There is nothing that scares me more during this economic downturn than the tinkering by politicians with the nation’s financial system. Rep. Barney Frank and Sen. Chris Dodd covered up the Fannie Mae and Freddie Mac scandals until it was too late. Sen. Barack Obama advisors, Frank Raines and Jim Johnson, were the principles in the fraud by these two mortgage giants. And Pres. George Bush, pre-occupied with the war on terror, took his eye off the ball and let these fast buck artists get away with what every man, woman and child should know — you don’t loan money to people who can’t afford to pay it back, and you certainly don’t go out an entice them into borrowing even more. (We expect our presidents to be able to multi-task; that means Pres. Bush should be able to maintain our national security AND our economic security simultaneously.)
I don’t know of any two presidential candidates in recent memory who know less about the economy, and are more willing to “float” ideas for political gain without regard to the real economic impact, than John McCain and Barack Obama.
It wasn’t merely enough to saddle taxpayers with a $700 Billion bailout of the crooks on Wall Street. Now McCain has proposed another $350 Billion to “write down” the balance due on mortgages to the current “value” of the underlying property. Obama can, and does, top that with a myriad of handouts including a tax “reduction” to the twenty-five percent of Americans who don’t pay any taxes currently — we used to call that welfare. And as the election draws closer you can count on each of these two economic morons to continue to offer to spend more of your money to ensure the loyalty of additional voters to their cause.
But there are some basic questions you ought to be asking the politicians, particularly those running for the United States Senate and Congress:
1. Why didn’t we simply insure the payment of the “bad” loans instead of purchasing good loans and bad loans alike? This is like basic family economics. If you have a relative whose credit is poor and you are feeling compelled to assist, you can do one of two things. You can either loan the relative the money yourself and thus be deprived of the use of that money, or you can “guarantee” the loan, preserve your own nest egg and face only the “possibility” of making payments or portions of payments during rough patches for the relative.
In this instance, the government could have simply guaranteed the payment of these loans over the remainder of their lives. Some would be short lived because people would move, some would face only sporadic payments during rough patches and some would be a full default in which case you would only be faced with the difference between the value of the underlying property and the balance of the loan.
2. Is purchasing these loans the only way to pump money back into the financial institutions so that they can re-engage in their primary role — lending money? Quite frankly I’m not sure that I want someone so careless with other people’s money to be given another chance to screw up again. But you can achieve much of the same by simply changing the accounting rules so that under collateralized loans that are now “insured” by the government are removed as charges against the banks financial statement. In doing so the bank would be able to 1) issue new stock to raise capital, 2) borrow more money from the federal reserve and/or correspondent banks to provide new funds to loan, or 3) fold their tents and go quietly into the night — not a bad idea for a number of them.
3. Do we really need more regulation of the financial institutions? Quite frankly it is government regulation that lies at the heart of this problem. The Congress demanded that more loans be given to “economically depressed populations” — that’s bureaucratic double talk for people who can’t afford to pay for such loans. Absent that mandate, coupled with the greed of the Wall Street financiers in finding a way to profit from a foolish investment, we would probably have not entered the world of subprime and no-equity mortgages. We would not have had the corresponding increase in demand for housing which artificially escalated prices annually by double digit margins.
If there is actually a need for more regulation it is for more economically sound regulation and less political interference. Any such change in the regulatory environment should be accompanied by more certain prosecution of those in the private sector who violate those regulation and those in the government sector who interfere with such regulations.
4. Are the huge salaries and bonuses for senior executives necessary? I continue to be stunned by the “lions” of Wall Street who say if you remove the avaricious salaries and the outlandish bonuses for the men and women who ran these institutions into the ground that you will not be able to attract others of “their caliber.” I think that would be a good thing. I served as an officer in one of America’s largest corporations. I was paid a healthy salary and a generous bonus but the bonuses were tied to real economic performance — the kind that led to long term stable growth. It was only after the merger with Qwest that we saw the kind of games that Wall Street greed can foster and we also saw the kind of economic calamity that eventually befalls those companies who allow it to be practiced.
I won’t begrudge anyone the right to make as much money as possible. However, when you are risking someone else’s money for your reward there should be some new rules to the game. Salaries of the top ten officers of every publicly traded company should be submitted to a vote annually at the shareholders meeting. Bonuses for every officer should be “earned” based on targets for the current year but paid in stock that is non-redeemable for five years — such a requirement would ensure that targets are based upon long term strategic and economically sustainable goals rather than quarterly performance.
Each of these questions and proposals are things you would do with your own finances. But then we are always more responsible when we are dealing with our own money instead of “other people’s money (OPM).