Subprime Lending and other Foibles
Tip of the iceberg
We all have read about about how companies doing subprime lending for mortgages are starting to go under. This should be of no surprise, let me count the ways.
The federal government – in support to the finance industry special interest group - has backed mortgages 100% by guaranteeing 100% the selling of bonds backed by mortgages. This means that the companies lend mortgages then turnaround and sell the mortgages as bonds which are 100% backed by Uncle Sam, then have more money freed up to lend as more mortages. This encourages lenders to give mortgage loans to people who are not financially viable, and even worse, encourages people who can’t afford it to take on debt they can’t afford. So when the deals go bad the lenders get ownership of the defaulted property. (Nothing wrong with the rich getting rich but not in this type of corrupt fashion).
And because land is scarce, the land-houses the mortage bankers take over (again at below market costs because the capital is guaranteed 100% and is therefore cheaper than the market) will eventually go up in values. Poor people lose – special interest groups win. When the subprimes started to go bad Uncle pulled out their guarantees (they don't want to look bad), sticking the poor with the overly burdensome debt and foreclosure on their homes.
There are other examples of these kind of financial market scams:
Student loans. Federal government student loan program guarantees student loans, or else guarantees low interest rates, with the lenders getting the difference between market rates and subsidized rates. This encourages colleges to charge more for tuition than they need to because the government will cover the costs, e.g., provide subsidized financing to students.
Winners – special interest lenders. Losers – the students, who of course are lower on the food chain as they are just starting out in life. So the kids start out with big amounts of debt they wouldn’t have to if Uncles Sam would have stayed out of it. Without Uncle Sam the schools would have to compete on price and offer decent, affordable tuition cots.
Health care. Medicare and Medicaid step in and cover medical costs. This does nothing except raise health costs because doctors and hospitals know the government will cover the costs, so there is no incentive to innovate and keep prices low. So health care costs go up 3 times as fast as other costs in the economy. Let people control their own costs for what they need themselves instead of supporting everyone else and well needless to say, these out of control expenses wouldn’t happen. Another well-intentioned program making things needlessly worse than they should be.
Small business administration. The SBA lends money to business people who can’t get loans elsewhere. I am sure some have decent business plans and good ideas but why develop them and reduce costs and become efficient ? If they get private business loans, well, then the government wont give them subsidized loans. So adverse selection says only businesses doomed to fail get SBA funds. What a surprise and certainly no way to continue to build the great American entrepreneurial climate which, well, despite the SBA leads our growth and innovation. Just imagine what it would it would be without the SBA. Giving entrepreneurs easy money helps no-one.
Social security. The government says you are too old to work at age 63 or whatever it is. Stop working then and get your miniscule amount of social security benefits. Well because if you continue to work then your social security benefits get decreased and taxed.
Tell that to the Rolling Stones they are grossing 100’s of million of dollars playing music well into their 60s. Maybe they should stop and move to Florida and live off of social security. Ha, I don’t think so. If they with their hard lives keep rocking, why cant hard-working lively people of the same age fight off the dole, despite the counter-incentive of social security.
Subsidized outsourcing. The government through the Overseas Private Investment Corporation (OPIC) gives guarantees and subsidized insurance for cheap financing for U.S.-based busineses to move their operations overseas (Enron was a big recipient of these programs). The world economy is great and allows us to buy bananas two pound for a dollar all year-round at the local store, but this’ll happen anyway. Why does the government need to encourage it, and favor some over others?
Isnt this just plain wrong for people who think that this type of OPIC program moves jobs overseas? Let lower prices and trade happen on its own - who needs the government distorting the way and helping some over others? That’s just not fair.
Give it up nanny state. Your time has come and gone. Pick it up and go home and stop embarrassing yourself and let people live without you saddling them with limiting life-choices and counter-incentives towards fulfilled lives. People can and will buy homes if and when they are ready. Not everyone needs or wants their own home, or some overpriced upscale university, and forced sunset to their working lives, or one-size-fits-all health plans.
To each their own and be gone. Know of a problem in the economy? 9 times out of 10 the government is behind it, its not always easy to see, but its there.
