bailouts

Left-leaning journalists are urging more mortgage bailouts to try to increase consumer spending, since they erroneously think that inadequate consumer spending is the principal cause of the current bad economy. This is a fallacy: As economist Mark Calabria has noted, consumer spending is currently high as a percentage of the economy compared to most periods in American history, and is low only compared to the unsustainably high levels reached during the housing bubble, when people borrowed rather than saved. It is corporate investment, not consumption, that is too low and needs to rise. Companies, and even Democratic businessmen, are afraid to invest and create new jobs now, because they fear costly, unpredictable new federal regulations and mandates from the Obama administration (such as the 2010 Dodd-Frank financial law, and the health care reform law, whose estimated cost just went up by another $50 billion annually and which will reduce the size of America’s work force by hundreds of thousands of people).

Apparently thinking that the government can create money out of thin air through mortgage bailouts, The New York Times‘s editorial board yesterday urged the Obama administration to pressure banks to cut the principal balances of people who imprudently borrowed too much money, even as it admits that such “principal reductions are seen as rewarding reckless borrowers,” since doing so will “free up money for borrowers to use for paying down principal or consumer spending.” But doing that doesn’t create any new wealth, or free up new money, all it does is transfer money from savers to borrowers. Enriching borrowers at investors’ expense results in investors feeling poorer and spending less money, reducing economic activity related to their purchases. The Times just ignores the fact that forcing banks to write off loans will harm bank shareholders, resulting in them spending less money. Thanks to my recent losses in the declining stock market, which will make it harder for me to ever retire, I have already reduced consumer spending, and to save money, I no longer eat out in restaurants.

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In 2010, Obama administration allies proposed a trillion-dollar bailout for those lucky mortgage borrowers whose loans were owned by the government-backed mortgage giants Fannie Mae and Freddie Mac — including wealthy borrowers who have no difficulty paying their mortgage — in order to increase their disposable income and temporarily pump up the economy through the next election. Now, Obama administration officials such as Associate Attorney General Tom Perrelli are trying to achieve the same goal on a much smaller scale in settlement talks with the nation’s four biggest banks. Perrelli is demanding that they reduce the mortgages of certain favored underwater borrowers (many of whom are underwater because they didn’t make a substantial downpayment, the way thrifty people do), using the banks’ unrelated foreclosure paperwork violations as a pretext (benefiting lucky borrowers who were never foreclosed upon, much less treated improperly in any way).

But as Mark Calabria notes, this demand makes no sense at all economically. Any mortgage write-off that increases the disposable income of borrowers will reduce the disposable income of investors whose mortgage-backed securities are worth less after mortgages are partly written off. The government’s demand reflects irrational, magical thinking, a kind of voodoo economics. This  proposed rip-off of investors would not create any wealth or income, but rather merely redistribute wealth and income from investors to borrowers (reducing the disposable income of the suddenly poorer investors), discouraging future investment.

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Mounting evidence shows that the auto bailouts weren’t worth it. They have been far more costly, and less successful, than claimed, as even liberal commentators now have admitted. The Washington Post fact-checker criticizes President Obama’s phony accounting on the auto industry bailout: “What we found is one of the most misleading collections of assertions we have seen in a short presidential speech. Virtually every claim by the president regarding the auto industry needs an asterisk, just like the fine print in that too-good-to-be-true car loan.”

Obama cites various figures of jobs allegedly saved through the bailout. But he’s playing deceptive numbers games that take credit for jobs actually created by foreign car manufacturers that didn’t participate in the bailout. As the Washington Post’s Charles Lane earlier noted, Obama’s jobs figures cite jobs created by the foreign competitors of GM and Chrysler, and their competitors’ auto dealers, including “not only the Detroit 3, but also all of the plants operated by foreign car makers in the U.S., the entire supply chain and all car dealerships around the country!

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“Only 16 percent of executives in the auto industry” support the Chrysler bailout, according to the Washington Post’s editorial today. I think the bailout was a bad idea, for the reasons I list in my own commentary at this link, where I also chronicle how the Obama administration has deceived the public about the cost and consequences of the bailouts, and disseminated misleading claims by GM about allegedly repaying taxpayers.

