A $700 billion bail-out legislation proposed over the weekend by the current Republican administration to avert an economic catastrophe gives emergency support to financial institutions but does nothing for Americans who are losing their homes every day--the real cause of the problem.
Adding $85 billion for the purchase of insurance giant AIG and $200 billion to shore up the world's largest mortgagers, Fannie Mae and Freddie Mac, the total price tag to save American business amounts to $985 billion so far in this month alone. If you include a $29 billion loan offered by the government to J.P. Morgan to buy the failing Bear Stearns investment firm, the proposed costs to date far exceed a trillion dollars. Indeed, one analysis by CNBC.com says the potential cost could be as much as $1.8 trillion.
Treasury Secretary Henry Paulson told Congress and the American people that the current crisis in which the federal government is, in effect, nationalizing the mortgage, insurance, and credit industries has been caused by "illiquidity," a fancy term that means financial institutions won't loan each other money because they believe they won't get paid back.
However, the real cause of the current economic emergency is the problem faced by middle class Americans who cannot pay their mortgages. Indeed, loan salesmen for years sold mortgages without checking if the new homeowner could pay back the loans. These salesmen then immediately sold the mortgages to speculators in order to avoid any risk, pocketing the sales commission without taking any responsibility.
Homeowners were assured they qualified for the loans because the loan salesmen gave them to them. The new homeowners made the mistake of trusting the salesmen, many of whom told them that the value of their homes would probably increase in value.
The bail-out package sends money directly to financial institutions without any going to people about to lose their homes. If help could be given directly to homeowners at risk it would treat the cause of the problem today. Bailing out financial institutions treats only the symptoms of the problem and does not guarantee a solution. Bailing out homeowners now would treat the cause of the problem and cost much less.
This is not my idea. Hillary Clinton proposed it a long time ago. Remember?
Announcing support for homeowners now by guaranteeing their mortgage payments would send the stock market soaring. Why? Because it is the right thing to do. Nothing inspires confidence like doing the right thing. It would keep people in their homes, for which they need to buy a multitude of consumer products. It would increase the value of homes immediately and stimulate the real estate market. To do otherwise is a signal of business as usual and right now business ain't so good, is it?
The future of the American economy is not speculation, which is what the government's plan is right now. The future is in the powerhouse known as the American consumer.
Guaranteeing mortgage loans at risk will improve financial institutions' bottom lines, reduce their debt and get money moving through the economy again, an economy driven not by speculators but one driven by consumer spending.
Republican administration officials have warned Congress not to put in any help to homeowners in a bill now being rushed through both houses. This would mean that only wealthy investors and financial institutions would receive direct help in the greatest financial calamity since the Great Depression.
Consumers are the most important driving force behind the American economy. Ignoring consumers who are experiencing the same financial hardship as financial institutions is not only bad economics, it further polarizes society in what can only be seen as class warfare. The upper class is getting free money, the middle class is being pushed back into the lower class literally by eviction.
Republican economists are missing the point that the consumer is the most important part of our economy. It is paradoxical that the political party most committed to a free market may end up being responsible for the end of capitalism as we know it now--even if the largest bailout of American business in history is successful. And no one is certain it will work.
There are even more important factors to be considered than the fate of capitalism and the American dream. Unpredictable nations like China and Saudi Arabia have significant ownership of our national debt. They are in a position to influence our economic future more than ever. Are we signing away our sovereignty?
We are being asked to increase our national debt by $700 billion. Who will purchase this debt? The answer is any one can. Even Russia (they could easily do it through a third party, even if we formally prohibited it.) Let's hope cooler heads prevail. Decisions made in panic tend to exacerbate things, don't they?
We are witnessing history of the same magnitude of the 9/11 attack. We may not like how it turns out. Should Congress not include any relief for homeowners at risk, I think the bail-out plan will not work because it treats the symptoms of the problem, not the cause.
A more reasoned approach would be to guarantee consumers' mortgages, lifting the value of financial institutions. Bailing out financial institutions is a waste of taxpayer money. It will leave our national debt owned by foreigners a grave liability and make more people homeless.
I am sure the situation is much more complex than my understanding of it. This is just my opinion. But in America, a person's opinion used to count for something. Here's mine:
Treat the cause, not the symptom.
--Chris Lareau
What others are saying
"More important, if the taxpayers are compelled to refinance the villains in this drama, then Americans at large are entitled to equivalent treatment in their crisis. That means the suspension of home foreclosures and personal bankruptcies for debt-soaked families during the duration of this crisis. The debtors will not escape injury and loss--their situation is too dire--but they deserve equal protection from government, the chance to work out things gradually over some years on reasonable terms."
"Republican leaders in Congress are warning Democrats not to load up the Treasury Department’s emergency bailout bill with help for homeowners or others facing economic hardship."
--Patrick O'Connor and Time Grieve, Politico
US Speaker of the House Nancy Pelosi wants to help home owners-- AFP News
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