and pretty soon you're spending more nationalizing companies than you are pursuing the war. according to USA Today, this year the federal government has provided $900B in "rescues and special loans".
This figure discounts the fact that now the US taxpayers are on the hook for about $4.5 trillion dollars after the government took over the liabilities of Freddie Mac and Fannie Mae. It only includes the expected expenditures to cover this years losses.
That includes the $30B we're on tap for in the bailout of Bear Stearns, where the government has loaned $30B to JP Morgan so they could buy out BS. The terms of the loan are way better than anything they could get anywhere except from the taxpayers.
The government skipped a chance to bail out Lehman brothers. Whew. But then 3 days later they basically nationalize a large insurance company buy "buying" 80% of the company for $85B dollars. In reality, what the government did was open a line of credit of $85B to the company, with 80% of the company as collateral. Of course, if the company continues downhill, the "loan" will not be paid back and the taxpayers are left owning 80% of a worthless company.
What caused this "sub-prime meltdown," which is claimed to be the root of all this market turmoil. Basically, mortgages were made to people who had no business borrowing that kind of money. The real question is why these loans were made in the first place?
It boils down to, I think, that it's easy to spend someone else's money. Banks were uneasy with easy credit and often turned down "subprime" borrowers. These are people who have a combination of factors like poor credit history, questionable income or job history, criminal records, or are borrowing more than they can comfortably repay. A subprime loan is more likely to be defaulted on by the borrower, and so carries higher interest rates.
It turns out that minorities are disproportionately represented in the subprime category. So the government, in 1988 ammended the Fair Housing Act to make it easier to claim discrimination. Since this opens banks up to what would usually be unfounded lawsuits just becuase they turned someone down for a loan (with good cause), the government at the same time offered to back these subprime loans. In other words, the goverment basically told banks "You have to give these loans out, pretty much to anyone who asks for one (especially if they're a protected minority). But don't worry, we'll buy those loans (through Freddie, Ginnie, Frannie), bundle them in lots and resell them. Of course, no one will really want to buy them since so many will default, so we'll sweeten the deal to the buyers by promising that taxpayers will make good on any losses." So the banks did what they needed to do, made the loans, and sold the paper to Fannie and friends.
And then...the banks turned around and bought the bundles right back from Fannie and friends! They weren't worthless, risky loans anymore, but had been converted into what amounted to Treasury Bonds.
But even Fannie and friends have some minimum standards, so not all these loans are in their hands. While all this was going on the Federal Reserve Bank had cut interest rates to the bone to stimulate the economy, while housing values were rapidly increasing. This allowed banks to justify making riskier loans by selling adjustable rate mortgages, 100% or even %110 financing, interest-only loans, etc. While these loans sometime make sense, they were also sometimes marketed to people as a way for them to get into a house when nothing else worked. That is, here's a loan that requires little or no down payment, minimum payments (at least in the short term), and if 3 or 5 years down the road you can't make payments (like the 3 or 5 year balloon payment, or if rates adjust upward sharply), the worst that is likely to happen is that you have to sell the house, pay back the loan, and pocket your profit -- the house will have appreciated by a lot in the meantime.
This had all the makings of a bubble waiting to burst. And it did. With inflation now becoming a problem, the Fed started to raise rates, which triggered ARMs to adjust rates upwards. With higher cost of borrowing, fewer people could get mortgages (and those high-risk loans dried up, since they didn't make much sens anymore). Fewer buyers means a downturn in housing values. Some people couldn't pay, and when they found out that their house was worth less than what they owed, badness ensued.
Now taxpayers are having to pick up the pieces of a problem that was, in large part, a direct result of the government interfering in the mortgage marketplace. Mortgages are essentially a commodity. The mortgage market simply needed regulation for real nondiscriminatory lending practices: banks must be able to demonstrate a risk-assessment based strictly on objective measures to justify a decision to grant or reject a loan or setting interest rates (as a commodity, there's not really much need to make subjective decisions) . They could require truthfulness and transparency, by regulating disclosure requirements (standard forms with standard content). Instead the government effectively became the nation's mortgage company.
It's not surprising that we're where we are.
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