[kj] Killing joke and Communism

B. Oliver Sheppard bigblackhair at sbcglobal.net
Thu Aug 23 00:13:03 EDT 2007


Mister Black wrote:

"I would be very unhappy if my government were giving money away whilst
at the same time my savings were being lost because of a bank going bust."


===============================

Dean Baker hits it on the nosey below:

http://www.prospect.org/csnc/blogs/beat_the_press



"Save the subprime borrowers, not bloated banks"

Dean Baker, economist w/ Center for Economic & Policy Research

The Unreported Wall Street Bailout
August 22, 2007

The media have the country cheering the efforts by [Federal Reserve
head] Bernanke and the Fed to stabilize the financial markets. They have
convinced the public that Wall Street is the home team and that we all
will benefit if the banks can be kept solvent and the financial turmoil
of recent weeks comes to a halt. That is not true.

The main reason that the financial markets are in turmoil is that banks,
hedge funds, and other financial institutions hold trillions of dollars
in bad debt. Much of this debt is backed by mortgages that exceed the
value of the homes against which they were issued, the result of an
unprecedented run-up of house prices. What is happening now is that the
banks and funds, after being oblivious to risk for the last five years,
suddenly noticed that much of the debt they hold is not very
creditworthy. They desperately want to dump this debt and exchange it
for safer assets. The Wall Street crew wants the Fed to lower interest
rates, which will reduce the cost of carrying this debt, and thereby
give them more time to find some suckers on whom to dump it.

There is no general public interest in having the government assist the
Wall Street crew in their efforts to dump their debt on less informed
investors. They profited on the upside, they absolutely deserve the
losses that stem from their failure to exercise good judgment in their
investment decisions.

On the other side, the core problem is that house prices have become
hugely over-valued. While the rate of home sales is down more than 20
percent from its 2005 peaks, there are still more than 100,000 people
buying a home every week. In many cases, these people are buying homes
in bubble-inflated markets that may be over-valued by 50 percent or more.

Imagine a hypothetical middle income family. Say, a factory worker who
is married to a retail clerk. They have a combined income of $50,000 a
year. They saved enough for a reasonable downpayment and now want to
purchase a $300,000 home in one of the bubble areas. Since the market is
currently hugely over-valued, the house price eventually falls back by
one-third (in real terms) to $200,000, costing this family $100,000.

There are millions of families who look like this. Every week that the
housing bubble persists, more of them will make an enormous financial
mistake that may impose a serious hardship on them for the rest of their
lives. Bernanke and the Fed will not be bailing them out. Middle class
families have to live with the consequences of their mistakes.

It is not the Fed’s job to protect the financial industry from its own
mistakes. As Greenspan and Bernanke said repeatedly in response to
questions raised about first the stock bubble and now the housing
bubble, the Fed can deal with the consequences of the collapse of
financial bubbles. I’m skeptical about how well it will be able to deal
with the consequences of the collapse of the housing bubble, but the Fed
certainly has no business deliberately propping up financial bubbles so
that more informed investors can recover from their mistakes. (In this
respect, the Fed’s decision to encourage the use of mortgage backed
securities as collateral on loans was completely improper. It should not
have been giving its seal of approval to bad debt – I take back my
earlier more benign view of this action.)

After having largely neglected to report on the growth of the housing
bubble over the last five years, the media should start reporting on the
losers in this bailout story. If the Fed can give the big Wall Street
boys the opportunity to save themselves by unloading bad debt, then it
just means that others will be the ones to eventually pay the price. The
media should make it clear that bailing out Wall Street is not win-win;
it is a win for Wall Street where some sucker down the road takes the hit.

--Dean Baker


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