Looting the Responsibleby
Kevin Duffy "I hope the titans of finance who expect us little people to save them are ashamed of themselves. But at the same time, in painting Main Street solely as a victim of a rapacious Wall Street, we are being hypocritical. We are all to blame." ~ Bethany McLean, "The Borrowers," The New York Times, October 2, 2008 In a sense, the former Fortune investigative reporter of Enron whistleblower fame has a point. It takes two to tango. The borrower was a willing dance partner to the lender’s lead. As the music kept playing, the dance floor became crowded and unruly. Many felt the party would never end. Some, like Citigroup’s Chuck Prince, thought they could quietly sneak out the back door before the cops arrived. Others – soccer moms, retirees, and avid readers of LewRockwell.com – knew better and dropped their invitations in the shredder. A significant portion of the population acted responsibly. We wrote about this dichotomy in June, 2006, less than a year after the housing boom peaked:
At the time, we reported 29% of the mortgages taken on in 2005 were already underwater. Housing costs consumed over half the income of 16% of those with mortgages, up from just 2% five years earlier. What we failed to mention were that roughly half of all mortgages fell within long-held standard payment limits of 30% of gross income and that 18% of all homes were owned outright. Scratch the surface and you’ll find plenty of people who resisted temptation during the bubble years and lived within their means. My sister and her husband who live in Harrisburg, Pennsylvania occupy the same home they bought in 1991. In 1998 they refinanced at a lower interest rate and increased their mortgage to pay for a significant extension of their house (my brother-in-law actually did most of the work). After the home improvement loan, their loan-to-value went up to approximately 55%. At the time their mortgage was about 14% of total gross income, 16% with taxes. The bubble from 2001 to 2006 largely passed them by. They failed to get the memo about using their house as an ATM, choosing instead to save before making major purchases (e.g., they began saving two years for a recent trip to Wyoming). They have no credit card debt. Today they have four years remaining on their mortgage. Total payments are 13% of gross income and their current LTV is about 15%. This is not to say my sister and her family will not suffer from the madness of others the last seven years. Her husband works for a specialty paper company which outsourced two-thirds of the local jobs to South Carolina a few years ago. The current hangover from our housing, credit, and consumption bender does not exactly help his job security. My sister’s family is also being forced to help bear the costs of a $1 trillion 5-year war, some of which shows up at the grocery store and gas pump. Now they’re being asked to pick up the tab for a party they never attended, with the cleanup bill already over $1 trillion. As you might expect, they are not exactly pleased by this prospect. Government
has no resources of its own, no elves working overtime to produce
something of value, just promoters who espouse Santa Clause economics.
It can only transfer wealth from one group to another (skimming
a nominal transaction fee in the process). The current Expect such a massive wealth transfer at the hands of the political class to be means tested. Those who were reckless, but friendless in Washington and have already paid a heavy price for their sins will go to the back of the soup line. Paulson’s checkbook will not be used to help Joe Sixpack who got in a little over his head or save Lehman Brothers shareholders who bled to death before the triage unit showed up. It will be closed to smaller banks not privy to high-level discussions about which Fannie Mae creditors the government would bail out and are now stuck with worthless preferred stock. What will Paulson likely tell pension funds holding the very same toxic paper as his "too big to fail" banking cronies? Take a number.
October 8, 2008 Kevin Duffy [send him mail] is a principal of Bearing Asset Management. Copyright © 2008 LewRockwell.com
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Stripped
of its lofty promises, the Emergency Economic Stabilization Act
of 2008 will not backstop your 401(k), encourage lenders to crawl
out of their bunker, resuscitate an economy on life support, or
turn a profit for the hapless taxpayer. Its primary mission in life
is to rescue "the Chosen Ones" – Goldman Sachs, Morgan
Stanley, Citigroup, Bank of America, and JPMorgan Chase. The early
returns are promising. On Thursday, September 18, the financial
establishment was coming unhinged. By early afternoon the combined
market values of the five companies had shriveled to $360 billion.
That night DC's power brokers – Paulson, Bernanke, Cox, Pelosi,
Frank, et al. – concocted their shameless scheme. As of last Friday’s
close, the Chosen Ones tacked on $137 billion in market value for
a 38% gain while the rest of the market, as measured by the Dow
Jones Wilshire 5000 Index, lost $634 billion, or 5.6%. 