As the Washington Post editorial board, which has not endorsed a Republican for president since 1952, noted, the bailout sent a harmful “message” that the automakers are “too big to fail.” And the bailouts might not have been necessary to save most auto jobs, since even “If GM and Chrysler had failed, their profitable parts would, eventually, have been bought up and put to work by others … expanding production and hiring workers in the process. Government dollars spent propping up the two automakers might have created jobs elsewhere.”

Even if a bailout had been a good idea, the Obama administration did not handle its execution well. As the Post notes, it is questionable whether having “decided to aid the industry, the administration chose the best way of doing so. The administration … did not press the United Auto Workers, its political ally, for even deeper labor cost reductions” needed to maximize the automakers’ long-run chances of survival. Moreover, bailing out Chrysler was harmful to GM, since “propping up Chrysler would saddle GM with additional competition, thus complicating survival for the larger, stronger company.”

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Former House Banking Committee Chairman Barney Frank (D-Mass.) tenaciously opposed efforts to reform Fannie Mae and Freddie Mac, the government-sponsored mortgage giants that were bailed out at a cost to taxpayers of between $148 billion and $363 billion. Now it turns out that he got his boyfriend a “handsomely rewarded gig at Fannie Mae” while Frank “was helping to inflate the housing bubble” by pushing affordable housing mandates and policies that encouraged Fannie Mae to buy up risky mortgages.

Fannie Mae and Freddie Mac engaged in massive accounting fraud and other abuses. But Fannie Mae’s collapse was not entirely due to bad policies of its own making. Pressure from liberal lawmakers like Frank to buy up risky mortgages was also a factor in triggering the mortgage crisis, judging from a story in the New York Times. For example, “a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers, according to a Congressional source.” The executives of government-backed mortgage giants Fannie Mae and Freddie Mac “eventually yielded to those pressures, effectively wagering that if things got too bad, the government would bail them out.”

Despite his key role in causing the financial crisis, Frank became even more influential after President Obama took office. As the New York Times noted, the massive financial overhaul later passed in response to the financial crisis is “largely the product of extensive conversations” between the Obama administration and “Representative Barney Frank of Massachusetts and Senator Christopher J. Dodd of Connecticut.” That law, known as the Dodd-Frank Act, harms the economy, and violates both the Constitution’s separation of powers, and private property and equal-protection rights.

Frank’s co-sponsor of the Dodd-Frank Act, Senator Chris Dodd, left office in disgrace after ethical lapses. As Victor Davis Hanson notes, Dodd “got a sweetheart deal on an Irish ‘cottage’ from a crooked stock-trader,” “receiving it for hundreds of thousands of dollars less than its market value,” “got two preferential discount mortgage interest deals from the now-bankrupt Countrywide,” “got a sweetheart profit deal from a condo joint-buy with crook Edward Downe, Jr.,” “intervened with the Clinton administration to get the felon Downe pardoned,” and “misrepresented the value of his Irish cottage that he obtained via the agency of the dubious Mr. Kessinger.”

“GM sees China as a road to profit,” reports the Washington Post today. “GM last year sold more cars in China than in the United States,” ranging from “high-end Buicks” to “low-end Chevrolets.” It’s good that GM is expanding its markets overseas, because its current share of the U.S. auto market may not last.

Even GM’s own shareholders seem to recognize that, and the fact that its recent profits may only be temporary. As Mickey Kaus noted recently in the Daily Caller, General Motors’ “sales and prices are up recently in part only because competing Japanese car suppliers have been crippled by the earthquake and tsunami. GM’s stock fell today and is still below the initial IPO price” (that is, below the price of the stock when it was sold to shareholders by the U.S. government).

Before that, GM’s finances were temporarily buoyed by bad PR regarding Toyota’s alleged safety defects in its cars, which turned out to be largely bogus. (The Toyota crashes turned out to have been caused by driver error, not manufacturing defects).