We all have read about about how companies doing subprime lending for mortgages are starting to go under. This should be of no surprise, let me count the ways.
The federal government – in support to the finance industry special interest group - has backed mortgages 100% by guaranteeing 100% the selling of bonds backed by mortgages. This means that the companies lend mortgages then turnaround and sell the mortgages as bonds which are 100% backed by Uncle Sam, then have more money freed up to lend as more mortages. This encourages lenders to give mortgage loans to people who are not financially viable, and even worse, encourages people who can’t afford it to take on debt they can’t afford. So when the deals go bad the lenders get ownership of the defaulted property. (Nothing wrong with the rich getting rich but not in this type of corrupt fashion).
And because land is scarce, the land-houses the mortage bankers take over (again at below market costs because the capital is guaranteed 100% and is therefore cheaper than the market) will eventually go up in values. Poor people lose – special interest groups win. When the subprimes started to go bad Uncle pulled out their guarantees (they don't want to look bad), sticking the poor with the overly burdensome debt and foreclosure on their homes.
There are other examples of these kind of financial market scams:
Student loans. Federal government student loan program guarantees student loans, or else guarantees low interest rates, with the lenders getting the difference between market rates and subsidized rates. This encourages colleges to charge more for tuition than they need to because the government will cover the costs, e.g., provide subsidized financing to students.
Winners – special interest lenders. Losers – the students, who of course are lower on the food chain as they are just starting out in life. So the kids start out with big amounts of debt they wouldn’t have to if Uncles Sam would have stayed out of it. Without Uncle Sam the schools would have to compete on price and offer decent, affordable tuition cots.
Health care. Medicare and Medicaid step in and cover medical costs. This does nothing except raise health costs because doctors and hospitals know the government will cover the costs, so there is no incentive to innovate and keep prices low. So health care costs go up 3 times as fast as other costs in the economy. Let people control their own costs for what they need themselves instead of supporting everyone else and well needless to say, these out of control expenses wouldn’t happen. Another well-intentioned program making things needlessly worse than they should be.
Small business administration. The SBA lends money to business people who can’t get loans elsewhere. I am sure some have decent business plans and good ideas but why develop them and reduce costs and become efficient ? If they get private business loans, well, then the government wont give them subsidized loans. So adverse selection says only businesses doomed to fail get SBA funds. What a surprise and certainly no way to continue to build the great American entrepreneurial climate which, well, despite the SBA leads our growth and innovation. Just imagine what it would it would be without the SBA. Giving entrepreneurs easy money helps no-one.
Social security. The government says you are too old to work at age 63 or whatever it is. Stop working then and get your miniscule amount of social security benefits. Well because if you continue to work then your social security benefits get decreased and taxed.
Tell that to the Rolling Stones they are grossing 100’s of million of dollars playing music well into their 60s. Maybe they should stop and move to Florida and live off of social security. Ha, I don’t think so. If they with their hard lives keep rocking, why cant hard-working lively people of the same age fight off the dole, despite the counter-incentive of social security.
Subsidized outsourcing. The government through the Overseas Private Investment Corporation (OPIC) gives guarantees and subsidized insurance for cheap financing for U.S.-based busineses to move their operations overseas (Enron was a big recipient of these programs). The world economy is great and allows us to buy bananas two pound for a dollar all year-round at the local store, but this’ll happen anyway. Why does the government need to encourage it, and favor some over others?
Isnt this just plain wrong for people who think that this type of OPIC program moves jobs overseas? Let lower prices and trade happen on its own - who needs the government distorting the way and helping some over others? That’s just not fair.
Give it up nanny state. Your time has come and gone. Pick it up and go home and stop embarrassing yourself and let people live without you saddling them with limiting life-choices and counter-incentives towards fulfilled lives. People can and will buy homes if and when they are ready. Not everyone needs or wants their own home, or some overpriced upscale university, and forced sunset to their working lives, or one-size-fits-all health plans.
To each their own and be gone. Know of a problem in the economy? 9 times out of 10 the government is behind it, its not always easy to see, but its there.
posted by Cameron Weber at 4:22 PM
