Livinglies's Weblog

Mortgage Meltdown: Socialized Losses and Expenses

The root of any solution to the current credit crisis and meltdown is politics, which is simply a consensus of opinion. When people consent to an idea like “free market” it seems to work because we make it work. The fact is that we don’t have a free market, we never had a free market, and if we did, the mortgage crisis  would be even worse. When we give up our ideology in favor of thoughtful response to the facts “on the ground” we will have a solution. Failing that, the economy is headed for far worse than ever imagined by the doom  sayers.

There is not enough MONEY in the world to stop this crisis. Mortgage Meltdown/Credit Crisis/Monetary Crisis/Housing Crisis can ONLY be solved politically through a consensus of ALL parties involved. REAL incentives must be present for borrowers, homeowners, bankers, mortgage brokers, appraisers, lenders, underwriters, investment bankers, retail securities brokerage houses, traders, money managers, CFO’s of government and companies and individual investors. “Bailing out” some of the variables just tips the economy more toward ultimate disaster. 

While we have free market forces at work within our economy, sometimes they work and sometimes they don’t. That is why you need a referee (government regulation). Free market ideology is wrong in its premise — that given the chance, everyone will rise to their highest potential, at least in terms of wealth. That has never been true because people are all different, they have all different perspectives and values, and all different life challenges that come from factors outside the closed circle of economic theory. 

In a truly free market, tyranny is the inevitable result. Those with the ambition, leadership qualities and political skills end up with controlling positions in the marketplace and in government such that wealth is unevenly distributed to themselves. Innovations, education, and cultural advances that endanger the dominance of such persons or companies are squelched. It’s legal because we make it legal. For the past 10-12 years American society has been reaching for the “ideal” of non-regulation or “free economy.” Now even the most ardent free market proponents are conceding that it has brought us to the brink of disaster.

In a truly “free market,” the market is actually a closely held dominated society with despotic leadership. Government mirrors the society in which the predatory and monopolistic entities get to pay for legislation and enforcement (and non enforcement) they want. 

In a truly free market, a few people dominate government and the marketplace so that losses and expenses are transferred to the citizens while profits and gains are transferred to the leaders in the marketplace and in government. This is what Bill Maher called “socialized losses.” I would add “socialized expenses.” 

Thus a truly free market is actually a socialized marketplace for the benefit of those at the top. In other words, “free market” is a combination of words stating an idea that does not exist but which politically is accepted because politicians and business leaders refer to it so much it has gained sufficient acceptance by listeners to be considered true. 

Thus it is the opinion of most people that “free markets” exist even though all empirical evidence is to the contrary. 

However as a political tool, the bullet phrase “free market” is appealing and is used to socialize the marketplace for the benefit of a select few right under the noses of the people whose opinion was swayed by disinformation emanating from the top.

• We already have socialism as the predominant policy in our politics. We just call it other things like “benefits,” “bailout.” loan, relief package, earmarks, etc. 
• We have socialized medicine — it just works to provide profits to the Big Pharma and service providers instead of medical service to the patients. 
• We have socialized schools — it just works to provide added money to government budgets instead of education to our children and college for aspirants. 
• We have socialized police — it just works to put more people behind bars than any other country in the world in a highly secretive privatization of prisons, the owners of which need to know the prisons will always be full. 
• We have socialized fire departments — but they are sacrificed in budget cuts as soon things get a little hairy. 
• We have socialized defense — but it used offensively to promote oil and profits pursuant to policies that should have been abandoned decades ago, instead of providing for the defense and welfare of citizens beset by disasters (Katrina) or defending and securing our borders.
• We even have socialized money — it just works such that non-regulated money floods the marketplace, leveraged off of a money supply that is supposed to be controlled by the Federal Reserve, creating hollow profits and rising stock prices, while the rest of the citizenry deals with prices so high for fuel, food and other essentials that they can’t make it on two incomes.
• We are a socialized economic society NOT a free market society. It just works for the benefit of the people at the top instead of the usual way of  spreading the benefit throughout the country to all the citizens. 

In a truly free market, Bear Stearns would have gone out of business, the proper result of overreaching behavior that tipped the risk allocations without telling anyone. 

OR, in an environment where free market forces were the goal, the Fed would not only have opened up its window to private investment houses, but also to private individuals and small businesses that were equally in danger of being wiped out. Instead we have the Fed conspiring to bail out one of a dozen variables in the equation that would produce a solution and then, responding to political pressure (something that the Fed was designed NOT to do), it increased the bailout for Bear Stearns 500% so rich people and the people that worked for this firm would not get completely wiped out. 

Careful examination of the Fed bailout of Bear Stearns, however, reveals the perfect plan for bailing out all the players behind all the variables in the equation for solving our monetary crisis, credit crisis, housing crisis, confidence crisis, political and economic crisis: Leaving the opportunity for their fortunes to rise when the crisis is over allows maximum protection for the player to recover, establishes an equilibtrium or plateau that is fairly strong is withstanding further downward pressure, and restores CONFIDENCE in the U. S. financial markets around the world.

By starting out as $2 per share and then moving up to $10 per share, the Fed and JP Morgan established a new precedent that can be applied to borrowers, investment bankers, lenders, investors in CDOs, homeowners who are in foreclosure and homeowners who are at risk. 

If followed out to its maximum advantage, foreclosures could stop, evictions would cease, payments would resume, CDOS (CMOs) would recover their value on balance sheets, capital insolvency would recede, and the opportunity for every one to recover as much as possible would be restored. 

As we have repeatedly said, there is not enough MONEY in the world to stop this crisis. Mortgage Meltdown/Credit Crisis/Monetary Crisis/Housing Crisis can ONLY be solved politically through a consensus of all parties involved. REAL incentives must be present for borrowers, homeowners, bankers, mortgage brokers, appraisers, lenders, underwriters, investment bankers, retail securities brokerage houses, traders, money managers, CFO’s of government and companies and individual investors.

Central to the solution is a political feat of enormous proportions: accepting the fact that housing prices were artificially inflated in 2001-2007. A reduction of the mortgage balances, payments and interest rates combined with an incentive to all players to recover their losses downstream when the market recovers would stop the slide, eliminate the crisis and stimulate the recovery.