The idea behind state intervention into the otherwise free market economy is leveling crises. But there is another side: market participants come to expect the crises to be leveled, and swing the market unreservedly. This is especially true for huge companies: they are implicitly assured of the government support, lest they fail, layoff many employees, and send shock waves through markets. Huge corporations can, therefore, assume higher risks: while they succeed, their profits are above average and they grow relative to smaller companies; when they fail, they are assured of bailout. Such a guaranteed status brings to them customers and investors who seek government-like safety with market returns. They are basically a fraud: the government subsidizes customers and shareholders of very large companies with taxpayer money. Fannie Mae and Freddie Mac’s operating profits ran into tens of billions of dollars during the years of the real estate bubble; its top officers received hundreds of millions of dollars in bonuses. The taxpayers are left with two to five trillion dollars in bad debt.
Here the interests of liberals and swindlers meet. Liberals want businesses to embrace social agenda rather than pursue profits. Such agenda is by definition unprofitable, or it would have been taken on and solved by free market already. Unprofitability can be solved by rising prices or lowering risks. In the American phantasmagory, liberals tax the commoners to increase the big businesses’ profits by providing them with government guarantees. In a typical example, a black American with no credit history approaches a bank for a $150,000 mortgage. A free market bank would have refused him on the spot simply because his risk cannot be measured. Not so in America. There, a government-backed corporation called Fannie Mae insures the risk. The black risk suddenly becomes lower than the white one: a middle-class white American can fail on his payments, but the government stays behind its black citizens. Additionally, the bank charges the black customer a subprime (higher) mortgage rate even though his risk is actually lower than the white’s. Of course, every bank jumps on the bandwagon of minority mortgages. Insurance companies such as AIG join the fray: they reasonably expect that for the sake of justness the government which insures subprime mortgages by blacks would also act as the last-resort insurer of other subprime loans and over-the-conforming-limit loan balances. AIG also insured the mortgages sold to Fannie Mae: practically insured by the government, Fannie Mae paid for commercial insurance from the insurer who in the end was bailed out by the government. If that is not a fraud, then what is?
Soon, the scheme is expanded from those minorities who theoretically might deserve affirmative action to the groups which only can claim such benefits in the socialist environment: Hispanic immigrants, single mothers, and various degraded elements.
Various scams have been devised to dress the affair in economic terms. The HUD and Fannie Mae substituted rent payment history for the credit history. Never mind the mortgage payments are two to three times the rent payments. Never mind their utterly difference nature: failure to pay rent lands one on the street soon, while walking away from credit obligations is relatively safe. One does not acquire a culture of managing his credit obligations simply by paying rent; credit relations are much more complex than that.
The facts were there for everyone to see, but no one wanted to act. On March 2, 2000, Fannie Mae’s CEO announced to press conference, “Fannie Mae’s policies are to expand homeownership as aggressively as possible….During the 1990s, Fannie Mae grew to become the nation’s single largest source of home financing for minority families….In the decade of the 1990s minority homeownership boomed.” Anywhere but in a socialist state this is a crime: of manipulation at least, of conspiracy at worst. In the land of tens of thousands of banks, any worthy borrower can find a loan; Fannie Mae propped the borrowing for those who on the average were bound to fail. They have the audacity to call this, “fair lending.” What next, selling Lexus to low-income blacks at fair price?
Investors wanted to believe Fannie Mae is a government-backed corporation despite the clear disclaimer in the law which has established it. Liberals served that end by increasingly regulating Fannie Mae: in conjunction with HUD, the continuously pushed the corporation to ever more lax policies so that undeserving borrowers would obtain loans. NAACP dictated many Fannie Mae’s policies. Fannie and Freddie customers enjoy the borrower’s paradise: lenders get their money back from the government, and the government won’t push the minority homebuyers too hard to repay; the government cannot evict thirty to fifty million citizens from the houses they have defaulted upon.
What is truly bizarre, is that all the racist-minority-fairness talk is a lie. Free market actually lends more to black families than does Fannie Mae. The corporation embraces not black borrowers but rather the bad ones. In doing so, Fannie Mae diverts lending resources and thus jacks up the loan cost for decent borrowers; it also bears major responsibility for the real estate bubble. Fannie Mae was among the pioneers of almost zero downpayment loans – incredibly, it provided high-risk loans to high-risk groups.
FDIC is another culprit in the current crisis. By insuring bank accounts, it absolved depositors of any risk, and essentially welcomed them to the riskier banks which pay a bit more on deposits. Like Fannie Mae, FDIC rewarded reckless behavior: if the bank succeeds in its wildly risky lending, everyone wins; if the bank fails, taxpayers cover the losses. Risky banks got an increasing share of deposits, and subprime loans ballooned.
The US mortgage crisis is greatly overstated. Liberals do so in order to push for more regulation and direct government action in the markets. Big businesses want the government to cover their losses. In fact, the defaulted money comes from big investors. The bank losses of half a trillion dollars belong to institutional investors shoulders-deep in various collateralized mortgage securities; they have enough money to cover their losses. Banks, moreover, can always water down their shares to cover the losses.
It is only fair to let the sharks go down: they profited immensely on the real estate boom, and if the market exerts justice on them, so well. The big lenders eagerly developed subprime mortgage market until it reached a whopping one fifth of the total. They gladly “accepted” the risks which, after securitization, others would buy from them. They gambled, profited, and now want the public to repay their endgame losses. Often the same entities which clamor for government subsidies continue destabilizing other markets, notably oil futures. This M3+ money flight from mortgages into commodities is largely responsible for the crisis: investors thought they can always find someone to dispose of the securitized mortgages, and are stuck with overpriced paper. It’s like the promoters of Ponzi scheme asking the government to pity them.
Only a minor small part of the debts would reach the M2 money supply relevant for common citizens. Besides, much of the debts will be eventually recovered through foreclosures.
To say that real estate prices are falling is misleading: they simply return to normality after manifold increase during the preceding fifteen years. A large percentage of responsible borrowers have considerable equity in their houses and won’t walk away from them even as the prices fall.
At its roots, the crisis is traceable to the government’s fateful decision a century ago to nationalize the business of issuing bank notes. If commercial banks have been issuing competing currencies, the speculation would be drastically curtailed. Each bank will be keen to control its own currency rather than let speculators inflate the money supply with cunning monetary instruments. Acting as clearinghouses for their own notes, the banks will control the money supply tightly. As private institutions, they can limit the use of their notes in the way the government cannot. Some issuers will serve speculators in the M3 market and retail customers would shun their currency. This is the ticket: the retail and speculative currencies have to remain separate to insulate common citizens from big-time institutional gamblers.
Some bank failures would be there, many of them – but for relatively small amounts, nothing like the current defaults. State regulation prevents the common restructuring crises – and paves the way to rare mega-crises.
