The current US banking crisis was inevitable, predictable, and completely avoidable. It occurred as a result of the timeless alliance between greed and stupidity. Anyone with two brain cells to rub together could have (should have) anticipated it. And now that it has happened, we must not allow our government to use tax payer dollars for a bailout. The very fact that the bailout is being pushed by the Bush Administration whose tacit support helped create this mess should be sufficient grounds to disqualify it. Let's take a quick look at the principal actors in this farce:
These are all the people who refinanced their homes again and again, converting every penny of equity first into cash, then into frivolous purchases; squandering it all so that when their low interest teaser rates finally adjusted, they had no money left to pay the mortgage. They acted on the assumption that housing prices would climb forever, allowing them to perpetuate this scheme indefinitely. That these people have lost their homes causes me no remorse. I am perfectly content with the thought that they will be renting for a while while they contemplate the lunacy of their actions. And I have no patience for the argument that they were exploited by Greedy Mortgage Brokers who duped them with predatory loan practices. The sole prerequisite for home ownership should be sufficient intelligence to understand the associated risks and obligations (or a willingness to learn). My opinion of the general public is too high for me to accept that the vast majority of people who lost their homes lacked the capacity to comprehend the outcome of their actions.
These are the people, primarily executives in banks and investment companies, who concocted the scheme that resulted in this mess. Commonly referred to as "Mortgage Backed Securities," a more apropos name might have been "Legally Sanctioned Larceny." The scam goes something like this --
Step 1: Issue a low interest home loan requiring little or no down payment to a "home-squatter" (calling them "home-owners" is inaccurate as they have no equity in the home and nothing to lose).
Step 2: Sell this loan (or more aptly, the future revenue stream from monthly payments made by the home-squatter) to another greedy company who sees this as a viable investment vehicle and has probably borrowed the money themselves to finance the purchase.
Step 3: Repeat this process several million times while financial institutions pad their balance sheets, executives applaud their creativity, and everyone prays that housing prices will continue to rise long enough for them to bank obscene profits.
Step 4: Teaser rates expire and monthly mortgage payments go through the roof.
Step 5: Home-squatters cannot afford exorbitant monthly mortgage payments and funding has dried up so re-financing is no longer an option.
Step 6: The whole cobbled-together mess comes crashing down.
Step 7: Congress, the Treasury Department, and the Federal Reserve Bank, complicit through their unwillingness to regulate the madness, shamelessly engage in fear-mongering to convince us to allow them to pick our pockets to the tune of $700 billion dollars in order to save the same institutions that perpetrated this fraud. And they want to do it FAST before anyone catches on.
Step 8: The same executives who banked millions on the way up will now be paid handsomely once again to clean up the mess they created.
Sound familiar? It should; it has become the American Way.
A bailout in this situation is unconscionable. Does the government bail you out when you do something greedy or stupid? I don't think so. Working our way out of the messes we create can take years, but it is called learning a lesson. The only funds that should be made available to these companies are loans that can be paid back with interest. One thing we know for sure, they understand loans.
CONVERT EXECUTIVE PAY TO LOANS
Before granting a loan to a failing financial institution, every executive who benefited from this scheme while working for that institution should have ALL excess compensation (salary, bonuses, and incentives) that they earned during this period converted to personally guaranteed loans to be paid back with interest. We should condone no default or bankruptcy; failure to make payments should result in garnishment of future earnings.
These individuals must be held accountable for their actions. And what better way to do it than with the very same weapons (namely loans) that they wielded against the public? This should apply both to executives who still work for the company and those who have since left. No one should be allowed to shirk responsibility or escape blame.
The only repercussion currently under discusion is to deny such executives future bonuses. This is exactly the wrong action. They must be allowed to earn incentives but only when they effectively resolve the crisis. Denying them a bonus will only produce one of following unwanted outcomes:
- Experienced executives who understand the inner workings of this mess will leave because they have nothing to gain.
- It will be impossible to find replacement executives because no one will participate without a meaningful up-side.
- Who ever is involved will have no motivation to clean up the mess.
Instead, let's give the original executive a way to earn the money s/he will need to pay back what they stole while driving their company into the ground.
TIME TO RE-REGULATE
Experience has repeatedly shown that inadequate regulation leads to excesses and abuses. How many more catastrophes can our beleaguered economy sustain before it finally collapses? Any system that encourages an unholy alliance between the greedy and the stupid is ultimately doomed. The only question is, do the rest of us have the resolve to act? Only time will tell. But if I had to guess, Congress will approve the bailout and every man, woman and child in America will be left holding the bag. The slogan for the last depression was "a chicken in every pot." This time around it will be "a mortgage in every pocket."