Bailing out the Fed

Who's going to bail out the fed?

The fed last night bailed out AIG for nearly $90 billion dollars. Before this, they bailed out Mae and Mac for an estimated $300 billion. Before that, the fed bailed our Bears & Stearns for nearly $30 billion. All told, we are up to nearly half a trillion dollars in federal bailout money and counting.

Who will pay for this bailout? WE WILL.

The two questions to ask: Why did this happen, and what should now be done?

First we look at how this happened. It's logical, and not as complicated as you may think. The Clinton administration wanted to do the politically correct thing by pressuring lending institutions to give unsecured money to unqualified minorities, and guarantee it through the secondary market of Mae and Mac - organizations quasi run by the government.

The idea was that all americans should be ENTITLED to a home, and the government would see to it that all people could get unsecured money from banks by guaranteeing loans would be good even if the recipients were grossly unqualified.

This practice expanded into a giant unsecured mortgage lending explosion, eventually providing the giant influx of lending money available to ordinary americans, and creating the housing explosion we saw in the first 5 years of the Bush administration.

Of course, we now see the fall out.

While the banks gave out money to anyone with a heart beat, the housing market began to show signs of serious failing beginning in 2006. People had seen the artificial appreciation of their properties begin to stall. Houses stopped selling because the bloated market had reached the breaking point. Bubbles began to burst and defaults started to creep in as the zero down, interest free loans came do to be paid.

Of course, collapse was inevitable. A house worth 100k that suddenly became worth 350k when money was more available than dirt could only be bought if buyers took out the big loans. The american people were in effect held hostage by the government intervention that created the artificially inflated market, forced to take out giant loans if they wanted to buy a house, and then hope that they would be in a permanently appreciating market that would provide access to unlimmited home equity cash.

Now we see the curtain has been lifted. People predictably are now stuck in homes they can never hope to sell, owing double or triple their value, and defaulting as the money dries up. The collapse of the housing market causes record unsold inventory stagnating the market. Repossession and auction becomes the norm. People declare bankrupcy left and right.

What happens to mortgage banks who have lost their cash cow? They go under. Suddenly the government controlled secondary market that floated all these bogus loans is caught with billions of dollars in unpaid, defaulted debt. The government that created this mess in the first place then steps in, bails out Bears and Stearns, then Fannie Mae and Freddie Mac, AIG and who knows how many more, and the American people are handed a bill.

A very, very big bill.

What do we do from here? The dems will tell us that the way out is through more government intervention. More government control and regulation of the lending market to make sure the economy won't fall too far and too hard.

McCain, has said he wants to reform the marketplace by eliminating those artificial safety nets the government issued that got us into this mess to begin with. He wants accountablity. He wants to end the madness by stopping the banks reckless money lending policies the government itself was responsible for creating.

I believe McCain is right. The government intervention caused this mess, and throwing more federal money and regulation around is the worst possible thing we could do to our economy. We need to go back to fiscal responsibility. We need to end the "hand out" mentality that begins with government promising "a roof over everyone's head, a chicken in everyone's pot", cradle to grave entitlement. This mentality extends all the way up to the top, where every failed lending institution is given hand-outs from the government, billions and trillions worth of handouts, so that they can keep giving more handouts to americans who are ENTITLED to the "dignity" of new houses, new cars and universal day care.

NO MORE!

McCain is right. We need to stop the madness, reform the government, demand accountability, and eliminate reckless financial policy. Institutions need to know the government will not step in with juicy hand outs and bail outs when their risky, dangerous monetary decisions backfire.

-MZ