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

[cos]

"Companies have no personality, no humanity, and no conscience." - which is exactly why the Supreme Court's decision giving them rights as if they were "persons" is possible the worst legal precedent in our history. But it's also irrelevant to this discussion, because the "hazard" can translate easily from "moral" to "expected value". If companies expect that once they're big, they can take on irresponsible risk without actually being at risk, that encourages them to do so as long as there's short term profit in it. If they can't expect that, boards would be more likely to stop such behavior even if it's profitable.

[mrf-arch.livejournal.com]

Given that this bunch of clowns call themselves strict constructionists the right wing of the SCOTUS's pro-corporate attitude is both baffling and infuriating, particularly since several of the actual framers we dubious about the personhood of corporations precisely because of the accountability issue.

If companies expect that once they're big, they can take on irresponsible risk without actually being at risk, that encourages them to do so as long as there's short term profit in it.

This is an issue regardless of the size of the company - in smaller firms it simply occurs in the form of siphoning profits off as quickly as possible, while leaving the lenders and stockholders holding the bag if the company fails.

If they can't expect that, boards would be more likely to stop such behavior even if it's profitable.

Unlikely, at best, since the stock market is a very efficient vehicle for creating an ethical race to the bottom - if companies A and B can generate a 10% return at the risk of socializing some of the losses if they go bust, and companies C and D refuse to go there and so take less risk and generate a 5% return, who's going to be in business when it comes time to pay the paper? Probably A and B will have bought C and D outright. But that too is far afield from the original point.

[cos]

I'd expect the stock market to price in people's expectations about what would happen to a company if it failed, given enough transparency (which needs to be mandated).