Fix It First

I know that it is easy to criticize what Obama and Congress are doing to try to recover jobs and value in the economy, so today I am here to make a suggestion: before you throw another $1T into the economy. fix the problems that got us here!

As I recall, things started to head south as real estate prices fell. Lots of people, including most of Congress, regulators, banks, insurance companies, etc. thought that housing prices would never go down. Massive financial instruments were developed based on this one assumption. They were all wrong. We can’t fix the fact that real estate prices fell, but we can fix the institutions that collapsed because of it. Before we go try to fix the entire economy, let’s fix the government and its regulatory institutions. More regulations? No, Just fix what we have. If you don’t fix it, it is still broken.

Let’s start with the institution designed specifically to let the government interfere/regulate home mortgages, Fannie Mae and her cousin Freddy Mac. I haven’t heard one word about the “New Fannie Mae” because there is no new Fannie Mae. Is Fannie Mae operating the same way it did 4 years ago? I don’t know but I would guess yes, since I haven’t heard anything to the contrary. Will Fannie Mae still underwrite loans to people that everyone knows will never be able to pay them back. Probably. Banks aren’t loaning the money now, but if they did, I’m sure Fannie Mae would rubber stamp the transaction.

Then we have $70T in default credit swaps, a secret system of alliances designed to spread the risk. These financial instruments remind me of pre World War I Europe, where the risk of one country gaining military domination over all others was spread with a complex and often secret set of alliances and mutual support treaties. One Serbian kills one Austrian and before you know it everyone is fighting everyone. Four years later half of Europe is in such a deep depression that a wheelbarrow full of cash isn’t enough to buy a loaf of bread. Default credit swaps should be illegal.

Next we have new accounting rules for valuing homes and real estate. The rules were updated a few years ago, an act to increase transparency, to force banks to value property at resale value instead of book value. Like most rules with good intentions, this rule turned a bad real-estate market into bankrupt banks and insurance companies. Maybe not the best regulation.

There are also those quasi-regulators who misrated the risk in commoditized mortgages. Business as usual there too. These so called independent evaluators of risk are not so independent since the company doing the assessment profits more or less by the assessment they give. I think this is called corruption.

Until all these problems are fixed, who would invest in this known broken system? Who would trust that a seamingly strong company might, the day after you put in your life saving, go belly up because a bank on the other side of the country made one too many bad loans?

The public is smarter than Obama or the Congress. We don’t want to throw our good money after bad. But the government knows better and is going to spend our money, whether we like it or not, on the same of things that got us here in the first place. More than half of the “stimulus” bill gives money to programs and people that “need” the money. Why do they need it? For the most part, because they didn’t manage their money well. This goes for bank CEOs, for state governments, and for the chronically unemployed. I would give a break to those people that are recently unemployed due to the failures of their management, but for others, sometimes it is better to fail and let someone else figure out how to succeed than to stay in power and repeat your failure.

We tried the money giveaway thing nine months ago and that predicably went nowhere. Most of that money went into our gas tanks. Now we are trying it again. What is it that Einstein said about insanity? it is doing the same thing over and over and expecting a different result.

One Response to “Fix It First”

  1. Akfortysevener Says:

    Let me sing this song:

    Zero Bama, oh Allah Bama
    Our prez iz GR8
    Kumba-kumba-kumba-yah
    Kumba-ya-oh-ya

    Don’t ever say anything bad about Barrak, because he cares and he can and he will do and we will prosper one more time again. One more.

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