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The President, just one day after he signed the trillion dollar stimulus bill, started pushing Americans to support his new borrow and spend policy. This time it is at least $275 billion to bail out people with mortgage troubles. Among so many other reasons to tell your U.S. Representative and Senators in Washington to oppose this scheme, the Top 10 are:
1. The Bailout Encourages Bad Behavior
Whether it is from this legislation directly or not, Obama’s plan will shift incentives for market actors by setting a precedent for future housing bailouts that the federal government can never, ever take back. Government is protecting irresponsible home buyers from risk of foreclosure with this plan—especially with the $200 billion for Fannie Mae and Freddie Mac—that will encourage future risky behavior with the prospect of government help.
Moral hazard is a term used in economics, business, and political science to describe such a situation, where one party is insulated from risk and that insulation changes their behavior so they behave as if they were not at risk. Moral hazard comes up when someone does not have to face the full consequences of their own actions—which results in irresponsible behavior like purchasing a home one cannot afford with the hope of a government rescue.
2. It Rewards the Wrong People
As Rick Santelli said on the floor of the Chicago Board Options Exchange, the plan does not “Reward people that could carry the water instead of drink the water.” This plan will force the people who were responsible and worked hard to buy what they could afford to pay for those who did not. Rewarding irresponsibility by forcing people who pay their taxes and their mortgages to bail out the others is not good policy.
Home owners who have paid off their mortgage and renters are exceptionally upset about this new bailout. FreedomWorks’ Chairman Dick Armey comments, “Punishing the responsible majority to reward the irresponsible bankers and those who borrowed more than they could afford is wrong.”
House Financial Services Capital Markets Subcommittee ranking member Scott Garrett (R-NJ) comments, “Additionally, it provides no incentives or rewards to those homeowners who have been diligently making their mortgage payments, or to those who recognized their financial constraints and chose to rent a home rather than buy one.”
3. It Will Further Nationalize our Housing Market
The plan will certainly succeed at one thing: growing government. Obama’s plan will give government even more control over our housing sector—which is hard to imagine, considering how much Fannie Mae and Freddie Mac alone did to transfer our housing market to government control. This is the wrong direction, considering government control of housing trough the income tax, the Federal Reserve, the CRA, and, HUD set up the housing crisis in the first place.
4. It is a Futile Effort to Re-inflate the Housing Bubble, which Failed Miserably in Japan
Those who fail to learn from history are doomed to repeat it, and this policy is another step down the path taken by Japan, which lead to their “lost decade”—which is now going on two lost decades. If we keep going in this direction, the US, too, will lose decades of economic growth.
Japanese housing prices rose by 51 percent and commercial real estate by 80 percent between 1985 and 1991. Similarly, US commercial and housing prices rose 90 percent from 2000 to 2006. Both countries then saw sharp downturns. In response, over 8 years Japan, passed 10 stimulus packages totaling $1.4 trillion. So far the US has passed one $1 trillion stimulus, and now President Obama is proposing billions more.
Twenty years later, and 10 stimulus packages later, Japans Nikkei stock index is down about 80%--from 38,975 in 1989 to around 7,400 today.
A similar drop in the Dow would put it at 2,800, down from 14,000.
5. The Bailout Keeps People in Homes They Cannot Afford
The plan forces banks to refinance mortgages for borrowers who cannot afford to pay even if the bank would have refused refinancing otherwise. This could create an even larger credit crunch that the federal government will undoubtedly attempt to remedy with even more spending than the $75 billion that it promises for this plan further down the road. More spending is the last thing we need and will lead to inflation and higher taxes on our children.
6. The Bailout Steals Billions from Hard Working Americans
The money will primarily go to places like Nevada, and California who the bubble was the biggest—where people made the biggest gains, and are now seeing the biggest losses. Taxpaying home owners and renters in other parts of the country including Texas and North Carolina will be paying for Nevada and California homes. The plan will result in a transfer of wealth orchestrated by government from states that did not experience the housing bubble as intensely as others. The end result: taxpayers who can afford their mortgages will pay for those who cannot. No matter what the politicians say, in order for government to try to stem foreclosures, it has to make taxpayers pay.
7. Policy Like this Caused the Crisis
Over at least the last 17 years, government acted to inflate the value and amount of housing in the United States. This policy is an attempt to re-inflate the bubble that caused the housing crisis in the first place. If housing prices are still too high, they should be allowed to continue to fall. Having the government interfere in an effort to prop prices up can not work, and will just push the problem off until another day.
Without the nearly endless interventions in the market that drove prices higher and created the housing bubble, we would never have experienced this crisis. Government caused the crisis and it should get out of the way to let the market fix it.
8. We Cannot Afford it
It would put the taxpayer on the hook for over $275 billion on top of all of the money the government already spent. We are looking at a $2 trillion deficit now and a record breaking debt. If the government continues to spend like it has been, even our grand children will not be able to pay it back.
President Bush pushed the government deep into a $1.2 trillion deficit last year, the third time he set a record for biggest deficit ever, and President Obama’s stimulus bill followed his lead, piling on more debt. Now he is piling it even higher. The deficit in 2008 amounted to about 8 percent of GDP. The entire debt is about 70 percent of GDP.
Even for those who do still believe in Keynesianism, it is important to remember his theory did not start with the government already over a trillion dollars in the hole, he was generally operating from balanced budgets.
9. It Distorts the Market Economy
Bailing out borrowers and refinancing loans will further distort credit markets. It will make economic calculation and forecasting more difficult for everyone else in the economy. Without accurate information on what might happen in a market, consumers and businesses have more trouble deciding what is profitable or what to purchase.
The more government is involved in distorting a market, the bigger the mistakes will be—witness the massive and widespread overinvestment in housing and banking government intervention pushed causing this crisis.
Similarly, the credit markets are as frozen as they are in part because of government intervention creating uncertainty. Under Secretary Paulson, the Treasury selectively gave bailout money to some banks, while refusing to fund others (see Goldman Sachs v. Lehman Brothers). Whether or not one financial institution would receive bailout money or not created uncertainty in the market that changed behavior for many bankers and has caused them, in some cases, to hold more cash than they would have otherwise which could be preventing profitable loans.
10. The Plan Creates Uncertainty in the Marketplace
How is any business person supposed to make plans in an economy like this with the government announcing new spending or making up new rules every few days? Should a home buyer purchase today or wait for another tax credit?
There may be no better measure of this than the amount of time erstwhile-investment programs like Jim Cramer’s Mad Money now spend talking about government policy instead of the fundamentals of companies in the private sector. And they’re right to do so, because who will win or lose in our market-ish economy is more and more decided by government dicta rather than competition.
There have been so many changes in plans and bailouts that we can hardly even count them. As the Nobel Prize winning economist F.A. Hayek wrote, “The more the state plans, the more difficult planning becomes for the individual.”