Sunday, March 16, 2008

Anybody else here starting to get angry?

Here is what is bugging me:

Credit was extended from central banks through financial institutions and mortgage houses through to mortgage brokers, borrowing companies and individuals. On the lending side, people put up their money and got returns that were well above T Bill rates. On the borrowing side, people who maybe did not really deserve credit got money and used it to buy assets (houses) or to consume more than they otherwise could or should have. All the while, bond rating agencies and insurers marked up the loans, guaranteed them, and pocketed their fees.

So careless greed on one side, and living beyond one's means on the other side, all facilitated by bond raters and insurers, led to a couple of years of fantasy-land bubbles in housing and consumption fueled by unsustainable leverage. The profits on all these transactions have been pocketed by the management teams that made the lousy decisions in the first place, and by the shareholders who supported the regime. Consumers enjoyed living beyond their means.

Now the rest of us are going to be asked to pay for the party, either as taxpayers funding bailouts in the US, or as holders of depreciating currencies.

In other words the profits are private property but the inevitable costs of cleanup are going to be shared as a social burden. Environmentalists go crazy when this principle is applied to private industries who pollute.

The approach is just wrong. Why not let the shareholders and the management teams fail? Yes, that means bank failures. But depositors have FDIC. Why not pay out the Deposit Insurance amounts out of the funds set aside for them, and apply whatever taxpayer dollars might be necessary ONLY to supplement the FDIC, then let the lending institutions write off the losses and move on? And let the lenders evict defaulting homeowners if they choose to, or work something out with each borrower if that is the better path?

Seems to me that the general public is going to pay and get nothing, and some foolish, greedy and/or unethical people are going to pay nothing and yet benefit.

Comments anyone?

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