Thursday, July 24, 2008

What Bailout?

Bail in or bail out?
There is an old expression: 'God helps those who help themselves'. In the current subprime banking Fannie/Freddie lending imbroglio I am left totally confused about who is the good guy and who is the bad one. There are so many making curmudgeonly noises as though these government assistance plans are from the devil himself, it is downright confusing. But is it true?

Rules for systems
We do have a system of private enterprise and one principle of it is that those who made mistakes should suffer the consequences and it is that knowledge that leads transactors to make good decisions. Still, mistakes happen. And when they do remedies are not always easy to find.

Limits to rules
While it is sensible to worry about 'moral hazard' when authorities step into a system of private enterprise to intervene, you don't let the Titanic sink with all hands on board to teach the captain or architect of the ship a lesson if you can help it. And that is the right context for considering the current so-called bail out plans.

Systemic considerations are important but so are people. And it is not just the individuals embroiled in this mess that are germane but the whole of the economy and what might happen to it if authorities were to turn a blind eye to its needs.

Not part of the plan...
In this episode, there are no plans to bail out banks in order to save shareholders. There are plans to assist markets and to support Fannie Mae and Freddie Mac so that they can support banks and mortgage markets in general. Without fixing the ability to finance housing we will not be able to fix the slump in housing and it will become an even deeper disaster that will weigh on the economy and spread across other sectors.

In the end I do not like monies to go and help with foreclosed property. That is water under the bridge of sorts. A foreclosure is the result of a concerted act taken by a bank in reaction to a 'troubled' loan. Since banks can choose to foreclose or not, or to work out or not, aiding foreclosures does not seem wise to me. Banks did make loans in which they only wanted to take the house as collateral if anything went wrong. They eschewed the time tested income requirement and down payment amount to let buyers into the market that in the past would not have been let in. Bankers got what they wanted - the house as collateral. For them help is not advisable. But for homeowners who have been caught in this mess and caught by the drop in house prices there is more of a reason to provide support.

Bankers as real estate companies
One thing this lending episode should help to clarify is what a foreclosures is. We have seen banks foreclose on homes then try to unwind the transaction after the house value has fallen. Vacant homes lose value fast. Bankers need to adopt a better strategy to deal with payments arrears other than just foreclosures and that is one of the main reasons I am against sending monies to them to help with already foreclosed properties. Had bankers instead worked out deals with existing buyers, that house might have remained occupied and while it's mortgage payment may not have been made in full, the house would have been cared for. Bankers need to sort out where their interests lie in cases such as this. They have been too quick to say that they are not in the real estate business when in fact they are. The minute they decided that the only bank-stop they wanted on a home loan was to seized the property what else were they, other than a real estate company?

My sympathies lie much more with the homeowners who could not have understood as easily what was happening to the sector as clearly as bankers and Wall-Streeters should have.

The bailout principle to should be to assist entities when the risk of their failure endangers the system or risks setting off an adverse chain of events. Help to the aggrieved should be saved for those parties who can be the most construed as victims. Assistance to the participating institutions who got it wrong and caused grief for everyone else should be withheld. But that is not always the way it has gone.

One especially bitter pill is for those who did not participate in this house buying spree because they saw 'all this coming' and now are seeing actions taken to support prices that otherwise would have fallen possibly making them buyers at lower more sensible prices that they could afford. That is the cruelest aspect of the bail out.

Supporting the economy instead of stepping back and letting "God sort it out,' the way that a 'Hell's Angels central banker' might, seems the right thing to do. This is no time to get ideological at the cost of the economy.

1 comment:


Its one bailout after another.