Monday, November 17, 2008

Whose Bailout is it anyway?

How should the Bailout money be used?
No need to be a savvy to understand the current lockdown in our economy. As a matter of fact that's Econ 101, ok granted maybe Econ 102, but it was rather bemusing to notice how long it took Mr. Treasury Secretary Henry (Hank) Paulson to conclude that he needed a way to force banks to loan money again. For beginners, the financial market is in such deep doo-doo because of markets freeze on cash lending. Even an 850 fico score does no longer guarantee that you'll get a loan to pay for that new "beemer", and let's forget about that Heloc you thought you could tap into.
This whole mess started with the subprime mortgage. "Predatory borrowers" as would say Phil Gramm, bought houses with money they didn't have, took loans they couldn't afford, and got ensnared into payments they couldn't make. Gramm, who has been quoted lately, thus coining the phrase "a nation of whiners" referring to America, is a strong advocate of free market and an ardent forceful voice of market deregulation, argues that "subprime lending is the American dream in action" as he recounts how his mother, a young nurse working double shifts to support her family of 5, bought a bungalow as a "result of a finance company making a mortgage loan that a bank would not make".
On a slightly different note, Gramm goes as far to say it is hard for him "to feel sorry" for Social Security beneficiaries and has urged for a reduction, if not an extermination of the food stamp program. I used to think like him, more so as an Immigrant who has worked her behind off to get where I am today, until about two years ago I watched a video of this middle age woman who had to rely on such program and charity to support herself and her family to meet ends. She had two bachelor degrees and a master, had a good job, owned her house. Then one day she got ill, very ill and was forced to take some time off her job, then some more time off, ran over her FMLA and finally got axed because her company could no longer afford her absences. With her source of income been cut off, her medical bills started piling up, she had to get rid of her house (or did she lose it through repossession? I can't quite remember), finally found herself on the street. I had no choice but soften my views on federal aids and their recipients. Of course, there are some abuses and I would agree for some more stringent laws that can curtail them. However, no need for a PhD to figure out that GREED will break loose if not carefully "monitored". Greed got hold of Fannie Mae executives as they would fattened up their pocket books with bonuses as high as $11.6 millions in salary for its former CEO Franklin Raines, $86k in bonuses for 749 lucky as reported by Peter Miller from the Realty Times. Even at a microsystem scale, we've seen spouses kill their partner in a hope of cashing some life insurance money, or empty their bank accounts and flee to greener pastures with their "grinner" lover. We've seen people confessing of the most gruesome acts thinking they would not get caught. What's make Mr. Gramm & Cie think the same wouldn't not have happened with those big shots that, we, tax payers are now imposed on to bail out? With the "blamees" been identified, what about an effective solution to get us out of the ditch? Paulson has shown some modicum of intelligence by first stopping short from buying bad assets from those companies that need "help" and second by recognizing that banks need to resume lending. For a small illustration, this is what the lending freeze is creating. For a company that sells goods and services, their clients need to borrow money that will allow them to acquire the good or service (may it be a new software that enhances or improves in many aspects the way they conduct their business and overall increase profitability). Now if the banks refuses to loan the cash, the client can't purchase the good or service, the selling company no longer makes money, thus can no longer afford to pay its employees, which leads to some layoffs, and the laid off employee can't pay their bills, which leads to more credit card debts, ultimately bankruptcy. Third, Henry Paulson need to find a way to force those banks to lend again and let the economy flow. The law does not currently oblige banks to lend money, that's why the term "negociations" exist. Paulson could upon pouring our tax money into those troubled companies require them to:
- Fire all those execs who were incompetent enough to allow this mess to see daylight;
- Improve lending practices using regulatory methods that would still generate reasonable profits for them and permit small and big businesses to keep current jobs and why not, expand.
Home owners should definitely be given priority (although some of them should not qualify) as well. It would reduce the exponential rate of foreclosures, which in turn will help deserving homeowners to keep the value of their house if not higher than what they were bought for, then equal to their selling price.
Hopefully, this economical downturn will teach each one of us a lesson: America please learn to live within your means.

No comments:

Tweet Me