Bailout Treats Symptoms, Not Disease
The bailout is done! Time to breathe a sigh of relief.
Or is it?
As details emerge about the financial bailout package that was jammed through Congress over 10 days of political theater at its most nauseating, there’s still a striking omission from the plan to right American’s economic ship.
The failure of bureaucrats and regulators to propose a realistic solution for the foreclosure problem is emblematic of their inability to treat the root cause of an issue, focusing instead on simply applying band-aids to the visible symptoms.
The bailouts of Bear Stearns, Fannie Mae (FNM) and Freddie Mac (FRE), and AIG (AIG) all claimed to remove the cancer - but all they did was hasten the patient's demise. 
Treasury's plan will deliver money into the banking system to sop up toxic assets sitting on the balance sheets of our financial institutions. This is a necessary -- albeit unfortunate -- step, but it still doesn't address the root of the rot: Milions of homes are worth less than the outstanding balance of the owner's mortgage.
Billions of dollars in negative equity are destroying Main Street’s balance sheet even as it devours Wall Street, eroding the value of the very securities Taxpayers are about to start buying.
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As long as Washington tries to fight foreclosures with ineffective loan modification programs that simply prolong the problems, foreclosures will continue to set records. Modifying a mortgage for someone who is barely scraping by is sort of like rescuing him from the side of a cliff, only to leave him on the edge, dangling by one arm.
Foreclosures are often blamed for spiraling home prices and the resulting collapse in value of securities tied to the mortgages used to buy those houses. According to Bloomberg, the government’s aid package is designed to support “financial companies reeling from the record number of home foreclosures.”
Foreclosures don't cause houses to lose their value. Foreclosures happen when a home loses value such that it’s worth less than the mortgage used to buy it, and the homeowner can’t sell or refinance if his interest payments become overwhelming.
Defaults become delinquencies, which become foreclosures, which become evictions, which become repossessions, which flood the market, depressing prices as supply outstrips demand.
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Only after this inventory is taken, classified and detailed and then released for public scrutiny, with disclosure of which financial institution it belongs to (or is holdingthe non-performing or defaulted paper) showing the amount of housing units in default, by how much $$, and a grand total $$, should we even consider a bail-out.
The bail-out is blind. This just isn't the way it is done.
All that aside, all defaulted mortgages should be accelarated to immediate foreclosure. This will put the debtor back in the rental market, allow investors to purchase the foreclosed property at market and quickly place the property for rent to those in need of housing (the foreclosed previous homeowner). This is a hard bite into the bullet, but it will cost far less than a bailout. It will be a shuffle of the cards in the housing market and it will bolster the cash flowing into the mortgage markets, providing the foundation for growth once again.
Bailout is not required, let the chips fall where they may, no free rides for anyone. Those institutions that acted prudently will rise to the top and replace those that played a game of financial Russian roulette. Failure is the reward of bad or poor business in a free economy, let us not go against common sense here.
Just a thought. It's time to try to be constructive about how to fix our problems.
JPM
You're right, on a larger scale overleverage is definitely the most widespread disease in our financial system. I do believe, however, that as long as we ignore this negative equity problem, the housing market will take years longer than most expect to stabilize. Paulson himself said the financial markets cannot be stable with falling home prices, so why not accelerate that price discovery.
The excess leverage will be destroyed in time, as will the negative equity -- its a question of just how much time we actually have!
Andrew
The simple truth is, we don't need all of these people or the stuff they have in order for our species to survive and prosper.
The perpetual growth, "go forth and multiply" model is the failure, whether it takes the form of big houses or big populations or radioactive waste and landfills or communism or democracy or free markets or barter. We have to learn to give something back.
The bailout is a plan to reinforce the top of the human pyramid by consuming the bottom. It might last for a while, but the pyramid will get shorter and shorter.
When I talk to "underwater" home owners they all hope against hope that "things" will return to "normal" and that their losses will not have to be realized. They intend to hang on, believing they have little choice in the matter. As they see it, if they liquidate, they have lost their savings, but if they wait, maybe "things" will get better. It is like a person refusing to sell a losing stock until they "can get their money out of it".
Emotional, not rational, of course. Human nature.
.. Any of us with 1/2 a brain or more PREDICTED back in 2000 that this was where it would go... we knew dufus Bush Jr. & Co. would take a PEACEFUL, HAPPY, PROSPEROUS, NO DEFICIT, PROFITABLE USA PAYING OFF THE NATIONAL DEBT and run it into the ground just like he bankrupted the two companies his wealthy family gave him to run before they gave him the USA to run and bankrupt... and McCain is also another spoiled rich kid propped up by his Admiral Father's influence... both Bush Jr. and McCain would be drunken, drugged out homeless derelicts by now except for their family push... McCain's credentials include LOSING 4 expensive gov't issued airplanes, 130 DEAD U.S. Sailors, getting CAPTURED by the enemy, and most recently a FAILED embarrassing effort to try and hold the presidential debate hostage to fastpassing a BAD BailOut plan... WHAT would you expect from HIM as president...??
