The Bailout Culture: Discouraging Responsibility Since 1979

Dear Sir or Madame,
Please Allow me to introduce myself, my name is Prince Sultan Foggube Bloggando of Nigeria. I am writing you to seek your assistance in a very complicated financial matter which, if you agree to provide initial financing, could be a very lucrative opportunity to you and your family. You see, my country has been marred in civil strife for many years now, and shortly before my father, The King, passed away he put several million dollars in trust to me and my siblings- we were to use this money to help end the conflict and restore our nation to greatness. Unfortunately militants have seized many of Nigeria's banks and we are having difficulty getting access to these funds. My family's legal counsel has assured us we have every legal right to the funds, however the appropriate legal action to liberate the money will be very costly. I am writing to ask your assistance in helping my siblings and I get access to the money we need to free Nigeria from the rule of militants. For an investment of $1000 I personally guarantee you a 1000% percent return on your money after the civil war is over and our economy is functioning again. In the unlikely event that my siblings and I are not successful in our efforts and hence are not able to repay your kindness, please contact your local US Congressman; they will happily bail you out of any unwise financial decision you've made so long as a lot of other people have made the same stupid decision- and I send this email to 30,000 people every hour, so don't worry, you're not alone!

Sincerely,
Foggube Bloggando
Nigerian Prince (Seriously)

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Ladies and Gentlemen,
Our nation is under serious threat from a pandemic of poor decision-making, and Congress (as usual) is only making things worse. Case and point, Massachusetts liberal and aspiring Menino impersonator Barney Frank has introduced H.R. 5818, the "Neighborhood Stabilization act of 2008" which will create a $15 billion slush fund with which to bail out unwise borrowers and lenders from their bad financial decisions. More information on the bill and its socialist virtues, comrade, can be found at Thomas.gov by searching "HR 5818."
Ok, ok, I know what you're thinking: '$15 billion hardly seems noteworthy when weighed against other abuses of legislative spending power previously covered in this blog' and you would be more or less right. Nancy Pelosi can't sneeze without appropriating $15 billion these days, but this is not just an issue of wasted tax revenues- bailouts of any kind always have the knocked-on effect of not only rewarding bad decision-making, but also punishing good decision making.
A good four minute summarization can be found in this NPR News Report. (Editorial note: If you're not an NPR listener, I strongly urge you to become one, you will not find a finer, more reliable source of unbiased news anywhere else in the American media.)

Many advocates of such legislative interventionism in the housing markets will suggest that because housing is such an integral part of the US economy, something has to be done to stabilize prices. They will argue that as more homes are foreclosed upon, the glut of unsold houses on the market will grow, which will soften demand, which will contribute to a further drop in home values which will worsen the state of the overall economy. Now there is merit to the economic logic in that argument, strong supply and weak demand always lead to deflated prices, but to suggest that intervention is the only way to prevent a complete bust in the market is a spurious assumption. After a steep enough drop in prices, supply and demand forces will always find equilibrium with one another- as home ownership becomes more affordable demand will eventually grow again as a new generation of home buyers finally begin to see the value in buying versus renting- spurring demand. Matter of fact, this is often the only time renters can afford to get on the property ladder in the first place, so let's not go throwing depreciating home prices under the bus just yet.

But of course none of us should be so naive to think that the elected representatives spearheading this initiative are doing it only out of concern for 'hard-working American families who have fallen on tough times', of course they're doing it for the dozens of big financial corporations that made billions upon billions in bad investments in the subprime mortgage market. The most significant aspect to HR 5818 is federally guaranteeing the mortgages most at risk of default so that lenders will have an incentive to refinance what were once very profitable loans into less profitable ones. With federal guarantees against the loss of their investments, the banks, rating agencies, brokerages, and investors (who not too long ago unanimously denounced government involvement in their lines of business) have not learned the error of their ways, and have no incentive to exercises better judgement when making future investments.

Two of the biggest offenders, Countrywide financial and Bear Stearns, come to mind when considering bailouts. Countrywide and Bear were the two heavyweights in the subprime market before it went bust, and as a result of their extremely bad judgement and lack of proper diversification they were hardest hit when the meltdown began. Bear Stears was in the midst of collapse when the Federal Reserve stepped in and financed a federally guaranteed buyout of Bear by JPMorgan Chase, and even though the Fed wasn't involved in Bank of America's buyout of Countrywide, but given that most analysts saw Countrywide's loan portfolio as an "immense credit risk" BOA must have known that an eventual federally sponsored rescue of the mortgage market would make Countrywide a good investment despite the bad loans on its books.

Strange how the alleged solution to the problem created by bad investments seem to be more bad investments eh? Bear and Countrywide and millions of subprime borrowers get saved from their own stupidity, Bank of America, JPMorgan Chase, and the the federal government then make big investments in the companies and people who made the original bad investments, and so on. All the while the people and investors who exercised better judgement are forced to pay for it.

I don't know about you guys, but I'm going to get in on the ground floor and start investing in the next bailout now. Anyone know how to wire money to Nigeria??