More on Goverment Intervention in the Financial Crisis

I definitely don't claim to be a financial genius or know exactly how economics works. However by reading knowledgeable writers and looking at numbers I can sometimes figure out how things may turn out.

I figured that the housing bubble would eventually burst, values would fall some and then stabilize. I had no clue about the fall out of the subprime market. It's just amazing how greedy and incredibly stupid lenders were now that the numbers are coming to light.

From this email from John Mauldin's weekly e-letter, it only gets uglier. Besides the subprime lending practices, there was a practice called Alt-A mortgages. These were mortgages made for borrowers who either couldn't document their income or for some reason chose not to. How bad are these mortgages? To quote Mauldin's e-letter directly:

"Around 3 million US borrowers have Alt-A mortgages totaling $1 trillion, compared with $855 billion of subprime loans outstanding. $400 billion of that was sold in 2006. Almost 16% of securitized Alt-A loans issued since January 2006 are at least 60 days late."

It's mind boggling. Bankers and lenders were willing to loan out $1 trillion without any clue of the borrower's income or if the loan could ever be repaid. I just don't understand the thinking. How do you gamble a major portion of your business without having any clue if the client will ever be able to pay for the product?

This reminds me of a story. My best friend's brother asked me if he could borrow my credit card. He'd give me a security deposit if I allowed him to use it. I said no right off the bat. I would be crazy to lend anyone my credit card but even nuttier for lending it to my friend's brother. He had a low paying job, a history of quitting jobs abruptly and I suspect a drug habit. This is definitely not someone to lend money to and ever expect to see it back. I view the lending practices of the financial institutions along the same lines. They lent money to my best friend's brother and now he's unable to repay. They didn't bother checking his job history or his current income. They just said,"Sure, how much do you need? Okay, sign here and you are good to go."

The worse part is that the government is stepping in and starting to save some of the bad loans and bad businesses. Now we the taxpayer are on the hook for these bad practices.

I hate for anyone to lose their house or job but on the other hand I don't want to be on hook for their bad decisions. Some lied about income, some chose not to disclose income and some were never asked about their income. They got in way over their heads and now can't get out of debt. I'm sorry but I nor should any taxpayer be expected to bail them out.

The same applies to the lenders. The didn't enquire about income nor did they stick to previous criteria for creating mortgages. They just went with the flow and sign off on just about anyone who walked into the door. Now they will likely never see the money they lent out and now again us taxpayers are on the hook for some of these decisions.

I honestly think that the whole thing should be allowed to collapse and wash out all the bad decisions. Will the economy suffer? You damned right it will but that's the nature of the capital markets. Will the economy collapse? No. The American economy is strong enough to withstand such a shock to the system. The economy is diversified enough to pass through this eventually. Enough damage will be done though to make financial institutions think twice about ever doing these bad practices again.

As a free market capitalist, I hate any type of government intervention in the markets. I definitely don't like the government putting taxpayer money on the line to bail out bad decisions. Unfortunately I think Congress will need to enact laws and regulations limiting or defining how financial institutions make their mortgage decisions. They also need to put some teeth behind such legislation. Making corporate executives criminally liable for encourage or ignoring such practices might go a long way in ever creating another fiasco such as the one we face today.