privatized profit, socialized debt

[sophiaserpentia]

It shouldn't really be such a rare occurrence that my president says something i agree with, that it causes me to do a double-take and exclaim with surprise. But that's what happened a little while ago when i read Bush saying that the government should not bail out failed banks.

But, i should have known that with politicians of all stripes there's a vast difference between what they say and what they do, and lo and behold, the Federal government is going to bail out two of the biggest banks of all. This, after the Fed has already printed money indiscriminately extended a special line of bottomless credit to certain kinds of institutions.

But of course, these banks are "so big" "we can't afford for them to fail." The loss of capital, savings, and jobs would be too big a hit. And yeah, they're right; we can't afford to have major parts of the economy evaporate.

Here's the story so far. Millions of mortgages were given out to folks who, the old rules said, couldn't have gotten a loan, because their incomes are just not stable enough to handle it. The new rules said, go ahead and give them a loan, we've thought of a way to spread out the risk so that no one takes too bad a hit. We'll plan on having a certain number of losses and just take "loan debt" as one package deal.

The whole thing depends on there being many more good loans than bad, so that the losses are covered by the gains. Problem was, when too many of the subprime loans went into default, there was a cascading failure because the fractional reserve banking system relies on enough people paying their debts for lenders to remain solvent. Once the losses became big enough, there wasn't enough money on hand even to make prime loans happen.

As has happened before, the government is talking about - and will - come to the rescue of banks under the argument that it is more harmful in the long run to let them fail.

In the long long run, maybe it's more harmful to create a moral hazard that encourages capitalists to behave recklessly.

The fact that it's happening twice in the space of two decades will hopefully be enough for some Americans to form an understanding of what is really happening here. When i took macro-economics in college, we were told that the essential moral underpinning of capitalism is that entrepreneurs deserve to make a profit because they are taking risks. Many ventures fail, so under capitalism things can happen that might not otherwise.

What happens to that moral underpinning when it turns out that a big enough risk can be shrugged off onto taxpayers, while profit remains in private hands? If it happens with regularity, it starts to look less like a "natural business cycle" and more like a huge fucking swindle.

Who ends with the profits and the assets? Lenders. Who ends up with the debts, the broken lives, the drained-out savings accounts, and a sham of a government assistance program? The middle class. Who winds up paying the bills and sweeping up the mess? Taxpayers. Dare i point out the racial dimension of the crisis as well?

It's not the way capitalism is "supposed" to work. But it's probably the way it's designed to.

Comments

[argentla.livejournal.com]

Don't forget that the likelihood of a federal bailout of one or more of the major U.S. automakers (for basically similar reasons -- "we sold too many SUVs that people can't afford, and now we're going belly up!") is imminent, too.

[sophiaserpentia.livejournal.com]

Argh! I've been meaning to write a post about the "big three" as a perfect example of classical tragic hubris writ large, but i don't know enough about Greek tragedy or the US automaking industry to do it justice, really.

[argentla.livejournal.com]

If you're curious, go to http://www.thetruthaboutcars.com and check out (in their Editorials archive) their lengthy "GM Deathwatch" series, which covers GM's malaise in great detail. GM is the worst of the bunch, both because they've fallen the farthest (their market share has dropped to less than one third of where it was 30 years ago) and because its leadership and board of directors still seem to have only the vaguest idea that something has gone wrong. Rick Wagoner, GM's CEO, collects vast paychecks for running the corporation into the ground -- seriously, at almost any other company, he would've been sacked two years ago. The fact that he has an indestructible golden parachute waiting for him, while demanding that the rank-and-file make endless sacrifices, makes me quite nauseous.

[sable-twilight.livejournal.com]

You know, you may have a point. Maybe I would not mind free enterprise if "major industries" were allowed to fail (like they are supposed to from time to time) instead of being bailed out by government intervention.

Of course I don't see a lot of Libertarian or Free Enterprise types, who are so in love with their capitalism, railing against this form of government interference in the market place.

