Posts Tagged: bailouts

American Society / Corporate Behavior / Financial / Political / Tax Policy — 0 Comments
3
Jul 11

All Millionaires are Not Created Equal

In Is Debt Ever Good? we contrasted productive debt and non-productive debt.   There is a duality with millionaires as well.   Some are productive and some are not.

At his Wednesday press conference, President Obama adopted what he figured would be the populist stance, and he vilified millionaires as a group:

Mr. Obama repeatedly mocked tax breaks that he said were for “millionaires and billionaires, oil companies and corporate jet owners,” saying that voters would not look kindly on Republican lawmakers who defended such breaks at the cost of cuts in popular programs like health care, education and food safety….

“If you are a wealthy C.E.O. or hedge fund manager in America right now, your taxes are lower than they have ever been. They are lower than they have been since the 1950s. And they can afford it,” Mr. Obama said. “You can still ride on your corporate jet. You’re just going to have to pay a little more.” See Obama: Republican Leaders Must Bend on Taxes

The financial press immediately declared this as “class warfare.”  See e.g. Obama’s Case Against the Rich Rings Hollow.  I would conjecture that the American public can distinguish between the good millionaire, who creates jobs and real wealth, and the bad millionaire, who becomes wealthy through political maneuvering or illegal activity.

The Productive or “Good” Millionaire

Americans applaud individuals from all backgrounds who have an innovative idea and are able to execute and create real wealth.  Bill Gates (Microsoft); Sergey Brin and Larry Page (Google); Steve Jobs (Apple); Jeff  Bezos (Amazon);  Pierre Omidyar (EBay); Mark Zuckerberg (Facebook) and a host of other entrepreneurs identified a business need, created a new product or service, raised private capital and became wealthy.   Even in the much maligned financial industry there were pioneers such as Charles Schwab who brought discount brokerage and other financial services to the average investor.  These are thriving enterprises, which need no government assistance or special tax breaks to make money and create jobs.

The Non-Productive or “Bad” Millionaire

Unfortunately, we have too many examples of this type of wealthy interloper:

Failed Bankers – Richard Fuld (Lehman), Charles Prince (Citicorp) and Ken Lewis (Bank of America) are examples of bankers who drove their institutions into bankruptcy or made them wards of the state.  Each of these individuals secured great wealth and suffered no compensation “clawbacks” or criminal prosecution.

Failed Corporations – During the financial crisis, companies like General Electric almost went bankrupt.  When they should have diluted shares and jeopardized their own stock-based compensation through equity and debt offerings, crony capitalists such as Jeff Immelt called on their Washington “friends” to extend large, below market rate, irresponsible loans to GE.

Under- performing Corporations – Legions of CEOs collected large compensation packages while their businesses, employees and shareholders suffered.  Instead of amassing their personal largesse at company expense, many an under-performing CEO should have been dismissed.

Criminal Enterprises – Ken Lay and Jeff Skilling of Enron and Scott Sullivan and Bernie Ebbers of Worldcom, among a long and undistinguished list of corporate malefactors, were able to deceive shareholders and bankrupt their businesses.  And worse, each amassed a large personal fortune.

Defense Contractors – A small, tight knit cadre of defense contractors feed at the Defense Department trough.  Many of these contractors have been accused of violating various bidding and other contracting rules, but are never disqualified from bidding on future contracts.  Cost overruns, delays and malfunctioning systems occur far too often.

Why Are Americans Angry?

We are angry at millionaires who game the tax code, misrepresent the financial status of their businesses, and seek government bailouts while continuing to pay themselves outsized compensation packages.  We resent non-performing CEOs who continue to be richly rewarded. We oppose government contractors with cozy Washington relationships.  To the average American, these millionaires win because the game is rigged.

Americans applaud the honest entrepreneur because he or she fills a real societal need. Further, these individuals are the best examples of the American spirit and ethos of creative imagination, perseverance and hard work yielding a valuable result. Americans do not want to destroy these individuals; they want to be these individuals.  Obama is overreaching when he paints all millionaires with the same brush.  What Americans want is an end to the bailouts and special deals that destroy incentives for honest entrepreneurs and both create and protect the undeserving rich.  Americans  want a level playing field so they can compete and become wealthy, too.

