The Financial Mess

Let's see what this is all about.

Say I pay cash for a house, and two years later the market has slumped, and the house isn't worth nearly as much as I paid for it.  I've lost money!  Does that mean the government should rush in and "bail me out?"  Of course not!

OK, say I'm a mortgage company, and loan money for the purchase of a house.  Two years later the market has slumped, and the loan is in default.  The security on the loan (the house) is no longer sufficient to pay off the loan.  I've lost money!  Does that mean the government should rush in and "bail me out?"  Of course not!

OK, say I'm some kind of financial institution that buys up mortgage loans.  I slap them together in a pool of assets, and use those assets to collateralize securities I sell to investors.  Two years later the housing market has slumped, too many of the loans are in default, and the houses are no longer worth enough to redeem the securities I've sold to my investors.  This reflects very poorly on my balance sheet.  I've lost money!  Does that mean the government should rush in and "bail me out?"  Of course not!

OK, say I'm an investor.  I buy some of those securities collateralized by the pool of assets including those mortgage loans.  When the housing market slumps, the loans go in default, and the houses are no longer worth enough to redeem the securities I bought.  The financial institution stops sending the payments.  I've lost money!  Does that mean the government should rush in and "bail me out?"  Of course not!

And finally, say I'm an insurance company.  I insure the securities collateralized by the pool of assets including those mortgage loans, guaranteeing payment to the investors.  Two years later, the housing market slumps, the loans go in default, and the houses are no longer worth enough to redeem the securities.  The investors are no longer getting paid.  Claims are made against the insurance I wrote.  I've lost money!  Does that mean the government should rush in and "bail me out?"  Of course not!

My point:  All of this is nothing more than smoke and mirrors.  It doesn't make any difference how complicated the transactions are.  It doesn't make any difference that the fellow who bought the house in the first place is just a poor working stiff, and the others involved are wealthy important Harvard educated MBAs.  The basic fact is the same.  They all bought high, and are having to sell low.  They all made bad deals and have lost money.

Where is it written that the USA has an obligation to make sure that everyone makes money, or at least breaks even, on their deals?  Nowhere.  Where is it written that the full faith and credit of the USA backs private business transactions?  Nowhere.  Where is it written that the USA will not allow companies to fail?  Nowhere.

This bailout scheme is nothing more than crudely disguised socialism.  In the end, there is no difference between government paying for housing, and government paying for housing market failure.  The price of the housing is being paid by the government either way.

I want a return to capitalism and the free market economy.  That is what made America strong.  That is why people all over the world dream of coming here.  The unpleasant consequences of failure is the greatest teacher.  How can we expect to maintain a strong economy and a strong country, if we reward stupidity and failure with government bailouts?  The markets will correct themselves, and the lessons learned from the housing market failure will be a source of strength in the future.  But that will not happen if the government bails us out.