The Morality of the Mortgage Bailout Plan
This paper will do two things: first, it will lay out the basic structure of the Obama mortgage plan to bailout the major lenders in exchange for their supporting troubled homeowners. Second, the paper will take those facts and reflect upon them given the writings of Upton Sinclair, Ron Paul, Paul Krugman and Steven Levitt, using these writers to conceptualize the paper itself and provide a basic theoretical backdrop to the evaluation and analysis this paper will offer. The basic thesis of this paper is that the bailout plan is as fraudulent as anything else in American economics, and serves to maintain an unworkable economic system.
What holds the above books together–despite their differences–is that the current system of economics and state power that typify American capitalism is no longer tenable. This paper agrees with this broad indictment, and seeks to use the insights of all four authors in order to make sense out of it in more detail. The purpose of the mortgage bailout plan, at least according to official sources, is to stem the tide of foreclosures that are marring the American landscape. Roughly $300 billion in state funds are being used to assist homeowners keep their homes.
In general, the point of the program is to assist those homeowners who are either on the verge of foreclosure or who are carrying mortgagees that are worth more than the actual value of their home. (Tedford, 2009) But as always with these plans, the bulk of the money is going to bail out the major firms, those firms who either over-lent, or who were pressured to lend, such as Fannie Mae, that will receive almost 2/3 of the federal funds (Tedford, 2009) In more detail, the money will go to the Treasury department that is authorized to spend it to buy stock in the major mortgage firms.
Some of this money will go to cushion the major firms in their re-lending cash at lower rates than prime, in effect subsidizing the major mortgage lenders so that they will lend at lower rates. This plan, in effect a major giveaway to failing mortgage firms, will basically apply to those areas of the country that are seeing foreclosure rates at more than 9%. The goals of these programs are, officially, to assist troubled homeowners to both pay old mortgages and to create new ones though refinancing. Unofficially, the real issue is to bail out the mortgage firms who are stuck with increasingly worthless paper.
In a recent statement, the Treasury Department sais this: The increased funding will provide forward-looking confidence in the mortgage market and enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners (quoted in NPR, 2009) But by claiming this is about “responsible homeowners,” Treasury is saying two things: first, that they can tell who has behaved responsibly and who has not, and, at the same time, that Treasury can tell what lending institutions have themselves behaved responsibly.
While Obama himself made the pledge that this money will not go to assist irresponsible homeowners, such a view assumes that the federal government has these facts on file and can reference them. Of course, there is no such thing. The Obama White House has sent out a paper that describes the four major pillars of this plan: 1. That roughly 5 million persons who are currently ineligible for refinancing now are, and can work with the major lending institutions to receive a refinancing schedule at below market rates.
The basic criteria are that the mortgage must exceed the cost of the house, in other words, overvalued mortgages. Lenders would cut mortgage rates to add up to not over one-third of the owners income. Since this time last year, home foreclosures have increased over 81% (Tedford, 2009) 2. To “create incentives” to have the major lending institutions provide sub-prime loans to homeowners who are in trouble. But the above statement put flesh on those “incentives,” the taxpayers will bail them out in exchange for helping struggling homeowners. 3.
To take “major steps” to make certain that middle class homeowners can keep their homes by keeping up with their monthly payments. These major steps, again, are to subsidize the major institutions so that they will “go easy” on struggling homeowners. 4. Pursue steps that will make it easier for families to avoid foreclosure, including, so the White House claims, “allowing bankruptcy judges to reduce mortgages on primary residences to their fair market value” (quoted on by NPR). Given that, the questions that arise and the theoretical positions one can take on this plan are endless.
The remainder of this paper will attempt to reduce these basic points to eight, taking in both the economics and the basic morality of the plan, its political ramifications and who benefits from it all. 1. The broadest criticism here is that the plan, like all the others in different sectors of the economy, prolongs the problem, gives it a new lease on life, and does not address the root causes. In short, the plan is a political ploy. The central contradiction is this: the necessity to constantly extend credit to mop up excess production.
But it is this excess production that maintains the American economy and supports the power of the dollar worldwide. Without the constantly extended credit, the US could no longer dictate the “rules of the game” to the global economy: the US, in other words, is both a military and economic hegemon. But unless the US is the world’s emporium, such power will fade. This seems rather abstract, but it needs to be understood to bring to light the fundamental contradiction in the American economy.