 

 

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American Society / Banking / Economics / Financial / International Finance / Political / The Federal Reserve — 0 Comments
24
Nov 10

Who Pays?

Early in my career I learned a valuable lesson.  In the course of a transaction, a question arose as to how much in pension assets were to be transferred to the buyer’s plan.  The pensions for employees transferring with the business were guaranteed and never in jeopardy.  The only question was who would pay to fully fund the pension plan, the buyer, one large company or the seller, another large company?

Much disinformation exists about the roots and causes of our current financial crisis.   Republicans blame Democrats, and vice versa.  Banks blame government policy, and vice versa.  Homeowners blame lenders, and vice versa.   The US government faults the failure of the Chinese to let the yuan rise in value.  The blame game is endless.

Government and its supporters have promised financial salvation in little understood programs such as TARP, TALF, QE1 and QE2.  By design these programs are meant to confuse and mislead legislators and the public.  The pseudo science of Federal Reserve and Treasury Keynesian technocrats has produced few if any promised results.  I believe that these programs have been deliberately designed to hide their designers’ true agendas: socializing losses among taxpayers, and allowing malefactors to keep profits and undeserved, out-sized executive bonuses.  Non-stop government propaganda again supports keeping the truth from the public.  See 1984 in 2010. What is missing from the discussion is the proper allocation of both blame and responsibility.  And logically flowing from that absent conversation would be the fundamental question now:  who should pay?

Ireland’s current financial crisis foreshadows what could happen here.

Ireland Pays and Pays

After steadfastly considering a bailout, the Irish government stated that it intended to negotiate a bailout package with the EU and the IMF.  Reports indicate the package could exceed $85 billion Euros ($149b).  The government would take over one bank and take a majority stake in another bank.  Report Asia One News

The central bankers have extracted financial concessions from the Irish government.  Ireland must operate under an austerity budget with increased property and taxes on the wealthy coupled with a ten percent or more budget cut each year for the next four years.  It is expected that the current government will be dissolved and new elections held.

How Did Ireland Get Into This Mess?

Like many economies, Ireland’s recent prosperity was built on a real estate boom.

Much of its growth was built around the property market, but since 2008 this has suffered a dramatic collapse.

House values have fallen by between 50% and 60%, and bad debts – mainly in the form of loans to developers – have built up in the country’s main banks. This almost wrecked the institutions, leaving them needing bailing out by the government at a cost of 45bn euros (£39bn; $60.1bn).

This has opened a huge hole in the Irish government’s finances – which will see it run a budget deficit equivalent to 32% of GDP this year. See BBC Q&A: Irish Republic Finances

When the property market collapsed the government stepped in to save its banks:

As several of the banks have been part-nationalised, most of their massive debt is now actually government debt.

And the great majority of this debt is owed to foreign lenders, which the Irish banks (and therefore the Irish government) simply cannot afford to default on. See BBC Q&A: Irish Republic Finances

Thus, the government saved foreign holders of Irish debt and the private Irish bank bondholders.  The losers are the Irish taxpayer and their economy.

The US Taxpayer Also Pays and Pays

Seemingly innocuous words and phrases such as “bailout,” “government guarantee,” “quantitative easing” or “Troubled Asset Relief Program” hide the true nature of the governmental objective.  Whether it is Bank of America, General Motors, General Electric, Citicorp or Chrysler, these are enormous businesses that made bad decisions.  The litany is long and undistinguished: lending irresponsibly (no income, no job loans); using too much leverage (Bear and Lehman); selecting the wrong products (SUVs during the oil price crisis) or misleading accounting (GE pension accounting).  All of these were private businesses pursuing profits.  Shareholders and bondholders of these enterprises willingly invested, hoping for share appreciation, dividends and interest payments. They understood the risk that businesses could go bankrupt, or dividends and interest suspended.

The rallying cry of “save the banks” or “save GM” is really a way of transferring losses from the business and its investors to the taxpayer.  With QE2 we face the prospect of the taxpayer/consumer paying the hidden tax of higher inflation.  Just after QE2 was announced the Fed revealed its true purpose:  saving the banks yet again by requiring a second round of bank stress tests.