[sophiaserpentia.livejournal.com]

I should think, actually, that Libertarians would be just as appalled by this as a Marxist like me. They view tax as government theft (figuratively or literally at gunpoint), and here we have an example of a wealthy few basically hiring the government to coerce taxpayers into cover their losses while for years they have been pocketing money in Switzerland and the Caribbean and wherever else they can shelter it.

[lassiter.livejournal.com]

The whole thing depends on there being many more good loans than bad, so that the losses are covered by the gains.

That's only part of the issue. Another was that it was expected and even hoped for that a certain percentage of loans would be defaulted on. Say you lend $100,000 under a "creative financing" arrangement, with balloon payments and a steep interest rate rise after 24 months. Your poorly-paid mortgagee cannot pay and the house is foreclosed on, but in the real estate bubble, that property is now worht $180,000, so the lender pockets a nice profit off of the foreclosure and subsequent flip. This is one way these seemingly risky debt packages could be promoted to the buyers as "low-risk."

The banks presumably knew that the real estate bubble would eventually burst, but they probably also knew from prior experience that when push came to shove, the Fed and the US taxpayers would pick up the pieces. As Chomsky says, profits remain private but losses are passed on to the public.

[sophiaserpentia.livejournal.com]

Say you lend $100,000 under a "creative financing" arrangement, with balloon payments and a steep interest rate rise after 24 months. Your poorly-paid mortgagee cannot pay and the house is foreclosed on, but in the real estate bubble, that property is now worht $180,000, so the lender pockets a nice profit off of the foreclosure and subsequent flip.

Ooh, yeah, that's a good point. I'd been keeping in mind that either the loan, or the house, winds up in the lenders hands. But i didn't think of foreclosures of houses that have significantly appreciated being a selling point.

Holy Christ, the rich make me sick.

[lassiter.livejournal.com]

Holy Christ, the rich make me sick.

That's a shame, 'cause that well-marbled flesh makes for some toothsome barbecue. :)

[slate-canada.livejournal.com]

I love and hate Chomsky for always saying it exactly right.

[slate-canada.livejournal.com]

It's like they're still allowed to call it "laissez faire" as long as they aren't bailing out the people who are losing their homes.

Somehow all the middlemen, realtors, mortgage brokers, appraisers and con artists have slithered away as entire nation has been sold grossly inflated real estate that they were told they would ONE DAY AFFORD.

Most of our homes are still intact in Canada as we have been less aggressive with unrealistic long term mortgage amortization periods. But our banks have suffered being tied so heavily to American paper. I think our time is coming though, we've mortgaged away an impossibly un-afforadable future for the next generation.

[sophiaserpentia.livejournal.com]

Unfortunately the whole world is gonna feel this one. The US has been financing the last decade on foreign capital, and now that it's time to pay back their debts, Uncle Sam is going to turn his cartoon-character pockets inside out to reveal them empty. He'll have a big frown on his face and shrug, and then dare the the rest of the world to sue.

[slate-canada.livejournal.com]

I've told my 'merican friends that when they are re-possessed by China, we only have ONE SPARE BEDROOM.

[liminalia.livejournal.com]

And Britain just reported a huge jump in foreclosures too.

[jimkeller.livejournal.com]

This is exactly why I wish people would stop referring to our current system as a free market system. It's not. It's always politically expedient to use our tax money to bail out the wealthy.

[liminalia.livejournal.com]

Have you heard about this book yet?
http://www.statesman.com/life/content/life/stories/books/08/03/0803galbraith.html
http://www.motherjones.com/commentary/columns/2006/05/predator_state.html
Some of Galbraith's ideas remind me of your own.

[alobar.livejournal.com]

I say bail out the banks, but then execute all high ranking bank corporate leaders, and send many of their medium-ranking underlings to prison for a decade or two. Also confiscate 100% of the assets of those executed or sent to prison to help pay for the bailout.

That would send a message to other capitalists.