Debt must be extended to continue consumption, but this debt cannot eternally be extended, soon, the system will reach a point where there is no hope of repayment. Hence, the extension of credit for housing or anything else is a dead end, but it is the lifeblood of the economy. Hence, it is a fundamental contradiction that none of the bailouts address. Making matters worse, none of the authors surveyed for the paper will deal with this fundamental contradiction of modern (or post-modern) capitalism. But this is the nature of capitalism.
In the housing market, the major contractors and suppliers who support the construction industry are a substantial element of the economy. Constant construction and renovation is itself a large portion of the commodity consumption in America. Hence, if banks were to have backed off on lending 20 years ago, the economy would have still entered into a tailspin given the idle capital that would have come into existence. But in extending credit (the “predatory lending” policies of the major firms) they also set themselves up for a major crash, leading to a major bailout.
So the system loses either way. Hence, it is the system, not “predatory” lending, that is at fault. Therefore, the broadest critique of the plan is that it preserves the system that is fundamentally unsound, as it depends on the endless supply of credit to absorb production. But credit cannot be extended indefinitely. If it not extended, the economy contracts. Hence, the system is untenable. 2. The plan as laid out by Obama as a more specific flaw: that of figuring out who is a “worthy” target for the plan and who is not. There is no way to tell this.
There is no way to figure out which “middle class” homeowners have managed their money well, and which homeowners have spent their money on needless luxuries like Ipods, alcohol, tobacco, endless new clothes, etc. But, like in #1, the spending recklessly on such products is necessary to the economy. But more fundamentally, there is no mechanism in place that can detect a responsible citizen from an irresponsible one. Hence, despite Obama’s assurances that this cannot happen, there is little real evidence that a system is in place to tell one from another.
It may well turn out that the money will be spent arbitrarily by the major firms in their own interests. 3. But as Ron Paul holds consistently through his book: there is no money. The fact is that the taxpayers will not be taxed directly to finance this, but indirectly, since they will be put on the hook for the additional loans the Treasury will be forced to take out to finance this. These loans will merely add to the already unrepayable debt both of the private and public sector, and hence deepen the problem, not solve it.
Paul holds that the US is so overstretched in every way that nothing but revolutionary change can even begin to change the way the state and the private sector does business. The bailout(s) exist solely as a band-aid solution to a problem that is fundamental. The US, in other words, cannot maintain a global empire on the one hand, and seek to bail out all in trouble on the other. A government (as well as a private sector) drowning in debt is in no position to bail anyone out, let alone the major firms that engaged in irresponsible lending in the first place (Paul, 2008). 4.
But from a moral point of view: what sort of message does this send? It seems to say that reckless spending will be rewarded, and that the crisis is no one’s fault. The myth that this is just another “bad patch” in the economy is not a tenable position to maintain. To hold that some private firms are just “too big to fail” leads to the public perception that the powerful can always count on a bailout while the poorer classes get stuck with the bill. There does not seem to be any stated “process” to receive this aid, and this is largely because the program is voluntary, businesses can accept or reject the government’s terms.
The “process” to qualify for any of this aid is something that must be done on the basis of lender/client negotiation. At the moment, it is difficult to tell which specific classes will be most affected by this program, since as of now, the foreclosure crisis is affecting both middle class and lower class homeowners, and those upper middle class buyers who overstretched themselves over the last decade. The reality is that there is fault all around, but the bailout merely stretches out the adjustment (or revolution) needed to reset the economic system as a whole. These bailouts serve as a political palliative to maintain the system as it is.
Morally it is wrong for it diverts attention from truly systemic issues and seeks to put out the fires rather than to kill the arsonist. But killing the arsonist would require nothing short of a revolution of the state, the economy and the aptitudes of the citizen that it is almost unthinkable. Hence, the bailouts in general allow both citizens and politicians to avoid the issue entirely. This mortgage bailout is a plan to assist investors, not homeowners, since citizens are now being encouraged to continue to pay on mortgages and refinances that are radically overvalued to begin with, hence perpetuating the irrational system more and more.
5. Should the assets of the major firms be confiscated? While reading the particulars of the Obama plan, this thought crossed this writer’s mind. Would it not be better to merely cancel the debts owed to the major firms and allow the homeowner to keep the house without payment? Could this be done with all mortgage holders? Given the massive amount of cash being spent on wars and a military establishment abroad (Ron Paul says 160 countries) the money is clearly there to permit all American citizens to simply keep their houses without payment. While this seems extremely radical, the impact on the economy would be tremendous.
