[kj] Killing joke and Communism

[B. Oliver Sheppard]

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."


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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