in its taxing and appraisals. In other parts of the country a bizarre partnership of realtors, lenders, and local governments lead to local tax districts feeding like vampires on local property values. Local government officials need to remember this lesson.
If this bailout goes through America will never be the same again. There will be no health care or education program improvement. No matter who wins the election there will be very few options but accept trying to figure out which programs to cut or stop altogether and how much to raise taxes. Billions of dollars will not only be going to foreign governments to pay for oil but we will also be bailing out foreign banks who participated in the mortgage business in the United States. No money will be left for hospitals, roads, education, caring for the elderly, retirement, or the military. America’s bright light will burn out.
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