Are We Capitalists or Socialists?
That is a question that perplexes me and I'm not sure what the answer is anymore, ten years ago I probably could answer that question much quicker. Today, I don't know the answer. Should banks fail (including my bank which I love)? Should the government be bailing out AIG, under the idea that its failure would adversely affect the world economy? As someone that does believe in capitalism I'm finding it difficult to wrap my head around an all out bailout with or without restrictions. Businesses that make poor choices close all the time for example, a restaurant won't thrive even in the best of neighborhoods if the food isn't good or is highly overpriced to what the average person will pay.
If a bank, in the business of lending money, lends money to people they have a good idea won't be able to pay it back (as was the case with most of sub prime mortgages) isn't that a bad business decision? Now I understand that this is a bitter pill to swallow, especially for the thousands of people facing foreclosure and I'm very sorry for them that they might lose their homes. That said, I feel the government's idea of buying those mortgages is a horrible idea for any price.
Breakdown Go Ahead Give it to Me
Lets say someone makes 60K a year or roughly $4600 per month before taxes wants to buy a house, under the old rules they would have to save 20% of the price for a down payment, and pay no more than 1/3 of their monthly income. That means simply put you can afford a house priced around $240,000. Instead with the sub-prime these people were qualifying for a loan for a house double that price, or $480,000. So now that these people have figured out that they can't afford these loans and they don't want to lose their houses the government is trying to work out a deal to buy those bad mortgages from the lenders that issued them. They will work to let the people refinance into a "traditional" loan so they may keep their houses.
So, lets go back to our hypothetical, and lets say that these people can refinance that $480,000 loan. First lets all recognize they put very little or no money down, and have not been paying any principle for the past 4 years so they don't owe $480K. It's more like $520K. Now remember they only make $4600 a month, so where are they going to get the money to pay the new mortgage bill of $3117.66 (that's 30y fixed rate of 6% interest)? A 40 year mortgage wouldn't save them that much about $256 dollars.
So how is this going to help them? Unless they forgive the past four years and offer them a loan at the original $480 at a 40-year rate that is lower than I would pay with excellent credit...they might make it at a little less than half of what they make. However the real question is still unanswered. How is the so-called bailout going to help these people? Short answer is that it won't.
Of Mice and Men
We can't consider ourselves capitalists until the economy goes into the toilet and is being flushed, then say wait a minute, we can't let that happen. We also can afford to bail out everyone, some will fall like WaMu who just late yesterday had their 300 billion dollars in assets seized by the FDIC and sold for 1.9 billion to JP Morgan Chase. Surprisingly I have no problem with this because it was sold, all the depositors money is still there (even those over 100K) and they handed out flyers to customers entering the bank this morning and put a notification on their (Washington Mutual's) website. It won't cost taxpayers anything and the FDIC can return to their jobs of watching other failing banks.
Maybe those people are just lucky they were banking with a bank that the FDIC felt was too big to fail completely and the amount it could have costed taxpayers would have been atronomical.
The bailout is more about global markets so that money can keep moving. If someone owns a business and needs to make an important improvement, they normally need to borrow money to do it. If they can't borrow, the business could fail, employees will lose their jobs. Think of George Bailey and the Building and Loan in holiday classic It's a Wonderful LIfe, when there was a run on the bank, George exclaimed that their money was in 'Sam's house or Dave's house..." you, I'm sure get the idea.
Money has become a virtual thing, no one really sees it anymore but I think that's going to change. Will there be a depression? If there is a bailout probably not but we still can't avoid a deep recession, if there isn't a bailout, then it does become likely.
This all said though, we always want people to be accountable for their actions, right or wrong, and that's not what is going on now. Lenders were irresponsible, the goverment was irresponsible, the brokers and everyone else that lined their pockets instead of doing what was right. If that means things fail, change and hit rock bottom then nothing will change it.
We call a huge downslide on Wallstreet today a Market Correction (meaning stock prices went too high too fast and must come down) maybe what we need is an Economic Correction?
In any event the debates are about to start and I for one am relieved that McCain changed his mind and decided to attend and very interested to see what both have to say.
© 2008 Whimsical Ranter
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