Manufactured American financial crisis: all thanks to borrowers

The impending American financial meltdown is a ruse. This manufactured crisis’s root cause and solution are not what politicians are telling us.

Who Caused This?

Accolade-seeking politicians blame faceless financial industries or creative loans. Such loans include adjustable rate loans, 0% down loans, “liar loans” where you don’t report your ability to pay it back, and so on.

In fact, greedy, irresponsible, or naive borrowers are the root cause:

  • Greedy borrowers took out more loan than they can repay.
  • Irresponsible borrowers signed loans they didn’t understand.
  • Naive borrowers blissfully ignored their (in)ability to handle terms of creative loans.

Why do I blame the borrowers and not financial corporations? Through their inaction, malicious intent, or declining to educate themselves, borrowers planned to inflict economic damage on someone else.

Nobody held a gun to borrowers’ heads. The financial industry simply made the guns that borrowers shot themselves with.

Many of these greedy, irresponsible, or naive borrowers, or the occasional unlucky borrower, cannot repay their creative loans. Modest drops in average home values and faltering insurers contribute to the problems but remain secondary factors.

Who’s Going to Hurt?

The mortgage-related financial problems will mostly hurt three classes of self-made victims:

  1. Greedy, irresponsible, and naive borrowers. If things go as they should, many of their butts will be kicked out of foreclosed houses.
  2. Stupid insurance companies. These creative loans were securitized and sold off to investors. To reduce their apparent risk, sellers insured the securities against defaults. 20/20 hindsight shows insurance companies accepted too much risk.
  3. Those who invested in these risky securities. Instead of getting an expected stable return on investment, they are facing a modest loss. (Yes, just a modest loss, not elimination of investment. Read on.

Politics

Economic liberals have “rushed to the rescue” with a proposed $700 billion or so bailout. This proposal is idiotic because:

  1. Investors can already get back most their money. These loans are backed by homes. If the borrower defaults, the home gets foreclosed and sold, and the remaining money goes back to investors. Sure, home values have declined modestly, and foreclosure creates expenses and delay, but in the end, investors do get back most of the value of distressed loans. This isn’t a catastrophic loss like investing retirement in Enron stock.
  2. The economic fundamentals of traditional financial instruments are unchanged. This includes traditional mortgages, like the 30 year “significant down payment” kind. The problem is only with creative mortgages. It is ridiculous to think that time-tested, well understood financial instruments should be feared.
  3. Negative consequences are learning experiences. Borrowers will learn to be smarter. Investors will learn to better research investments. And insurers will learn not to insure idiotic securities.
  4. Nothing will work with a catastrophic housing collapse, and the bailout won’t prevent it. A housing value collapse means the bailout is “pissing in the wind,” a futile effort. However, I don’t fear this because…
  5. People still need a place to live. Values can only decline so far before natural market forces stabilize them. Case in point is a recent surge in home sales in inland California markets.
  6. Companies that took irresponsible risks must die. That’s how we clear out bad companies like Enron or Arthur Anderson. That’s why I am not bothered by the prospect of some banks and insurers going down. Almost all of these businesses have sound assets and business units that could be sold off to investors. The remaining, troubled business units could go into bankruptcy or be handled with less interventionist measures.
  7. Socialism. Open markets work best. Period.

Here’s the flip side. While I oppose a federal bailout, I’m not worried.

The buyout’s net, long-run cost will only be a fraction of its initial cost. This is provided that democrats don’t gum it up with political shenanigans. Predictably, they are trying to buy votes from greedy, irresponsible, or naive borrowers by finding ways to prevent lenders from kicking them out.

Why the Buyout?

Why would politicians, even supposed conservatives, dive headfirst into a $700 billion dollar program?

Simple: your name will be in history textbooks for centuries.

Regulation

I am bothered by liberals in both parties calling for drastically increased regulation of the financial industry.

What other highly regulated industries perform well? Let’s see: utilities, cable companies, telephone companies, pre-deregulation airlines… see the picture? Regulated industries suck.

Now liberals want to hamstring the financial sector, the lifeblood of our economy. Yikes!

The Aren Plan

What would Aren do? A three point plan:

  1. No bailouts. If you did something stupid, be it investing or borrowing irresponsibly, you’re going to hurt. I won’t ask taxpayers to save you.
  2. Leadership. Besides the above-mentioned moderate losses, most of the problem is perception. Traditional financial instruments remain sound, and strong leadership is needed to reinforce this.
  3. Expedite. Drawing this out hurts our recovery. I would streamline or repeal regulations that delay resolution and propose new legislation if existing rules don’t already allow the following sub-plan:
    1. Encourage troubled insurers to self-dissolve by selling off all marketable divisions and assets.
    2. Establish new coverage on all “creative mortgage”-backed securities that is proportional to remaining funds.

Conclusion

Here is where traditional essays have a closing paragraph. In high school, I was taught that one model is to summarize what I wrote. So here it is: We’re in the middle of a manufactured crisis caused by greedy, irresponsible, or naive borrowers, and the best resolution is leadership, not a huge new federal program.

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