Rick Wagner Column October 02, 2008

Taxpayers should assist, not purchase, the private financial system

It has been a period best described by the Bette Davis line, “Fasten your seatbelts, it’s going to be a bumpy night.”

Apply that sentiment to the week and you have the feeling: the stock market going up and down faster than Chinese astronauts, financial markets waiting for government bailout from a crisis that politicians are afraid to even explain and the presidential candidates’ positions so obtuse it’s doubtful they even know where they stand.

I suspect there are several books in the works right now explaining how all of this happened, but like most stories, it really revolves around politics, greed and incompetence.

There has been much squawking from Rep. Barney Frank and Speaker Nancy Pelosi, trying to pin the blame on the Bush administration and Republicans, but they clearly protest too much and too soon.

This is especially true in the face of those pesky YouTube videos everywhere showing the same Barney Frank and other Democrats thwarting regulatory efforts in 2003, while simultaneously praising the stability of the Fannie Mae and Freddie Mac duo under the stewardship of incompetent Clintonites.

It was, after all, during the Clinton presidency that mortgage lenders were encouraged and then coerced into lending into geographical areas and economic profiles that made sense as political expediency if not financial wisdom.

To be fair, there is blame to go around. The Bush administration continued to push for the semi-government agencies to place people into mortgages despite their ability to pay.

It was only later, as the situation became wobbly and questions were raised about the enormous bonuses being paid to the operators of the organizations, along with questions about their capital reserves, that strong regulatory effort was attempted and thwarted.

It was too late, politicians had committed themselves to buying votes through the encouragement of desktop lending and zero-down loans and weren’t about to pull back, even when it looked as though some in the organizations may have been manipulating the financials to achieve the maximum payout in the bonus structure.

That predicate began to unravel as loans were made to people who were willing to endure much less financial hardship before walking away from their investment.

Wall Street types traded securities backed by these mortgages based on the now-outdated concept that abandoned lending guidelines were still in place.

Worse yet, smelling gold at the end of the home-ownership rainbow, lenders took advantage of loosened guidelines and began to create instruments that required less financial participation by the borrower and added volatility to the payment structure. These bizarre financial instruments were then bundled with conventional mortgages and were either sold or used as the basis of financing by overly optimistic financial institutions.

This combination created the equivalent of economic nitroglycerin, where even a slight jostle in the credit markets could cause an explosion.

The biggest mistake that can be made is to construct a system that will interfere with the markets operating at least as a vestigial remnant of the free-market system.

The push toward a planned economy model is probably the most feared outcome of correcting systemic errors that are, for the most part, the result of political meddling in the system.

The amount of the bailout itself, while important, is not as critical as the mechanism used to apply tax dollars to the problem. Acting as a backstop and absorbing some bad debt while expecting payback from the market as it acquires stability is a much more intelligent and sound solution than purchasing an entire market sector.

Taxpayers should be reluctant co-signers, not wholesale buyers.

Rick Wagner offers more thoughts on politics at his blog, The War on Wrong, which can be reached through the blogs entry at GJSentinel.com.


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