Let 'em Fail

The irresponsible rush to salvage FannieMae, FreddieMac and then the contradictory refusal to salvage the private mortgage companies is puzzling.

None of them should have been salvaged and it really does not matter the economic consequences. Investments pay interest as a product of “risk.” When one invests there is no guarantee of any return. Can you imagine for instance, an armored car parked in front of a casino (wouldn’t the Indians love it) to pay losers the money they lost in the casino, thus being “bailed out” for horrible choices. “Have a wonderful, fun-filled evening compliments of more prudent taxpayers.”

The mortgage companies made many bad loans for several reasons. One, they were afraid of prosecution under “redlining” law which says that “one must not lend less frequently in impoverished areas.” During the Clinton administration more Federal Deposit Insurance Company ("FDIC") enforcement officers were assigned to investigate allegations of discrimination than were to assure solvency of the banks. No one speaks of this because, well, uh, it might be “racist.” No matter that the loans are horrible. The bankers chose to not argue that abomination publicly. They should have. Years ago.

Then mortgage bankers make marginal loans because the interest rates are higher and since the “bottom line” must be superior to those of the competitors in order to attract capital, the bankers increased the risky loans, that capital now should be worthless.

Lastly there is the stupid, greedy borrower. If Mr. Jones can buy a bigger house than Mr. Smith and does so to strut his peacock feathers, we should let Mr. Jones fail on his loan, lose his house and Mr. Smith, who chose to live within his means is not taxed to pay for Mr. Jones extravagance.

It may seem like a stretch but the same “they must not fail logic” is an unaddressed campaign issue. At least two states, California and New Jersey are now in irreparable budget deficits. Others may follow. The two governors, one a Democrat (NJ) the other a Democrat wannabe (CA) pray for a Democrat administration to bail out their miserably managed states. McCain? He might. That is why Palin would be a better lead but that arrangement has already been decided. Moot point.

Let the mortgage companies fail; strip the CEO’s of their golden parachutes (ESPECIALLY the CEO's of FannieMae and FreddieMac since those are monopolistic providers of funds and should be held to a higher standard) and let the borrowers fail, thus providing prudent purchases at reduced prices for those folks who were responsible and waited! The imprudent borrower’s mistakes become the prudent borrower’s opportunity.

Capitalism at its best (yes, seriously)