- PT Barnum must be laughing at us. There’s a sucker born every minute: Never buy something you don’t understand. People ignored that advice with complicated mortgages and--learning nothing--now repeat the mistake on a national scale by buying a complicated government bailout that they don’t understand.
- The Blind Leading the Blind: Congress does not understand the problem any better than the Wall Streeters. Many Congresspersons probably do not understand the bailout that they voted for. Senator Chris Dodd (D-CT) and others cry lack of regulation, except that Dodd incriminates himself, because he as Chairman of the Senate Banking, Housing, and Urban Affairs Committee is the very one who was supposed to have been doing the regulating and oversight all these years, except Dodd, Congressman Barney Frank (D-MA), and others were too busy pocketing cash from the banking/financial lobbyists. President George W. Bush said that "Wall Street got drunk" but his bailout pours whiskey down the drunkard's throat (the problem was too much cheap money in Wall Street, and the bailout pumps more cheap money into Wall Street). Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry “Hank” Paulson suddenly declared the need for a government takeover of Fannie Mae and Freddie Mac only a couple months after declaring them fit as a fiddle. I would not trust them to change a light bulb, much less tinker with the world’s largest economy.
- The World’s Most Expensive Telegram: So what then is the purpose of the $700 billion bailout? House Speaker Nancy Pelosi explained her intent, "Please be assured that we will have a package that will speak to the issue in a very substantial way to send a message to the markets of our seriousness." As movie mogul Samuel Goldwyn said about misusing a medium, "If you want to send a message, call Western Union." Ms. Pelosi, next time you want to send a message, get your hands out of our pockets and type an email.
- Guaranteeing that You Overpay: The bailout’s government purchase of risky mortgages with your money is a classic case of asymmetric information where the seller knows much more about what is being sold than the buyer does (as NPR noted today). That observation should result in “no sale” until the seller discloses sufficient information—but it won’t with these people at the helm. Not only is the bailout not going to require sufficient disclosure, one of the reverse auctions designed by University of Maryland professors for the bailout intends to rig the results so that the government does NOT pay the lowest price. That’s right, the plan is not only to force you to buy bad mortgages, the plan is to force you to OVERPAY for bad mortgages, on purpose.
- Bailout’s Own Premise Disproves the Need for Bailout: The bailouters allege that we need the government takeover because banks won’t buy/lend because banks don’t know the value/price of each others’ mortgages, so the bailouters claim that the government has to buy/lend in their place. The fundamental flaw in the whole bailout logic is that government doesn’t know the price either, so the bailout solves nothing (if banks can’t buy because there is no price, then government can't buy because there is no price). Therefore, the bailouters--without any inkling of their own absurdity--declare that the bailout cannot work until we know price, so the first step is a massive program to determine prices before the government can buy anything. However, once the government determines the price, the government bailout is no longer necessary, by its own premise. The preliminary necessary step of price discovery eliminates the purpose of the bailout’s existence before government buys a single mortgage.
- The government is not ending the scam. The government is taking over the scam: Dodd’s, Frank's, and others’ bailout sales pitch that you will make a killing in the real estate market when prices turn around should sound awfully familiar because it is the same "housing can only go up" pitch used by the hustlers shilling risky mortgages, except re-packaged on a vast national scale. Scams appeal to the victim’s greed or self-interest so it is no surprise that the pro-bailout crowd tell you that they are only looking out for your best interests and you have to bailout the banks for your own good and you have to buy now or lose out forever (the oily saleman's high-pressure sales tactic) and besides you will make a profit from the bailout--the only thing they didn't promise is to include a set of free steak knives if you "act now!" The bailout is NOT solving/preventing the bad practices. The bailout magnifies the bad practices exponentially. The only thing worse than the door-to-door huckster is when the real-estate huckster is the federal government. If you were smart enough to have avoided the bubble, you lose because the government is forcing you to participate in the bubble by funding the bailout. You are now the sucker in the newspaper who fell for the bad deal. If wannabe-real-estate-tycoons Dodd, Frank, and Paulson want to play Donald Trump, they should do so with their own money, not yours.
- Inviting the Foxes into the Henhouse for Another Feast at Your Expense: The government probably will hire the same highly paid mortgage/financial people who made the mistakes during the bubble and caused the credit crisis as the ones who will decide the prices in the bailout—and this time they are spending your money.
- The Money Pit: The 1980-90s Savings & Loan (S&L) bailout final cost of $125 billion was 4 times the first estimates of as low as $30 billion (contrary to recent media propaganda to try to burnish the S&L bailout's reputation). If Paulson’s $700 billion underestimates the final cost by a similar factor, the current bailout will cost almost $3 TRILLION.
