The weekend before the election, I was talking to a retired university professor. We just met for the first time, and he was sharing with my wife and me how the recent collapse in stock prices would influence his retirement. I told him that things could get a lot worse. He looked at me with alarm (perhaps over his retirement and perhaps over panic that he was sitting next to a “kook”); and with that, he was not really interested in extending the conversation. He ended our conversation with a puzzled question: “Even after all they have done?”
He didn’t wait for my reply; as he uttered “even after all they have done,” he was moving away to get some food. In reflecting on his comment, we can begin to understand why for the foreseeable future, more will be “done.” The belief that our government institutions can fix our problems is still widely, almost universally, shared.
He doesn’t read my blog; but I would like to review a few of the more recent things “they have done.”
A few weeks ago the New York Times told the story of a homeowner in suburban Los Angeles who had one of those “name your own payment” home loans. Those were the loans where you didn’t even pay the interest due each month on your loan—the principal kept increasing, and the theory was that eventually rising home values would bail you and the bank out of your mutual lunacy. In any case, the homeowner now owes $350,000 on a house worth only $150,000. He has already cashed out, and presumably spent, $200,000 of his “home equity.” He has stopped paying his loan so that he can qualify for a new mortgage which will write down the $350,000 to $142,000. In the Times article, he freely admits to fraud saying, “I guess they are forcing me to deliberately stop paying to look worse than I am.”
Now, if this loan modification was a voluntary business transaction between the bank and the homeowner, I would not be writing about it. However, the Fed has infused billions of dollars into banks; and all of us will be paying the bill. Today, Citibank announced they will be spending at least $20 billion on such loan modifications; this follows in the footsteps of J.P. Morgan Chase who will be spending $70 billion. Today too came news of a massive new effort by Fannie Mae and Freddie Mac to modify the terms of millions of loans.
If you still think this is a good way to spend taxpayers money, Sandra Hamilton gives a concrete example why it is not :
Several years ago I bought a house. I had an option for the financing; I could take a rather high interest rate (for the time) that was fixed or I could put nothing down and pay nearly nothing for an adjustable rate mortgage. I decided not to gamble. I knew interest rates can and do rise. I opted to pay a lot more for my house and to have the security of a fixed rate loan. That decision cost me a lot of money over the past five years, but it was supposed to save me money when the tide turned.
Now, I am paying for that decision. I am paying for my neighbor’s house down the road who did not want to pay more at the time. I am paying so that my neighbor and yours, who took out a mortgage with no down payment and paid next to nothing for the past five years, can get his mortgage reduced with my money. How is that fair?
My next-door neighbor decided to take out a huge chunk of change by refinancing when housing prices were high. He spent nearly a hundred thousand dollars fixing up his home and buying new cars and boats. He has a lovely new kitchen and a bathroom to die for. Now he will be bailed out by the government because his house is in foreclosure. He will get a new loan, a nice low fixed rate (even lower than mine) and he will have a significant chunk of his principle reduced. Who pays for that? Me. Why? Because the government doesn’t have a dime and all money it gives to Mr. Smith it must take from Mr. Jones. (You and I are Mr. Jones in this example.)
Today’s news also told of how yesterday, Obama pressed Bush to provide massive new aid to the automobile industry. Nowhere in the stories about Obama’s request is there even a hint that Toyota, Honda, Hyundai, Subaru, and BMW are happily and profitably building cars in the United States. They are just not building their cars in Michigan with union workers or providing their executives with obscene salaries.
Please don’t let anybody tell you that the success of foreign automobile plants in the United States is on the back of the workers. Auto workers at GM earn about the same hourly salary as autoworkers do at Toyota. The big differences are in executive pay. In 2006, Toyota’s CEO, Hiroshi Okuda, earned $903,000; while GM’s Rick Wagoner earned almost $10 million dollars.
Perhaps Obama can explain—if Toyota builds a better, safer, more reliable car than GM—why should the taxpayer be forced to spend billions of dollars to subsidize Michigan’s overpaid auto executives and unionized automakers? They are no more entitled to your tax dollars than any other business who fails to satisfy your needs. Don’t expect a reporter to pose that question to Obama anytime soon.
When supermarkets replaced the corner grocery store, when Wal-Mart replaced K-Mart, when Starbucks replaced your local diner, did the economy collapse; or did it grow?
If you long for the standard of living Americans had when corner grocery stores provided much of our food, then by all means, support giving away billions of dollars to the big three automakers. If you think this is a good idea, ponder this question: If GM took out an ad in the newspapers announcing the “save the GM fund,” how many taxpayers would voluntarily write a check? When you answer that question, you will understand why GM will force the taxpayer to write a check. Let’s not call this a bailout or a rescue—this is theft, pure and simple.
One more recent thing that “they have done”—when you are forced to cut back on your holiday gift giving this year, you can be thankful that at least the bankers at Goldman Sachs will not go without. Goldman Sachs, who has already received about $9 billion in taxpayer money, plans on giving out about $11 billion in bonuses to their employees.
Indeed, after “all they have done,” we can be thankful that the American economy is as resilient as it is. Eventually, anything reaches the breaking point; even the resilient US economy will collapse after “all they have done.”