Monday, September 29, 2008

Bailouts Vs. The Old-Fashioned Way

Last night I happened to catch radio talk show host, David Ramsey, as a guest on a new talk show on the FOX TV news channel, hosted by Mike Huckabee.

Dave Ramsey has a nationally syndicated radio talk show that probably ranks within the top 20 nationwide. I occasionally listened to his show while driving across the country. His theme is always the same. The slogan of his show is "Around here, the paid home mortgage has taken the place of the BMW as the status symbol of choice". Ramsey is a practicing Christian who has a talk show about personal finance. Ramsey believes that everyone should make being "debt free" their financial goal. Of course this is completely contradictory to most popular wisdom in the financial and political world. He encourages listeners to pay off all of their debts, including home loans, car loans, student loans, credit cards, etc. During each program I have listened to, several callers proudly proclaim that they are now totally debt free. Often these callers are of modest income. They explain how they achieved this goal over a period of years while paying off their various creditors, and are now living in a home that is totally paid off, drive an automobile that belongs to them with no lien-holders, have education accounts for their children and retirement accounts for themselves.

In many ways, Dave Ramsey's advice is similar to the way previous generations of Americans have led their financial lives. Dave often recommends that people sell their luxury cars privately (not as a trade in to a dealer) and purchase an economy car in it's place. Often when people are stuck with one or more homes that they can not afford, he recommends that they forget about the cheese and "get out of the trap". He tells them that they have now become motivated sellers and they must sell immediately, even if it is at a loss. Ramsey recommends that families write out a budget for the following month so that they know where each and every dollar will go. If something is not on the list, they simply can not afford it that month. He recommends a 10,000 dollar emergency fund, should unexpected emergencies arise. If a decline in income should occur during a month, the list should be written with priorities on top, such as food, rent, gasoline, etc., sometimes circumstances call for low priority items to be sacrificed. Ramsey's followers are happy, content and enjoy all of the luxuries of the 21st century, however, they have learned to live within their means and become debt-free.

If you compare Ramsey's tried and true recommendations, with the way the our federal government does business, you will see a stark contrast. Ramsey's recommendation is to maintain the prosperity of our nation by putting the government's financial house in order. First we must drastically cut the size of government by listing our priorities in order of the most important, and only fund what we can afford as a nation each year. He also recommends that we pay off the national debt, and that we encourage business investment by eliminating capitol gains taxes. We should let the markets self-correct themselves without government intervention. This will leave the strongest institutions standing and will eliminate businesses that have become burdensome and corrupt. This will also clear the financial dead wood out of the economic forest and make room for new, young, vibrant and effective new players. On the other hand, to prop up what has already proven to be a failure, will leave no room in the market for the necessary changes, improvements and growth to take place.

Everything that the federal government is recommending with their 700 billion dollar bail-out program will exacerbate the financial difficulties that we find ourselves in today. A bailout will reward all of the players who have caused this economic downturn, including the politicians.

The politicians unwittingly encouraged the current downturn in financial markets with the Community Reinvestment Act, so called "Fair Lending Laws", and other well intentioned but misguided programs. The government and community activist organizations, pressured banks to give mortgages to people who had no down payment and who could not afford to make the payments. Politicians did this in an effort to make home ownership possible for all Americans. Unfortunately, in the booming economy of the 90's, the reasons why many people could not afford to own their own homes, was usually due to lack of income, lack of discipline or lack of a sound economic plan. Either way, the Community Reinvestment Act did not address these concerns and was doomed for failure from it's very inception.

However, banks were encouraged to make many loans that were not likely to be paid back. The government offered banks incentives for lending to poor people and minorities. The banks were protected against loss from risky loans, because two investment banks were chartered by the government, that would buy these loans from private banks. These government chartered investment banks were called Fannie May and Freddie Mac. It was understood from the start that the government would not allow these institutions to fail.

This made the entire mortgage industry ripe for corruption, because the risk was taken out of the free market, because it was understood that Fanny May and Freddie Mac would not be allowed to fail. "Risk vs. reward" is the foundation of our capitalist system. When risk was removed by Fannie May and Freddie Mac buying up theses risky mortgages, providing government bail-outs and not allowing certain critical businesses to fail, the entire economic system became corrupted. This is where we stand now.

