Thursday, October 2, 2008

Bailout Part F

Again I must belabor the point of disagreeing with the Scrub and the assumption that “the Feds made this mess, they might as well clean it up.” I know it is long, I hope you find it worthy.

I have several scenarios that lead to my conclusion but will start with an example.

Example: Having Congress bailout the financial meltdown is tantamount to having a 3-year-old cleanup the bathroom, unsupervised, after clogging the toilet while attempting to flush the grape juice stained blanket and complicating matters by then using the commode for its intended purpose . Yes, like Congress, the child’s intentions were good, afterall, they were just trying to solve a problem, and really, the mess was the fault of the person who purchased the juice in the first place. And just like Congress, the 3-year old will have a self congratulatory grin as (s)he drags the soiled blanket across the new white Berber carpet while taking it outside. And Congress will continue to resemble the tot who, after digging up the prize flower bed in a vain attempt to bury the blanket, tells the neighbors about how dedicatedly they rose up in sacrifice to adhere to the call-to-duty to clean up a mess they could not control. And finally, with a flooded bathroom, ruined carpet, destroyed flower bed, and half buried blanket; the toddler, looking more like Congress than ever, will demand a reward for successfully solving the problem left by some evil, mean spirited, person for someone else to clean up.

Bad case scenario: Year in year out the most fiscally irresponsible single group of people on the planet is the US Congress. Even Republicans who were elected on a platform of fiscal responsibility cannot resist the urge to play Santa Claus. With a “National Economic Crisis” (very sarcastic ‘Oh yeah’ is needed here) at hand, the desire in congress to hide $700 million of pork in a $700 billion bill is tempting beyond their limited ability to cope. When that much money is at stake they just can’t resist the opportunity to try to buy votes back at home. I would expect more ethical responsibility from the Cartagena Cartel then Congress when that much money is at stake.

Worse case scenario: Let’s do a little speculating on some of the possible aspects of what the bailout bill will entail.

  • We’ll need a new “Office of Housing and Banking” regulatory agency. This will begin with a budget of $20 million. At 5% growth per year in 2020 the budget will be closing in on $34 million and the director will be railing against budget cuts when it is suggested he suffice with a 3% growth. This will be despite the fact that after the first six months there will be nothing for an agent to do except sign a note stating that (s)he has read the auditors statement for the mortgage companies under their domain. Since the agents will be lawyers and not accountants it will be found in court that they cannot be held liable for any discrepancies. Of course the court in question will be a division of the agency. This agency will be with us forever
  • We’ll need a government “Office of Loan Application and Oversight” whose sole responsibility will be to approve all mortgage applications. You think the process was arduous before? Go fill out a passport application then multiply it by one hundred. It will take one year from offer and acceptance to closing. Oh, this mortgage oversight will be a separate government agency from the regulatory branch. No conflict of interest. While less prestigious it will still keep young law school graduates employed and have an initial budge of $75 million. By 2020, due to work load demands and the standard 5% growth, the budget will have ballooned to well in excess of $300 million. The agents will be overworked and do most application checking while on overtime. But fear not, the money will not come out of the Federal budget but will be added on to each and every mortgage in the country. The sole goal of each agent is to be transferred to the “Office of Housing and Banking”. The seniority list will be called ‘the death list’ because someone will have to die for a position to open in the “Office of Housing and Banking”. This agency too will be with us forever.
  • Since these agencies are breaking new ground we’ll need experienced personnel to oversee and direct these entities. How about Franklin Raines. He has been CEO of Fannie Mae and assistant director of the US Office of management and Budget. Experience, connections, what more could you want?
  • First order of business will be a complete overhaul of the mortgage business in the US. This won’t take the originally estimated six months. Scholars will cite standard project management methodology that a 300 percent error is within tolerances when estimating time of large unknown projects and state that getting this report done in 15 months is remarkable. Yes, they will lament that no home sales requiring mortgages occurred in those 15 months but will cite the near 100% apartment occupancy as being “good for the economy:” When asked about the lack of home sales the safety of the economy and ensuring the greedy are held in check will quiet the naysayer.
  • Both the “Office of Housing and Banking” and “Office of Loan Application and Oversight” will have diversity departments. This will be to ensure there is no discrimination based on race, creed, sex, sexual orientation, economic status, or credit history. Mortgage companies who turn down loans based on an applicants ability to pay will be declared, by each agency, guilty of discrimination and fined millions of dollars.

Worst Case Scenario: If the bailout goes through there will be a mountain of new federal regulation. Within this regulation will be a continuance of the bill to get low income people into homes. Therefore mortgage companies will be required to make a certain scalable percentage of the loans to low income high risk sector. When the company issues its X loan number each year, the percentage of low income loans will increase. This means companies will artificially cap the number of mortgages it makes. What results when an artificial limit is placed on a commodity? Well, according to Econ 101 (which apparently, no member of Congress can pass) the result is shortages. What happens when a shortage occurs? The price goes up. What is the price of money for loans? Well, the interest rate. So a couple that has saved diligently (while paying taxes on the interest) to get the 20% down and found a home that costs two years salary will be buried in paper work and wait a year before any hope of seeing their dream come to fruition. Should our heroes get the proper lottery number to actually obtain a mortgage they will have to agree to a 20% interest rate. Think interest rates can’t go that high? Does the name Jimmy Carter ring a bell?

The author wishes apologize to Dr. Tom Coburn Senator from Oklahoma for making him guilty by association, but would like to point out that Senator Coburn purposely, ran for the House and Senate.

The author further wishes to apologize to all of the world’s 3-year-olds. It will be years before any of them do anything heinous enough to be compared to Congress.

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