- Monopoly Money: The government does not have the money. It was running deficits and putting you in debt to foreigners before the $700 billion bailout. Bush ridiculously claimed that "government is the only institution with the patience and resources to buy these assets at their current low prices and hold them until markets return" but everyone with a 401k has the patience to wait decades, the government has no patience as its instant gratification is what put us deeply in debt and caused the problem, and its only "resource" is the ability to borrow and put us deeper in debt. The federal government matched its short-term impulsiveness with shorter-term debt. The FDIC insurance increase from $100k to $250k is grossly irresponsible because, not only does the FDIC insurance subsidize insolvency and make zombie banks by design, the FDIC does not have enough money to pay for coming bank failures at the $100k level, much less $250k, so they might as well have completed the fantasy and raised the promise to $250 Trillion per depositor. Your head should be spinning that your leaders arranged/are arranging to add an astonishing $2 TRILLION to the national debt in little more than a year (original deficit, stimulus packages, bailout, and they’re not done with you yet). Add to this crushing debt its inflation (counter-deflation) and dollar depreciation.
- For the Children: Someone out there must have a little daughter named Suzie so, given politicians’ penchant to exploit children to shill bad policy, you can call the bailout the How To Financially Ruin Suzie Act of 2008.
- Irony: "Ownership Society"=Government Ownership: While Fidel Castro’s communist Cuba begins to privatize, Comrades Bush and Pelosi continue to Sovietize the American economy, centrally planning the price of individual houses, taking over the real estate market, seizing banks, nationalizing mortgage giants Fannie Mae and Freddie Mac, etc. Viva Hugo Chavez.
- Government Should Do Nothing. It Has Done Enough Damage Already: Reject the propaganda that the economy will stop. The same greed that caused the problem will solve the problem. No one can make money if the economy stops. Therefore, the economy will not stop. Even if credit did stop, that would not stop the economy. People who saved (yes, there are more than a few) can buy houses. Millions with home equity can buy houses any time they please, as long as the new house does not exceed the equity in the current house (no trading up but plenty of trading sideways if you need to move for your job). Developers who overbuilt will be selling houses one way or the other (bankruptcy liquidation). Houses will become affordable to millions as long as the government does not prevent prices from falling (trying to stop houses from getting cheaper is as stupid as trying to stop gasoline from getting cheaper). If a business cannot make payroll without a loan, it does not need a loan, it needs a better business model (What happened to the revenue? Hint: revenues should exceed costs. Subsidizing money-losing businesses does NOT help the economy). Moreover, credit has not stopped, despite the hoopla about frozen credit markets (hat tip: Joe), according to the Fed's own FRB Volume Statistics for Commercial Paper Issuance. Further, the Fed's 10/7/08 G.19 Consumer Credit report shows that consumer credit continued to GROW during the "credit crisis"--still at a 2.4% annual rate in July 2008--and the decrease of 3.7% finally showing in August 2008 still puts total consumer credit AT BUBBLE-YEAR LEVELS. The misleading 10/11/08 media headline "Lenders say Days of Easy Loans Are Over" leads to an article which warns that car-dealership "tight" standards "often can mean a downpayment"--you MIGHT need a downpayment, but you still might need nothing more than to scratch your X on a scrap of paper to get a shiny new automobile. Media claims about inter-bank lending that "Banks won't lend to banks" is incomplete when the full statement is, "Banks won't lend to banks for garbage collateral." Bring good collateral to the table. In the days of better loan standards, a bank understandably would refuse to loan to an applicant who refused to disclose financial information. Likewise, banks now are understandably refusing to lend to other banks that refuse to disclose financial information about their MBS or their solvency. Simple, if you want a loan, show your books. Buyers will buy and lenders will lend when the price seems right. Warren Buffet recently bought $3 billion of GE. Wells Fargo and Citigroup recently engaged in a $11.7 billion bidding war and lawsuit over who would get to buy Wachovia. Cerberus Capital management might buy GMAC Financial Services. General Motors (GM) might buy Chrysler (hat tip: CR).
Government Prevents the Solution: The dirty secret is that we still have super-lax credit, but the government prefers mega-super-lax credit, which is why the federal government nationalized GSEs Fannie Mae and Freddie Mac to stop a prudent deleveraging runoff--effectively making that smart market solution illegal until 2010--and instead ordered those 2 GSEs combined to buy $40 Billion of "toxic waste" mortgages per month (hat tip: Mish) to add to the bailout's and the Fed's desperate attempts to pump-up the mega-bubble at your expense.
Why are there no lemon laws against bad legislation?
Why did the public buy the bailout?