A Moment of Morality

Karl Denninger provides an unvarnished view of the morality of the Irish bailout, the parallels to the US and what must happen:

Looting becomes impossible to sustain eventually.  Now the Irish Government thinks that the Irish people should pay for being robbed!

It’s not enough to get ripped off – now the government wants to tax the people to pay for the stealing that they allowed to happen in the first place.

This is no different than what happened in Greece or the United States for that matter, and it will continue to happen until the people stand up and refuse to accept it.

Further, and far more importantly, shifting the bad debt around doesn’t get rid of it.  It simply tries to impose the cost on the nation as a tax – a tax that cannot be paid, and won’t be paid.

To the Irish people: You must choose between putting a stop to this – no matter what it takes to enforce that demand – and literal debt peonage and servitude imposed upon you for the sins of a handful of rich bastards that robbed all of you. See Another Lie Exposed: Ireland

Behind all these fancy financial terms and maneuverings there is a moral dimension.   Judeo-Christian theology is based on concepts of reward and punishment.  Capitalism follows the same path.  Rewarding financial elites who misbehaved, and punishing hardworking, prudent taxpayers, runs contrary to a moral core.  The programmatic maneuverings blur the distinction between right and wrong.  Further, from an economic viewpoint it encourages moral hazard, that is, risk taking without fear of punishment.  Ultimately, the populace refuses to accept this new burdensome status quo and real trouble starts.

Until now, we in the US have accepted the status quo that we must save banks, auto companies and insurance outfits and further burden taxpayers.   Has anyone in authority explained why, or offered any other alternatives?  If we don’t ask these questions soon, we face a weekend like Ireland is experiencing right now:  looking down the gun barrel of austerity and increased taxes or worse.

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American Society / Economics / Political — 0 Comments
15
Jun 10

Bailout Nation Lives: Revisited, a Short Update

A mere two days after Bailout Nation Lives was posted, the President urged Congress to bail out states to avoid massive layoffs. The President

…urged reluctant lawmakers Saturday to quickly approve nearly $50 billion in emergency aid to state and local governments, saying the money is needed to avoid “massive layoffs of teachers, police and firefighters” and to support the still fragile economic recovery.  In a letter to congressional leaders, Obama defended last year’s huge economic stimulus package, saying it helped break the economy’s free fall, but argued that more spending is urgent and unavoidable. “We must take these emergency measures,” he wrote in an appeal aimed primarily at members of his own party. See Obama Pleads for $50b in State, Local Aid.

The price tag for this proposal will be $50b.

The Problem

  1. We continue to foster profligate spending
  2. We spare states the need to make the hard choices of picking which employees need to be laid off (it does not necessarily require states to lay off police or teachers); raise taxes or cut spending in other areas.
  3. Knowing that this proposal is unpopular, we get another weekend announcement to deflect criticism.  Where is the vaunted transparency the Administration trumpeted? See Shredding the Social Fabric where we discussed the pre-Christmas Eve unlimited bailout of Fannie Mae and Freddie Mac.
  4. Given all the Administrative propaganda on the robust recovery, why must we take “emergency measures” to support the “still fragile recovery?”
  5. Are ANY groups not entitled to a bailout?

Where is Your Money Going?

The savvy view is that Obama is just buying the votes of public sector union members in key states.  See Obama Once Again Wants to Buy Union Votes with your Tax Dollars. Our money is going to pay very rich public sector salaries, pension and health benefits.

Juxtapose the problem of underfunding state pension plans with rich salaries and benefits in the public sector.   Michael Shedlock points out that seven state pension funds will be out of money in 2020 and twenty state pension funds out of money in 2025.  See Seven State Pension Funds Out of Money by 2020.

At the same time we learn that 100 top administrators have earned pension benefits that actuaries value from $7m to $26m. See Make this Story Go Viral – You Thought California State Pensions were Out of Control? Wait Until You See this List from Illinois. The Illinois state teachers’ pension fund is 61% underfunded and is employing risky strategies using derivatives to try to achieve full funding.

Why shouldn’t we get “back to even” with risky investment strategies that smack of “doubling down” in Vegas?  Obama has our backs and is sure to bail us out when we inevitably fail.

