What's Wrong With This Subprime Picture?

Life is all about learning and applying fundamentals. This applies to economics and finance as well. Government, insulated largely from market forces, is usually not a good economist, because it does not usually apply the fundamentals of economics. It is counterproductive, then, for the Bush Administration to get involved in dictating a 'voluntary' solution to the sub-prime mortgage crisis--especially when government helped to cause the problem in the first place.

Dictionary.com defines socialism as
Any of various theories or systems of social organization in which the means of producing and distributing goods is owned collectively or by a centralized government that often plans and controls the economy.
Under that definition, George W. Bush just socialized the subprime mortgage problem. Wait...I guess not. He said that his plan was purely voluntary.

The Deseret News did a good job of calling BS on Bush's "voluntary" plan.
To a politician, the most difficult thing in the world is to acknowledge that the best solution is for government to do nothing at all. When it comes to the mortgage lending crisis, President Bush has shown he, also, lacks this ability.

He said Thursday the mortgage industry solution he helped draft was a voluntary, private-sector solution. We doubt many mortgage lenders feel the deal is truly voluntary. Whenever the president summons people to the White House to work out a deal, there is always the unspoken threat that if they don't do as told, government will impose a deal upon them.

It's interesting that
...administration officials became convinced the tide of foreclosures threatened by the mortgage resets represented such a severe threat that a more sweeping approach was needed. They opted for a proposal that was along the lines of a plan put forward in October by Sheila Bair, head of the Federal Deposit Insurance Corp.
Without realizing it, instead of solving the problem, the Bush Administration has perpetuated and exacerbated it. People make stupid decisions because they know that a significant number of the consequences of their stupid actions will be borne by someone else. Starting with Franklin D. Roosevelt's ill-thought-out Social Security plan, Americans have become conditioned to think that, when the going gets tough, someone else will bail them out.

Bail outs should be rare, and they are not a function of the federal government. But the federal government is constantly involved in bailing someone or other out, usually after the bailees take advantage of another perverse government incentive.

I like better the approach of Zion's Bancorp CEO, Harris Simons.
The pain caused by the subprime mortgage mess likely will get worse, and lending institutions need to learn to say "no" to people who cannot afford mortgages, according to the head of Zions Bancorp.

"One of the responsibilities that we have is to provide products that we can be proud of and that actually help customers become stronger, not weaker, and sometimes the best thing we can say to a customer, for their own sake, is 'no'."
If government gets involved, how will that help the fundamental problem? It won't. It will make the problem fundamentally worse.


  1. Hi there. Nice article! Anyway, if you'd rather host the welfare motivator image yourself instead of leeching it off of my server, that'd be extra nice. :) Bandwidth isn't an issue for me yet, but if it ever becomes one, I'd have to disable hotlinking and that'd break your image link as well, which would be unfortunate.

    Cheers! (P.S. RP2008!:))

  2. I think I saw this on CNN. The reason Bush suddenly cares about helping people in the middle class, or at least creating the appearance that he does, is because the mortgage crisis is concentrated in political swing states like Ohio and Florida.

  3. Why are you hot linking anyways? Just save the file to your computer and then upload it into blogger as an image. Then you can use bloggers bandwidth.

    Anyways, I want to know who is going to bail me out of my student loans.

    Bush is doing this because of wall street, they want the government to bail them out of making stupid loans because they got to greedy. This is how it goes with these free market types, they are fine to let the free market work just as long as it is in their favor. Once the tide turns then they want the rest of us to pay for their stupid free market decisions. Funny how that works.

  4. Pasi,

    I guess I'm lazy. ;-) It takes a few less steps to have my blog article ready if I just hotlink. Occasionally, though I do have to go back and replace images where the link gets broken.


    It's unfortunate that politicans do things that get them through the next election, but you're right.


    I think you've hit the nail on the head. This is the problem with the American Establishment, (to include the Bushes and the Clintons) that to them it is a sort of deadly game for which they want to make the rules, which include that they can change the rules any time the rest of us don't notice.

  5. Don't fool yourself into thinking that the mortgage industry didn't lobby and help write the administration's "voluntary" plan. The problem at its base is the fact that we have too much government, and thus, government involved in too much of our lives.

    Here's how it works. The government pushed the mortgage industry to offer loans to higher risk customers. They wrote it into legislation under the guise of equal opportunity lending. The industry complied (and even lobbied for it) because they saw a way to expand business and profits. But they had to get investors that were willing to accept higher risk instruments.

    The industry pushed these high risk investments to institutional investors as, "Hey, they're mortgage loans, and you know how safe they have traditionally been. Only now you can get a higher return on your investment!" Even school districts invested. (Follow the money trail on that one.)

    The dumb thing is that everyone involved -- the debtors, the lenders, the investors, the government regulators, and the legislators -- could easily see what a house of cards this was if they wanted to. It's like the Emporer's New Clothes. Of course, everyone involved trusted the 'goodwill of the US Goverment' to make it all work. Thus, they were all shielded from the true costs of their actions.

    Now that the house of cards has folded, you've got both debtors and the lending industry (or lobbyists for them anyway) clammoring for relief. They worked with the administration to write the "voluntary" plan. The investors and the taxpayers will be left holding the bag. The industry and the debtors will be shielded from bearing the actual costs of their actions; thus, they will be incentivized to pursue similar actions in the future.

    None of the actors in this are pure. All of them are at least somewhat culpable. But the costs of their actions will ultimately be borne by those that are not culpable. That's socialism.

  6. I wish more people would start realizing that their vote counted. We've got to vote the shysters out of office and get people in there that have integrity.

    Government has gotten too big, all because we think it can solve all our problems, but we look the other way when it fails, because after all, it's government, and it can do what it wants. George Washington said "Government is not reason. It is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master."

    It's time we realize that government is suited to solve very few problems, and that when we ask it to solve the problems that they ought not, it can't help but make those problems worse.


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