This would essentially be a state sponsored form of income redistribution from the major banks to the average homeowner without an intermediary. Paul Krugman might actually find this amenable (though he is too moderate for it) in that it would be a major step toward equalizing incomes in America without much actual work. The mere cancelling of mortgage payments would free up a tremendous amount of money, as well as disenfranchise the major lending firms who are partly to blame for this crisis. It would be a major cancellation of private sector debt that is dragging the American economy downward.
The morality of this can be seen from two points of view: the American consumer would finally get a due reward for his labors. His house would be his forever. The average American would be empowered over the banks for the first time. But at the same time, irresponsible Americans would be rewarded. But irresponsible banking agents would get their comeuppance. It would send a message that America is a nation of homeowners rather than mortgage payers, which is not ownership. Under a mortgage, the bank owns the house, and the bank receives the payments and their profit (in the form of interest), or else that bank confiscates the house.
One is only a homeowner once the bank is paid off more than the value of the house. But this rarely happens, hence, America is a nation of renters, not owners. 6. Paul Krugman spends quite a bit of time speaking of the income gap in America. It is a serious moral issue. Cancelling mortgage payments and back taxes would be step in the right direction, permitting a nation of middle class homeowners to spring up where previously there had been Americans working to make banks prosperous and to pay for homes more than they are worth for as long as the citizen is alive.
On the other hand, these series of bailouts do little more than to maintain the current level of income disparity, which is outrageous, and amounts to the overwhelming majority of Americans working in order to enrich the handful. The Obama administration could fix this at the stroke of a pen, and the endless lawsuits from the major investment firms would be met with the newly enfranchised homeowner and their righteous anger. Once one reads The Jungle for the first time, one is struck by the struggles of the lower class worker, who works constantly for low pay and endless debt.
This debt and the official encouragement to become more and more indebted leads to, among other things, a destruction in personal morality and a lack of a real stake in the system. The American founding fathers deliberately restricted the vote to those who had this stake, real property owners, not slaves to the banks. This was because they made the important connection between pubic morality and property ownership, those who own property have a stake in the economy and hence become civic minded and moderate in their opinions. The current bailout plan perpetuates the system that created this debt bondage in the first place.
But more seriously, it might increase inflation and continue the decline of the dollar. Both of these are serious issues when money is being thrown at problems that do not admit of band-aid solutions. If major economists such as Levitt speaks of “adjustment” that is necessary in the economy, why cannot it be the major mortgage firms that do the adjusting. System economists continue to speak of necessary adjustments, that is, hat layoffs should continue and foreclosures as well, and those people involved should then adjust their lifestyles to the new conditions, restoring balance to the economy.
But it seems that it is the average taxpayer that has to make the adjustments, why not the major figures in the banking industry? America would become a land of homeowners and the banks would suddenly be beholden to the citizen, not the other way around. Inflation and devaluation would be nipped in the bud since the available liquidity would then be spread around to other areas of the economy, including home improvements. 7. Furthermore, it seems that the lending institutions bear the brunt of the blame here. First, they continued to extend credit after it was rational to do so.
The main explanation for this is that the stress was on short term profits rather than long term balance. Therefore, as the Obama plan stands, it is these very same firms that will receive the bulk of the money, and, even with that, their participation in the plan is purely voluntary. If anyone is rewarded here, it is the banks, not the homeowners, that will now be encouraged to spend more and more money on increasingly overvalued mortgages. 8. But the state should also not be left off the hook. The state is the one who encouraged this lending by continually pumping money into the economy and promising bailouts rather than serious reform.
If Obama is upset by “predatory lending,” and yet, wants to lower rates, how is this anything other than dragging out the lower rates for a bit longer (5 years to be exact)? And since there is a 5 year limit on all of these mortgage plans, how will this help then? In 5 years, the same situation will emerge. Hence, given this, it seems that this plan is merely a ploy, not a serious attempt at reform. What it does is give the new administration some breathing room, permitting the problem to be placed 5 years into the future (just into the next presidents term, or his own second term) rather than being dealt with now.
It seems a political move more than anything else. It is a short term fix that covers over the problem and does not solve anything. From this writers’ point of view, the cancelling of all mortgages is the only way to really help homeowners and to bail out the economy. References: Levitt, Steven. Freakinomics. Harper Collins, 2005. Krugman, Paul. The Conscience of a Liberal. WW norton, 2009. Paul, Ron. The Revolution: A Manifesto. Grand Central, 2008 Sinclair, Upton. The Jungle. Doubleday, 1906 Tedford, Deborah (2009) “How the Obama Mortgage plan Works. ” NPR, 2009 http://www. npr. org/templates/story/story. php? storyId=100831129Sample Essay of BuyEssay.org