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American Society / Economics / Financial / International Finance / Municipal Finance / Political / State Finance — 0 Comments
10
Jun 10

Bailout Nation Lives

Where is the coordination of economic policy among the Federal Reserve, the Treasury and Congress?  In testimony before Congress, Ben Bernanke, Chairman of the Federal Reserve warned against large budget deficits:

The Fed chief repeated his call for lawmakers to come up with a long-term plan to reduce the federal budget deficit, which is projected to widen to a record $1.55 trillion this fiscal year. “Unless we as a nation make a strong commitment to fiscal responsibility, in the longer run, we will have neither financial stability nor healthy economic growth,” he said.  See Bernanke Says Fed Prepared to Counter Effects of Europe Crisis

It is clear that bailouts are not consistent with fiscal responsibility.  But it seems the Administration and Congress are tone deaf to these no more bailout pleas.

No Constituency Left Behind

We have analyzed the bailout actions of the Bush and Obama administrations. See Are We a Socialist Country? It has been a long and undistinguished progression from Bear Stearns, AIG, American Express, GM, Chrysler, GE and others.  We have collectively decided that banks, insurance, automotive, industrial, credit card and other companies are too systemically important to fail, and are therefore bailout worthy.

Despite all protestation the Obama Administration appears to be on a constant search for new bailout candidates:

-          A $23B Bailout for Teachers – Education Secretary Arne Duncan urged Congress to support a $23b jobs bill to prevent teacher layoffs.

-          Why Leave Out Pension Funds? – Senator Casey, D-PA proposes affording two large multi-employer Teamster pension plans federal protection.  The estimated cost would be $8-10b.

-          US Largesse Goes Global – Through IMF membership, the US taxpayer will be funding the bailout of Greece and other European nations. IMF Chairman Boutros-Ghali pointed out the perilous financial position of the IMF and the need for more member capital contributions.  Rep. McMorris Rodgers, R-CA highlights the hidden cost to us:

“This should give pause to Treasury Secretary Geithner and others who boasted that the IMF’s bailout bonanza wouldn’t cost U.S. taxpayers a dime,” said Rep. McMorris Rodgers.  “In truth, the cost to U.S. taxpayers goes up every few weeks.  After the Greek bailout, it stood at about $7 billion; after the EU bailout, it stood at about $60 billion.  Now – based on Mr. Boutros-Ghali’s comments – we’re talking at possibly $100 billion or more.  This has got to stop.” See Congresswoman McMorris Rodgers Responds to IMF Statement Europe Bailout will Cost  US Taxpayers 100 billion+

-          As we have pointed out, Fannie Mae and Freddie Mac are uncapped, growing, perpetual bailouts. See Shredding the Social Fabric.

The Hidden Costs of Bailouts

Politicians are constantly on the prowl for a free lunch.  Bailouts and promises of “little cost to the taxpayer” provide that seemingly free repast.  A closer look at the bailout phenomenon shows us its high and hidden price tag.  A look at some unintended consequences:

  • Bailouts only add to the burgeoning federal deficit.
  • Ultimately, they will be paid for either through higher taxes, higher inflation or both.
  • We are eroding financial discipline.  GM was roundly criticized for giving away a new Corvette to a Detroit Tiger, who pitched a near perfect game.
  • Likewise, we are eroding fiscal discipline in states and municipalities, which should be cutting budgets and raising taxes rather than seeking bailouts.
  • We are compromising our most basic federal system of separation of powers, as a state and local function, education, becomes a federal ward.
  • We are encouraging moral hazard with reckless and profligate behavior (and prudent behavior is punished).
  • Bailouts beget other bailouts, as it become impossible to draw the line when future constituencies come to Washington for their bailout.
  • Today’s funding of bailouts limits the flexibility of the Administration to respond to future, more serious crises.

Fundamentally, bailouts are unfair, as one group is leveraging its political clout to earn a bailout at the expense of innocent taxpayers.  Rewarding the profligate and the irresponsible makes little sense as public policy.  It is time to end the bailouts.

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American Society / Banking / Economics / Executive Compensatio / Financial / Political / Uncategorized — 0 Comments
10
Mar 10

Are We a Socialist Country?

