There are rumors (and only rumors at this point, mind you) that President Obama may order federally-controlled mortgage giants Fannie Mae and Freddie Mac to blanketly forgive debt owed by millions of Americans. Let me tell you why this could be a terrible idea.
How familiar are you with physics? Physics tells us that matter and energy can neither be created nor destroyed, but only altered or transfered. That's why when you burn something you get smoke and ashes.
The same principle applies to debt, unfortunately. We learned this two years ago when all of the so-called "toxic assets" (the debt owed by all the homeowners who bought homes they couldn't afford with the help of sub-prime loans) started making their way up the mortgage food chain. Every lender who was pressured by the federal government into loaning money to people whom they knew couldn't repay (for the sake of "everyone owning a home") eventually had to deal with the fall off in revenue that comes from throwing your money out a window. The lenders in turn soon couldn't pay off their own debt, which was bought by even larger banks and lenders up the ladder until it eventually reached Fannie and Freddie, which is what lead to the TARP program of '08 (leaving an unmistakable trail of smoke and ashes in its wake).
Now, where did all those "troubled assets" go at that point? Right onto the taxpayers' backs. We're now saddled with paying off all that debt that began to accrue when the government originally told banks and lenders to ignore the fact that their customers likely would never be able to pay off their debt. Now, the government is about to do it again (reportedly). Fannie and Freddie are practically owned by the government, which is why the President feels he can order them to do this and that. However, the debt he wants them to "forgive" won't just disappear; it'll return to sit right back on our shoulders once again.
Aside from shifting "toxic" debt around like leaves on the lawn being a bad (and impractical) idea, what is the point in "forgiving" debt? It's a bailout for the little guy, of course; the one "main street" has been seeking ever since Wall Street got theirs. But if Wall Street didn't deserve one (remember all those cries of "Hey, it's their own fault for mismanaging their finances in the first place"), then why do people who bought houses they couldn't afford deserve one?
What's the alternative, you ask? First is the government recognizing the mistakes it has made, namely in sponsoring enterprises such as Fannie and Freddie and in pressuring lenders to provide subprime mortgages. To regain credibility with the American people (almost impossible to do in any election year), the federal government, President Obama in particular, needs to say "the buck stops here"; which, not incidentally, is where the toxic assets were "supposed" to have stopped.
Second, the government needs to divest itself of its ownership/stewardship of and finanical stake in private sector entities and enterprises; not just Fannie and Freddie, but also of General Motors and any other private company that may have received public funds. It must further close its doors to any and all businesses that may seek a "bailout" in the future.
Noted financial and policy experts Donald Marron and Phillip Swagel last May proposed several measures for "ensuring liquidity for housing [while addressing] the critical need to protect taxpayers and the financial system from the systemic risks posed" by the model the government uses in the case of entities like Fannie and Freddie. Regulation and backing for mortgage finances would still exist, but it would gradually phase out federal involvement in the operation of the companies, making them completely private enterprises subject to free market competition. I encourage anyone to read their proposal in its entirety.
Now, what does that mean for all those currently saddled with more housing debt than their homes are worth? Shouldn't they still receive aid? Yes; but not a "bailout". Provisions should be made to rehabilitate their finances and reduce their debt, but the argument that the 80% homeowners who aren't "under water" should foot the bill for the 20% who are runs completely contrary to both Democrat and Republican philosophies. After all, haven't Democrats spent the last year arguing that those with health insurance shouldn't have to cover emergency room costs for those without it? And isn't the same argument used by Republicans to show that taxpayers shouldn't have to fund universal healthcare coverage for those who can't afford to purchase it? It's a bit of a paradox, I know, but that's politics for you.
This whole situation began when the government started telling banks and lenders how to do business; let's not have it continue with that.
Update 08 August 2010:
Well, it remains a rumor (for now). The Treasury Department insists they're not considering what could be called a massive redistribution of wealth in the name of "forgiveness".
I used to have a friend who would always ask me for a couple of bucks so she could get something to eat, and she would always promise to pay me back. I always told her that it wasn’t necessary, since it was just a couple of bucks. Over time, though, it started to add up. One day, we learned that a hurricane was coming, and she needed some “real money” so she and her friend could leave town until it all blew over, so to speak. I gave her forty bucks, but I told her this wasn’t like the other times, and that until she paid back the forty bucks, I wouldn’t give her any more money, no matter how little. She never paid back the forty bucks, and I never gave her any more.
Governments have a responsibility to not waste taxpayer money. Every penny they spend, they spend in our name, and it is all supposed to benefit the country and its citizens. With welfare, President Clinton worked with Congress to ensure that people on welfare would someday return to the workforce, which would benefit all of us in the long run. That’s an example of responsible stewardship of taxpayer money. The TARP program is supposed to be another, although it still hasn’t been repaid and the government has accepted stock in some banks and businesses in lieu of repayment.
As far as mortgage “bailouts”, that’s simply complete irresponsibility. I would never have been able to “make” my friend repay the forty bucks; all I could do was what I said, to never give her anything else. The government, on the other hand, continues to give (our money) to people who will never be made to repay. These people received loans they would never be able to repay, bought homes they could never afford, all with the government's approval and over the business community's objections, and now that the margin call has been issued, so to speak, it seems that the government's solution is to let the lenders take it on the chin (again); which means, since the government is the one financially backing these lenders, we're the ones who take it on the chin (again).
I certainly hope this just remains a rumor.
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