The Wondering Mind

You learn something new every day.

Like many people, I didn’t realise that the couple depicted in the SNL skit about the financial bailout (and yes, it IS a bailout: don’t let anyone convince you otherwise!) were real. (FYI, I have no idea how long that link is good for.) Well, it turns out they are, and they were the people who sold the mortgage company to Wachovia that basically ruined that bank.

Since I don’t know these people or the exact circumstances of the sale of the company to Wachovia, my ability to judge the fairness or otherwise of that skit is limited. Whatever they may have made personally from the deal, perhaps they believed in all the mortgages they sold, and they believed it was fair compensation for all their hard work. But I’m betting a lot of people wouldn’t believe that, and neither do I.

The crisis was very much a result of the culture of greed that McCain and Palin have been talking about, although they never let on that it’s a culture that Republican promoted, and continue to promote even now. When the boss of a major international bank admits that pay in the industry is out of whack, you know something is seriously wrong.

Everyone I know knew that house prices would eventually come back down, so there’s no reason to believe that all those smart people working in banking and mortgages didn’t know it too. They were just playing the odds, hoping that they could make their quick buck and get out before the Ponzi scheme collapsed. Which is what much of the modern investment and finance has become: a big casino built on Ponzi schemes. With the exception of very few people such as Warren Buffet, no one is investing any more; they are gambling.

This is a key reason for the outrage people feel for the current bailout. Those more widely read on the topic also must be wondering why the U.S. government hasn’t taken the lead from past experiences of other governments. The Swedish government not only rescued their banks from a past crisis, but managed to do so without costing the taxpayers for the bankers’ mistakes, by charging interest and taking a stake in the banks. It’s an idea that others are advocating also, and one that the British government seems to have opted for.

Without such measures, the taxpayers are almost certain to end up paying for cleaning up the current mess. And at the same time, no one in the Republican party would advocate the rich, who are the ones who have profited from the mortgage business, paying a greater share of taxes to pay for the mess they created. (Anyone still feeling sorry for the Sandlers?)

Instead, you get more hare-brained schemes like the one McCain proposed last night during the debate. Aside from having no idea how to pay for such a scheme, except wishful thinking, it is also fundamentally unfair and regressive. At the end of the article, you get a sense of why.

It also raises fairness issues, given the many homeowners who are scrimping in order to continue paying off mortgages based on former market values far higher than their properties’ current worth.

You can take this idea further. The people with mortgages are one of two types of people: they are either financially secure enough to have gotten a mortgage, or they are not qualified, and never were. If they are the former, they are better off than those thousands, perhaps millions, of Americans who don’t even have money for that. In which case, these better off Americans are being subsidised from the tax dollars of those who are less fortunate than they are. Does that sound fair?

You can make valid “end-of-the-world” arguments as to why such measures are needed anyway, and you can kind of buy those arguments. But then there is no reason why the taxpayers can’t get a stake to recoup the costs later when the economy, and the mortgage holders, are more secure. One example would be, rather than the government getting stake in your house, anyone who gets help from such a scheme would be subject to higher capital gains tax when they eventually sell their homes. That way, if and when they make money from selling the property they were able to keep with government help, they would pay back some of the profit they make as a result to the taxpayers.

If you are someone who had no business getting a mortgage, then I’m not sure why you should get a bailout. Especially when there are probably many others in exactly the same economic circumstances who are not getting that kind of help from taxpayers. Why should those people gain from being stupid or greedy, or both? This is another example of the government helping out people who make stupid decisions with money from those people who don’t. I can’t think of a more clear example of moral hazard if I tried.

So why don’t we think of ways to tackle the current crisis in an effective and fair way, instead of worrying about the hurt feelings of people who have made billions contributing to it. I’m sure their billions can provide sufficient comfort.