Wednesday, July 23, 2008

More Taxpayer Dollars to Mediocre Financing Companies

The House enthusiastically passed a bill today to bail out Freddie Mac and Fannie Mae (why do they have such similar names? That makes no sense!) using your hard-earned taxpayer dollars. It's a "loan," but cheap enough that the US Government will be losing a fair amount of money on it. Note that no reputable lending institution was willing to give them the money to keep going.

Sometimes I wonder why the economy's not doing great. Then I remember one of the reasons is we use dollars you could be saving/spending and putting them in the pockets of failed and irresponsible big business execs.

Now I'm told that a Fannie/Freddie collapse would be devastating for the US economy. That's also what I was told about Bear Stearns, somewhat passionately and loudly by a few of my fed-loving friends. But after we so enthusiastically spent US taxpayer dollars to keep Bear Sterns afloat, they still collapsed. And the world didn't end. Why?

Turns out, when a company with assets goes down, those assets become very cheap to acquire by other rival companies. Mortgages, for example, can be bought for chump change by banks or other lending institutions. We call this an "investment." If one of Fannie or Freddie collapsed, Bank of America, Wachovia, Citigroup, Morgan-Stanley, or any number of fine US money-manipulating institutions would gladly acquire those mortgages. But some of the mortgages are bad, you say? Well, they'll sell for cheaper. They would almost certainly be sold as a package deal, instead of piecemeal.

And then, these mortgages would be backed by lending instutions A) not run by fools, and B) not on the verge of collapse. I should note that one major reason cited for the collapse of the Soviet economy was the absolute refusal to let failing companies die. One of the reasons any economy works is that companies that cannot make profit don't survive. If they don't make profit, then they're either not offering anything of value or are not running efficiently enough (or some arbitrary regulation is choking off their ability to profit, but I know that's not a popular fact to admit).

And in case it wasn't clear that Congress was trying to help "Homeowners," they are trying to pass a law limiting how much money the Fannie/Freddie execs can get paid. So the Feds are financing a falling company and telling them how much to pay their employees? This sounds like an acquisition.

Ultimately, keeping failing businesses running prevents better businesses from increasing their market share over the burning hulks of the dead ones. So who hurts, ultimately? Consumers. Any talk of all these mortgages disappearing and homes being repossessed is foolishness. Who would repossess them? Fannie and Freddie owned them. If they bleep out of existence, they can't just show up and start throwing people out of their houses as a last dying breath.

If the government feels obligated to act (which it does, because election season is just around the corner!), the best thing to do would be to help manage the transfer of assets from Fannie/Freddie to institutions of less failure, like it's doing with Bear Stearns--when Fannie and Freddie finally collapse from their own poor business practice. But instead, Congress is doing what it does best: ineffectually spending the money of the middle and upper classes for all sizzle and no steak. It's not like the money in the pockets of these productive Americans would help the economy, right?

On the foreclosures: many of these foreclosures are still going to happen. Some people signed onto bad loans that they simply could not afford (you know the whole sub-prime thing by now), and keeping Freddie and Fannie afloat is not going to make them magically able to afford these mortgages. It's possible new lending institutions may be able to restructure or consolidate some of these loans so be more manageable. But if you're broke, it doesn't matter who your lender is, you're not paying him back, and you're losing your house. The bailout really won't help these folks.
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