These setbacks for Toyota temporarily drove buyers away from Toyota to GM, artificially propping up GM’s profitability. But devastating earthquakes like the one that hit Japan occur there only once or twice a century, and can’t keep GM profitable in the long-run.

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Liberal economist Peter Diamond is likely to be confirmed to a powerful position, despite issues far more severe than those that blocked the confirmations of highly-respected conservatives. It smacks of a big double standard.

Diamond was nominated to one of the most powerful positions in the land — the Federal Reserve’s Board of Governors, which sets monetary policy. (The Fed is now printing hundreds of billions of dollars to buy up government debt and inflate the money supply, in a controversial policy known as “quantitative easing” or QE2, which some economists have predicted will lead to substantial inflation.)

By law, the Board is supposed to be balanced regionally, but it isn’t: its members come almost entirely from the East and West Coast. So does Diamond, a professor at the Massachusetts Institute of Technology (MIT). He has lived in Massachusetts since 1960.

The Obama administration nominated Diamond for a seat on the Board representing a district in the Midwest, claiming he is from Chicago because he has lectured at Northwestern University. But as economist Mark Calabria notes, Diamond is really from Massachusetts, which already has a representative on the Fed (Fed Board member Dan Tarullo). That violates Section 10-1 of the Federal Reserve Act, which says a new Fed member may not come from a district that already has a representative. If Diamond is confirmed, every single member of the Fed’s Board will come from a coastal state, and none from America’s heartland.

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“The top corporate tax rate in the United States is 35 percent, one of the highest in the world,” but General Electric, whose CEO was recently tapped to lead President Obama’s Council on Jobs and Competitiveness, pays no taxes at all, reported the New York Times.

The company reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States.  Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.

This negative tax rate is the product of lobbying aimed mostly at liberal lawmakers. “G.E. has spent tens of millions of dollars to push for changes in tax law,” such as “‘green energy’ credits for its wind turbines.” “Since 2002, the company has eliminated a fifth of its work force in the United States while increasing overseas employment.”

In his State of the Union address, President Obama called for even more spending on forms of energy that benefit GE.  Government energy spending and tax credits disproportionately benefit GE, which recently spent  $65.7 million on lobbying to get government subsidies.

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Post image for Federal Government and State Attorneys General Push Arbitrary Mortgage Bailout

Back before the election, intellectuals with ties to the Obama administration proposed a trillion-dollar bailout for some (but not all) underwater mortgage borrowers, as a way to increase consumer spending.

Last week, The Washington Post reported that bureaucrats at the newly-created Consumer Financial Protection Bureau (CFPB) want to do something similar on a smaller scale. Their proposal would require banks to write off part of the mortgages of certain (but not all) mortgage borrowers who owe more on their mortgage than their house is worth. Worse, they would require mortgage servicers to write off loan principal on loans owned by other institutions, like pension funds, violating their property rights.

Virtually all of America’s pension funds own mortgage-backed securities. Pension funds that millions of people rely on for their retirements would lose billions of dollars due to reduced mortgage value. These demands are contained in a 27-page proposed settlement sent to the banks by the CFPB, the Justice Department, and state attorneys general who sued the banks over their recent foreclosure documentation lapses. Such demands flout court rulings like Louisville Joint Stock Land Bank v. Radford (1935), which overturned a federal law that wiped out mortgage value.

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The Obama administration is now working with state attorney generals to rip off pension funds to bail out mortgage borrowers who don’t even need help. Pension funds that millions of Americans rely on for their retirement will suffer. Bank shareholders will also suffer. I  explain how and why in a commentary at The Washington Examiner website. The government is trying to get mortgage servicers to write off portions of loans that are owned by other people or institutions — like the pension funds that millions depend on. That undermines property rights. Last fall, intellectuals with ties to the Obama administration proposed a much larger, but conceptually similar, bailout that could cost taxpayers a trillion dollars, the idea being to temporarily increase consumer spending through the next election.