The House of Representatives just defeated the biggest bank bail out attempt in history. Now comes the uncertainty. Will there be a self-fulfilling prophecy of continued enterprise economic failures? Or will the market correct itself allowing those who voted against the bail out claim a free market victory? This this the day creative capitalism and those greedy enough to manipulate the system face the reckoning. Today congress spoke to Wall Street and told them “We have determined your system sucks” – Rage Against the Machine.
This is going to get good in a hurry now. And by good I mean increased gas shortages, layoffs, hyper-inflation, a rush on non-durable goods. Soon it will be down to Skeeter and his shotgun to protecting the family pickle jar full of cash. Who’s ready?
Actually it’s a very good thing this may not pass regardless of the outcome. The underlying problem, according to Bernanke and Paulson, is that there’s no lending going on between banks or consumers. Even after they’ve injected hundreds of millions into the markets since 2007 the banks still won’t lend. Well I wonder why not?
Why do banks lend money? So that people pay it back with interest and they make a profit. If people and companies can’t pay them back then why are they going to lend commercially or privately? The inability to pay back loans is a reflection on the micro economy. If is no money in the hands of the consumer, they can’t pay their bills. If they can’t pay their bills then their credit score goes down. Low credit scores don’t get loans. Pretty simple. And right now the banks are saying not many people or companies are credit worthy. How is removing hundreds of billions off the financial institutions books going to make them lend again when the bad debt purchased by the US government will just be replaced with brand new bad debt?
To fix this problem people need the money necessary to pay their bills. With the rising cost of goods people have less disposable income. Wages must increase and prices must fall. We are currently experiencing the reverse and yet arguing over why banks are failing. Pay raises do not occur because of banks lending money. When was the last time you heard of a business owner taking out a loan to give their employees a raise? The banks are losing their ass because of their own greedy, bad practices and I for one am glad to see them pay the price.
If banks would stop increasing interest rates because someone sneezes and creating new fees every time a fresh loophole is located they might not be in this situation. And if everyone with a credit score lower than 720 is considered a risk then that includes the majority of America. Banks will have to be more forgiving regarding their credit standards and repayment periods (like net 60 instead of 30) or job growth and real wages need to rise to meet the demand for repayment being issued by the banks. If neither of these two occur we’re in for a long winter full of foreclosures, repossessions and job losses. This fundamental principal holds true whether we give Wall Street $700 billion or not.
And the bank investors who chose to decline the option to modify thousands of mortgages to freeze adjustable rates are now feeling the repercussions of their greed. They gambled to the last minute that a few foreclosures was better than modification that would keep people in their homes. Never mind that most fixed to variable rate mortgages were paying more in interest than any 30-year prime rate fixed. Investors bet that people would struggle to meet the adjustable rate increases to keep their home and they (the investors) could reap the rewards. Well, you lost your ass now didn’t you Mr. Sub Prime securities investor? And it isn’t looking like the Feds are going to give you the bail out you were counting on.
Today is synonymous with revenge for any homeowner who experienced a foreclosure in the last couple of years because their mortgage investors decided not to modify their loan and instead ballooned the payment to the stratosphere to wager a greater return. The homeowners lost and now, without this bailout, the mortgage investors lost. Sure home buyers speculated that they would be able to refinance. And the banks did too. And they figured if they did have to foreclose the house would have gained equity. Then when the micro economy went to hell home prices fell and the banks wouldn’t pull back their wager on adjustable rate increases. Now it’s come full circle. If you’re a mortgage backed securities investor put out your hand, Congress is handing you back your burnt ass.