In 1995 and 1999 laws were changed that permitted investment banks to purchase mortgage backed securities on margin, with a very small cash reserve. This encouraged speculation in the real estate market. Also, many families who did not qualify for mortgages in the past, were now qualified, thus the demand for housing rose sharply. Home prices rose sharply as a result of increased the demand, and speculation. As long as real estate prices were rising, everyone was making money. However, since investment banks were so highly leveraged, a small drop in real estate prices would wipe out all of their equity. Common sense dictates: "what goes up, must come down", and that is exactly what happened.

The laws that they changed, that now allows small cash reserves, were originally enacted in 1930, in order to protect against future devastating stock market crashes. If the definition of insanity is: "making the same mistake and expecting different results", our lawmakers are truly insane.

The government has already bailed out Fannie May and Freddie Mac to the tune of 300 billion dollars. This in itself is corrupting to our economic system. If the government guarantees additional mortgage backed securities, to the tune of 700 billion dollars in the pending bail-out, we will no longer be a capitalist society. The government will have ownership and control over much of our financial industry. Centralized government control of industry has never worked over the long run. This is what led to the fall of the Soviet Union and caused poverty in Cuba, North Korea, China and other communist nations.

This bail-out plan is nothing more than politicians trying to maintain their power and stave off investigations, when what is needed is a correction in government and the financial industry. Our entire group of lawmakers in Washington has become so misguided by their own self-interest, that they can no longer govern effectively. They feel that it is in their own self-interest to gin up a financial emergency, that was years in the making, a month before a presidential election. If passed, this bail-out, will only buy some time before a more serious consequences will take hold. This plan only offers more of the same policies that created this economic turmoil in the first place. Since our federal government is operating at a deficit, they will either have to borrow or print over a trillion dollars to pay for this bail-out. This is sure to have unintended negative consequences.

Politicians are using emotion to sell their bail-out plan. They are forecasting unprecedented worldwide economic failure if they don't get their plan passed this week. This is the most blatant example of fear-mongering that I have ever witnessed. I am suspect of anyone who pressures me to buy now, or else it will be too late. Common sense and experience tells me that a bill that calls for 700 billion in spending, should not be rushed through the Congress in one week. They are also ginning up angst against executives of troubled firms for their high level compensation. Executive pay packages had nothing to do with the predicament that we find ourselves in today, yet the media and the politicians spend much time chastising these executives for high pay, bonuses and golden parachutes. They are using jealous emotions in order to sway the public's opinion, while keeping our attention diverted from the actual reasons why our financial systems are in turmoil.

The current meltdown in our financial institutions is the direct result of the unintended consequences of liberal social engineering policies, the inevitable corruption that followed and the gutless inaction of intimidated conservatives.

Conservative radio talk show hosts have varying opinions on what to do about the current meltdown of the financial markets. However, they all seem to agree on how we ended up in this predicament in the first place. I found an excellent music video which sums up the conservative prospective about how we arrived at this place. This video has few spoken words. It is mostly printed words and newspaper articles flashed on the screen that describe the history that led to the current financial mess in our banking industry. Rock and roll music is played in the background. The name of the video is "Burning Down the House".

This video names only Democrats as culprits, and describes how some republicans tried to bring about reform, but failed. Of course, I think that this video is overly one-sided politically. Republicans too, were obviously complicit in allowing this to happen. Republicans controlled the House, Senate and the Presidency between 2000 and 2006. I'm sure that some republicans were also corrupt, and many other republicans have been intimidated into silence. As I have written in previous articles, the left often uses intimidation and demonetization to stifle opposing views. In this case, politicians who called for reform and investigation, were labeled as heartless bigots and racists who cared only about the rich banks and not the poor people. To fight the Democrats on this issue would have been political suicide. In a society that places emotion above reason, I see no other outcome possible.

In my opinion, the only plan that will see us through this economic and moral crisis, is the one that Dave Ramsey recommends. It is unlikely that Ramsey's plan will be considered because it requires sacrifice, self-discipline, courage, and patience. Although these spiritual principles are what made our country great, I'm afraid that they are no longer revered in today's America.

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