Sunday, March 28, 2010

Bubble Trouble - Sunday Musing

My editor has been "gently reminding" me of the lack of regular updates lately. She has a point - The Hype is starting to look more barren than David Frum's blog over at AEI (BA-ZING!!). With the sincerest respect for my fellow Canadian Mr. Frum, who showed me nothing but utmost kindness in our brief correspondence years ago, I am beginning to suspect that since his adoption of the term RINO as a badge of honor, he is on a fast track to becoming a daily columnist over at the Huffpo. I don't think he's reached the level of sharing elbow space with Andrew Sullivan and David Gergen yet, but he certainly is one of the loudest cheerleaders on the sidelines of those holding the ridiculous notion that the GOP's opposition to bloated government is "outrageous", "dangerous" and "ineffective". Colin Powell may have liked the idea of a "Big Tent GOP" during his dud of a speech at the 1996 Republican National Convention, but right now the tent is filled with free market conservatives who champion the idea of limited government. Frum and Powell are welcome to squeeze into the tent, but no one is buying into their vision of a soft socialist nanny state, so they don't get dibs on the megaphone - not that the Wolf Blitzers and Chris Matthews' of the world aren't more than willing to oblige their favourite pastime of playing whack-a-mole with fellow conservatives.

Hey, remember last week when we talked about how the President created another housing bubble that's going to burst? Well the bubble is a-burstin' (again) and the Treasury is deciding where 50 billion dollars of your tax money under TARP should go. On Friday, the US Treasury announced they want to "modify" the existing plan - that's Washington speak for "take out your wallet". What the President and the Treasury want to do is so monumentally stupid it defies reason. Let me break it down for you.

In the waning years of the Clinton administration, the government decided that banks should grant home loans to people who couldn't afford them, or who had such bad credit not even my cousin Knuckles the loan shark would give them $20. Doesn't make much sense, does it? If you have bad credit and your monthly income is lower than what your monthly loan payments are, you can't afford a loan, and you're going to lose your home while the bank gets stiffed. Still with me? People like President Clinton and Congressman Barney Frank didn't seem too bothered by this, and pressured banks to hand out loans to people who didn't have the money to pay the loans back.They even pressured banks to allow people who had already defaulted on their loans a chance to renegotiate the terms of their mortgage - kind of like a do-over for grown-ups. If you don't eat things off the floor of public washrooms, you probably have trouble imagining how anyone could be so stupid. Well, never underestimate the power of government when it comes to being moronic.

The government felt that owning a home was a right - a right that banks were obliged to provide to poor people and those with bad credit. That sounds nice. Most people like the idea of a poor family having a nice roof over their heads instead of an apartment in a bad part of town. The problem is that by dangling a magic carrot in front of them, you are dooming them to financial ruin, and putting them on the road to homelessness - and that's exactly what happened. People envision fat cat banks preying on struggling low income families, but a closer examination can be very revealing. My friend and fellow blogger, the talented Ace Smith, discovered just such a case in his own backyard in June of 2008. A lady living across the street was regaling the neighbourhood with tales of the predatory bank coming to take her house. When Ace dug a little deeper, this is what he discovered:

"Two months after closing on the mortgage, she secured a $20,000 home equity line of credit on the home. A month after that, she somehow was able to get another line of credit for an additional $30,000. Based on my recollection, this is roughly around the same time she started driving a spiffy, new BMW 335. Retail price: $40,000. I also noticed several big ticket items appeared around this time, including a top-of-the-line 56” television that was clearly visible through the living room window from the street, and the delivery of various furniture and new appliances."

To top it off, during the same time, the average American household owned 13 credit cards. By October of that year, 936 439 American homes had completed forecloser, and the housing "crisis" began (I've quibbled over how much of an actual crisis this was in the past, but that's a debate for bean counters much smarter than I).

You would think that everyone would have learned their lesson by now, but you'd be wrong. What the government had once considered a fair shake for every American to own a home was now being referred to as "predatory loan practices". The same banks that had been pressured by the government to "help" the poor were now being accused of taking advantage of them. Let's ignore the fact that most of the so-called "poor" had stacks of plastic credit the size of a deck of cards and some snazzy wheels in the driveway and entertain the false notion that the banks were the sole culprits in the bubble burst. Logic would dictate that this was a bad idea, that the government had made a terrible mistake, and we should never allow banks to engage in this sort of tomfoolery again. You would think that government had learned their lesson. Again, you would be wrong.

President Obama rolled out his massive TARP scheme, thinking he could do the same thing all over again and expect different results. Despite a projected foreclosure rate of over 60%, the administration decided to throw billions of dollars of your tax money into the exact same scheme, only this time they allowed even more people to make the same mistake, and gave yet another chance to the idiots that had already screwed up under the provisions from over a decade ago the opportunity to screw up again. The gas was thrown onto the fire, and we're still smelling the smoke.

Which brings me back to the Treasury's announcement, if you're still with me and haven't surfed over to Youtube to watch "epic fail" videos - The President wants to "restructure" the TARP bailout to decide which of the 4 million Americans currently on the rocks with their mortgages (again) qualify for help. The Treasury says they're not going to give any of the 50 billion smackaroos to those who have been irresponsible, but this is the exact wording of the what the guidelines are:

"Homeowners must live in an owner occupied principal residence, have a mortgage balance less than $729,750, owe monthly mortgage payments that are not affordable (greater than 31 percent of their income) and demonstrate a financial hardship.”

That sounds like the definition of irresponsibility to me. If someone bought a 3/4 of a million dollar house, with mortgage payments equaling about a third of their income, and they can demonstrate the vague provision of having "financial hardship", everyone else (that's you, by the way) has to fork out 50 billion dollars of tax money to let some idiot keep his sweet pad. The talk about 'modification' is troubling because many suspect the Treasury intends to allow those who bought even more expensive houses and can't afford them to be able to put their snouts in the trough as well.

Hollywood likes to portray the banks as heartless scrooges and the families an inch from losing their homes as victimized saints. In the recent movie "Armored" the main character is trying to take care of his younger brother after the death of their parents, begging for double shifts from his boss and bumming rides to work to keep his no-frills home. It tugs at your heart strings, because we like to romanticize those in need as being victims of forces beyond their control. This is because Americans are good people. They see the best in everything and everyone. It's why I think the United States is so wonderful, but if you stop the movie projectors and take a closer look at reality you'll discover that the supposed "down and out" are living beyond their means, drowning in credit card debt, and buying flat screen TV's, IPOD's and big shiny trucks.

As hard as it may be, and as counter-intuitive as it is to our nature, we have to let people be idiots and suffer the consequences, or they keep on being idiots. President Obama - health care aside - is on the verge of creating another crisis, only this time he's making the people who aren't wearing dunce caps pay a stupidity tax.

No matter how hard it tries, government can't magically make the house you can't afford available to you by strong-arming the bank into giving you a loan you can't repay. The problem trickles down to responsible citizens because the money has to come from somewhere to make all this magic happen - and magic is just an illusion pulled off by a clever slight of hand.



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