June 30, 2008
Dean Baker
The Guardian Unlimited, June 30, 2008
See this article on original website
Loan guarantees will help the bankers responsible for the housing crisis, not the homeowners suffering from it.
It now looks as though Congress will pass a housing bailout bill that will provide $300bn worth of loan guarantees. The main beneficiaries will be incompetent bankers, who issued mortgages during the housing bubble that are now going bad by the bucket. The government will save these bankers billions by guaranteeing new loans that will pay off the existing loans at considerably above their market value.
Congress is running to the rescue of the bankers because, unlike autoworkers or textile workers, bankers have real power. When an autoworker or textile worker faces the prospect of losing their job, their house, the ability to put their kids through school, the politicians will feel their pain. They might even give a few good speeches. But they will not put out policies that will actually help US workers keep good-paying jobs.
The economists and people who imagine themselves to be economically literate will tell you that the basic story is that there is nothing that can be done. In a globalised economy, there simply is no place for the sort of high-paying jobs in manufacturing that tens of millions of middle-class workers held in decades past. The best policies they can produce are temporary adjustment assistance or other measures that can help acclimate these workers and their families to a lower standard of living.
So when it comes to workers’ pain, we are told that there really is nothing that can be done. What about the pain of incompetent bankers? Well, we can’t let incompetent bankers suffer. Congress, the president and the Fed will move heaven and earth to make sure that the bankers are not allowed to sink just because of their bad business decisions.
That was why Fed chairman Ben Bernanke was so quick to tell the creditors of the major investment banks not to worry that that Lehman Brothers or Citigroup might be following Bear Stearns in going belly up. He promised that the Fed would throw out as much money as was necessary to make them whole. There was little concern for moral hazard or the incredible waste of taxpayer money to bail out the extremely rich. (Guarantees are real money – if anyone ever tells you otherwise, ask them to sign a guarantee note for your mortgage or student loan.)
The guarantees, plus the below market loans from the Fed’s discount window, was just round one. Round two is the bailout package that is about to pass Congress. This bill is being sold as a bailout of homeowners. The big problem with that story is that the government guaranteed checks go to banks, not homeowners. Furthermore, the banks get to decide which loans get placed in the programme.
This is simple Econ 101. Banks are sitting on several hundred billions of dollars of really bad loans. They can go through with the foreclosure process, but this is costly. In addition, house prices have fallen so much, and the market is so glutted in many areas, that they will get be able to recover relatively little of the original value of their mortgage through foreclosure.
So, along comes Congress with a big bag of taxpayer money and offers to guarantee new mortgages that will allow the banks to recover a much larger share of the original value of their mortgage. Who knows, with an exaggerated appraisal (ever hear of exaggerated appraisals?), they may even be able to recover most of their money.
Of course Congress sells this as a bailout of homeowners. And we all know homeownership is the American Dream, so anyone who raises questions must be some sort of al-Qaida loving communist.
OK, no one expects politicians to have any backbone, but where are the economists? These are the folks who get apoplectic about a 20% tariff on steel imports. Why are they so quiet about the much larger waste associated with this bailout?
The bottom line is that economists can be every bit as corrupt as politicians. They are happy to use their arguments about economic efficiency to beat down uppity autoworkers or textile workers, but when the gainers from inefficiency are the rich and powerful – like bankers (or the pharmaceutical and health insurance industries) – don’t look for economists to be making arguments about economic efficiency. In such cases, the economists are happy to just salute the cult of home ownership and then go out and look for some union to beat up.
In short, the next time an economist whines about the threat of some form of protection that is designed to help ordinary workers, it would be worth asking where they were during the bank bailouts of 2008. If they weren’t yelling at the top of their lungs, then their objections are based in their desire to aid the rich and powerful, not any genuine concern with economic efficiency.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, “Beat the Press,” where he discusses the media’s coverage of economic issues. You can find it at the American Prospect’s web site.
