First, the public was told that we needed to bail out financial institutions because a failure to do so would result in the collapse of the financial markets and credit markets. Hundreds of billions were authorized to be spent to that end. The Troubled Asset Relief Program (TARP) was created, giving the President a total of $700 billion to be spent to that end. $350 billion was given without having to go to Congress for authorization. The President has roughly $15 billion left; having spent nearly $335 billion so far.
What has that gotten us? Banks and financial institutions continue sitting on the money that the government provided, credit markets are still tight, and subprime borrowing is still a mess.
The money being thrown at the markets is going to the wrong people, and is doing nothing to address the key issues facing the markets today.
The markets got into trouble in the first place because the government told banks to lend to people who were incapable of repaying mortgages. Easy credit, combined with no income verification and teaser rates that were at incredibly low interest rates flooded the market with buyers, driving up the cost of housing and making many parts of the country unaffordable. The government responded by further pushing for "affordable housing" programs, which only instigated a feedback loop of higher home values that were out of whack with actual value for the properties being considered.
Flooding the marketplace with buyers who had marginal credit meant that the moment that the economy soured or that these borrowers faced higher costs through higher taxes or higher interest rates on adjustable mortgages, they would begin defaulting because the pool of buyers would dwindle as market prices sagged and buyers would begin pressing for more and more concessions on price.
The government stepped in and demanded that the banks renegotiate mortgages of those who were defaulting or were already in foreclosure. That's been a disaster as well. Nearly 60% of those who had their mortgages renegotiated are finding themselves back in default.
That's not a bug; it's a feature of an entire philosophy relating to housing that must come to an end. Affordable housing isn't affordable when you extend credit to those who are not creditworthy. Affordable housing isn't affordable when you watch the stock market shed trillions of dollars in value because everyone ignored the warning signs about the marketplace and real estate - and didn't understand or ignored the risks involved of lending to subprime borrowers.
Cries from Congress about how lenders are now reducing their exposure to subprime borrowers and how this affects minorities the greatest ring hollow. Creditworthiness is color blind - you either had the ability to repay the loans or you don't. If you don't you shouldn't be put in a position where you're only going to be set up to default on a loan sooner or later because you simply don't have the ability to repay the loan. Congress and "affordable housing" advocates are clamoring for additional protections and programs to assist minority home buyers. That must be resisted at all costs.
These affordable housing "solutions" have cost the nation dearly, and it looks like we're about to repeat the same mistakes with the automakers.
President Bush doesn't want to see American automakers go bankrupt on his watch, so he's contemplating using TARP money to bail out GM and/or Chrysler. Ford is looking for a line of credit because it claims that it's in better financial shape that doesn't require a bailout.
Why do these companies need to be bailed out? Bad business decisions put them in this position. It's not that they built SUVs and gas guzzlers all these years. That's what kept them afloat. What has destroyed these companies is that they've been saddled with structural costs that can't be passed on to the consumers - union and pension costs that drive up the costs per vehicle to the point of not being sustainable. The bill has come due, and the down market has driven down the demand for all vehicles - high energy costs during the summer drove down interest in SUVs and larger vehicles as well, but the amount of hybrids being produced by all the automakers is a fraction of the SUVs and larger vehicles being produced.
The failure of Congress to agree on a bailout has led to the UAW claiming that the GOP wants to break the union. Well, hate to break it to the UAW, but if they don't act and provide concessions, the UAW will cause the automakers to go bankrupt - and that would destroy the union completely and utterly. Besides, the Democrats didn't exactly go out of their way to support the bailout either. Democrats have the numbers to make a bailout happen but their caucus could not agree to the bailout; it required GOPers to support matters.
They did not.
So for the union to blame the GOP makes for great soundbites, but it isn't what happened. It's a failure of the Democratic leadership to keep their caucus in line and support the bailout.
That too is a pattern we saw with the initial TARP legislative package. The Democrats couldn't get a number of their own members to support TARP, so they had to lard up the bailout package to entice enough GOPers to switch and support the measure.
Now, Congress is on recess and it's up to the President to decide. Given his eye towards legacy building, watch him fold like a cheap suit and extend a bailout package to these undeserving companies that show no signs of understanding the problems they face or how to fix the problems with their companies.
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