The Financial Crisis Pt. 2

Yesterday I gave a couple ideas for why America is in a financial crisis. This was on the heels of Wednesday night when we (finally) heard from President Bush who acknowledges the problem by saying,

For more than a decade, a massive amount of money flowed into the United States from investors abroad. This large influx of money… made it easier for Americans to get credit… there were also some serious negative consequences, particularly in the housing market. Easy credit — combined with the faulty assumption that home values would continue to rise — led to excesses and bad decisions… Optimism about housing values also led to a boom in home construction. Eventually the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell. And this created a problem: Borrowers with adjustable rate mortgages who had been planning to sell or refinance their homes at a higher price were stuck with homes worth less than expected — along with mortgage payments they could not afford. As a result, many mortgage holders began to default.”

Basically, the housing market was overinflated; it crashed, and took everything with it. Bush then goes on to outline a plan.

Under our proposal, the federal government would put up to $700 billion taxpayer dollars on the line to purchase troubled assets that are clogging the financial system… markets have lost confidence in mortgage-backed securities, their prices have dropped sharply. Yet the value of many of these assets will likely be higher than their current price, because the vast majority of Americans will ultimately pay off their mortgages. The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal… as these assets are sold… we expect that much, if not all, of the tax dollars we invest will be paid back.”

The way I read it, the government will buy houses that are currently in trouble. Because he is not specific, I don’t know how they will really put the money back in the economy. My vote is to give taxpayers the money directly. Anyone with a bad mortgage can pay down their debt, others can buy a home, the rest of us buy like there’s no tomorrow and prop up the economy.

My economic stimulus round two is silly, but buying houses seems like a good solution. That way Wall Street is not directly helped; instead, consumers are bailed out and the entire system benefits. I’d rather the government control a collection of houses than a few corporations. The government could do a lot of good things with houses or whole neighborhoods:

  • use the homes as government offices,
  • sell homes to consumers for the amount of back taxes due
  • give homes to veterans
  • subsidize housing for teachers
  • make a block into a military base

I am curious to see how the proposed plan will unfold. Ultimately, I think America needs a greater sense of personal responsibility and disincentives for failure. We all bought the bad debt that we did not understand, so we are all in this together. Companies that are in trouble should face the reaper instead of being bailed out.

I have to wonder, if our companies are too large for the government to let them fail, who will save our mammoth government when it fails?