Is Congress crazy?

[cos]

Problem: A lot of banks, insurance companies, and other financial institutions are in trouble, and if a bunch of them fail the economy will suffer severely. They're in trouble through a chain of stuff that starts with a lot more mortgages failing than were expected, and a bad housing market. When someone can't make their mortgage payments they may be forced to sell the house, but in a bad housing market, their house may not be worth enough anymore to pay off the mortgage by selling it, so they can't do that. Glossing over a lot of the stuff in between, and ignoring for a moment the legal changes that let this happen, that's basically where the problem begins at the moment, yes?

Now, assuming that we decide that we can't afford to let all these financial institutions fail, and assuming we decide it's worth spending several hundred billion dollars on it right now - rather than argue the merit of those two points, let's take them as a given - assuming all of that... why would Congress even consider using that money to bail out the financial institutions directly?????

We could take the same money and spend it on bailing out homeowners who can't make their mortgage payments.

We could get more bang for the buck at first pass because we wouldn't have to buy all of the "bad" debt, only enough to make it possible for each homeowner to keep on paying, perhaps with lower payments over a longer period of time. Banks would be stronger simply because all this debt would no longer be poised to fail, and confidence in the banks would recover as soon as the plan was passed, even before actual homeownwers were bailed out, because people would know that a lot of these loans would no longer fail completely, because they'd qualify for the bailout plan. Not only would we save banks, but we'd save jobs, neighborhoods, and families. By preventing mass dislocation of people we'd be saving lots of other pieces of the economy at no extra cost.

I've heard some arguments against the "moral hazard" of bailing out people who took risks that didn't work out... every single one of those arguments applies to a much greater extent to bailing out financial institutions who took vast amounts of irresponsible risk, who risked not just themselves but everyone around them, who were paid to understand finance and to know better than to do this, who lobbied for laws to make it easier for them to do this...

In what bizarre reality does it make any sense to even consider bailing out the financial institutions instead of the homeowners in trouble?

I'm going to call my members of the House and Senate and I hope you call yours.

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Comments

[mrf-arch.livejournal.com]

Are you talking about people who a priori knew that they wouldn't be able to afford their house, but wanted the thrill of buying something large

Not to mention people who a priori knew nothing, because they didn't, couldn't, or wouldn't read the fine print. Again, to the extent that there's an issue of predatory lending practices, there's a need for individual punishment of individual bad lenders, but that's also an aside to fixing the problem.

Are you talking about people who were responsible, knew their limits, and made their payments on time every month, but $BADTHING happened, and now they can't move or sell, while getting hit with an adjustment they never thought they'd have to face (due to moving before then)?

And have we historically ever bailed those people out? Traditionally, "I did my best planning but something went wrong" is what bankruptcy is for.

[hammercock.livejournal.com]

Traditionally, "I did my best planning but something went wrong" is what bankruptcy is for.

Which Congress made much more difficult a couple of years ago at the urging of Big Finance.

[mrf-arch.livejournal.com]

Absolutely. The primary pushers of the Bankruptcy act were credit-card companies and other holders of unsecured debt, rather than mortgage holders, but since both tend to live under the same roof, it doesn't actually change much. I haven't studied the 2005 bill in enough detail to know how bad it is, though my knee-jerk reaction is against it.