Europeans and Russians are socialists.  Americans are staunch capitalists.  Maybe all it took was a financial crisis to reveal the slide toward socialism in America.  During the Cold War, faced with a military threat from the Soviet Union, Americans would rather have died than become socialists:  better dead than red.  Unwittingly, we now invite socialism into our lives.  Ironically Wall Street firms and large industrial corporations, the purported bastions of capitalism, have paved the way to socialism.  A left-leaning Administration has been only too happy to oblige.

The Slippery Slope

The road to hell is paved with good intentions.  I do not think any of the pillars of our economy intended that the country become socialistic.   Each entity was merely maximizing its own position, seeking to enhance shareholder value.   When financial crisis hit, our formerly capitalistic businesses could not rush to Washington fast enough to seek support, bailouts and guarantees from the government.   The government was only too happy to oblige with the passage of TARP and then an alphabet soup of government support and guarantee programs.  In one short crisis period from summer 2008 to spring 2009, the government ignored 200 years of American economic and constitutional history to save a group of greedy and profligate bankers and industrial corporations.   The end result: we privatized profit and socialized losses.

A Factual Progression

Here are the events that have taken us on the path to socialism:

  • The Federal Reserve’s active role in the forced sale of Bear Stearns to JP Morgan
  • The Government seizure of Fannie Mae and Freddie Mac
  • TARP:  Government purchase of troubled assets from private financial institutions
  • Goldman Sachs and Morgan Stanley become banks by expedited process  to obtain government guarantees
  • Government seizure of AIG and complete payback to private institutions for credit derivative losses
  • Federal Reserve intervention in broker mergers, with guarantees against losses (Washington Mutual with JP Morgan, Wachovia with Wells Fargo)
  • Federal Reserve intervention with $1.3 trillion in loans to companies outside the financial sector (GE).
  • Government removal of management at GM and Chrysler
  • Restrictions on executive pay for banks receiving bailout funds
  • Government restrictions on foreclosures unless there has been a Home Affordable Modification Program review.
  • Administration desperation to pass comprehensive health insurance program.   See Timeline:Global  Economy in Crisis

How Did We Get Here?

We invited the devil in the door.  Banks claimed that they could not withstand loan and derivative losses.  Unemployed Americans wanted extensions in unemployment benefits and stimulus programs.  Nobody wanted to see the stock market crash and their portfolios and retirement plans decimated.  Big business wanted the profit opportunity in universal health care coverage.  Insurance companies did not want to hurt their policy holders.  Auto workers wanted to maintain their rich union contracts.  The litany goes on.

Once we were a brave, independent and self-reliant nation.  Now when adversity strikes our first inclination is to blame others and call Washington for a bailout or a handout.  I do believe in the concept of welfare.  Welfare was meant for the truly dire circumstance, the impoverished citizen. Welfare was not meant for auto workers to maintain above market wages and job guarantees, banks to get paid in full for risky derivative bets, GE or GM, homeowners who falsified their income disclosures to remain in McMansions or every insurance policy to be paid in full.

Capitalism is about freedom, risk and failure.  Without failure there can be no progress.  The slide toward socialism is an escape from freedom and ultimately an end to progress.

My European immigrant grandfather lived through the Depression, World War Two, and into the 1980’s.  He once told me he was most proud that he never went on relief (welfare).  We should return to the ways of our forbearers, regain our mettle and become too proud to ask for a handout or bailout.   Our freedom and that of our children depend on it.

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American Society / Banking / Business / Justice System / Political — 0 Comments
27
Jan 10

We Can Handle the Truth

“You can’t handle the truth!” Col. Nathan R.Jessep in A Few Good Men

After his election President Obama had the opportunity to educate the public on the causes of the financial crisis and the necessary steps to help us emerge from it.  Over this past year, he has squandered this chance, and in so doing has created the political backlash that is occurring today.

Policy Making and the Truth

With great fanfare, we inaugurated President Obama against the backdrop of the greatest financial crisis since the Great Depression.  In any new Administration, policy making is never easy and advisors at times seem to operate in virtual echo chambers, hearing only themselves.  They presented Obama with a range of options: nationalize the banks; let them fail and let the bankruptcy courts sort it all out; continue the Bush/Paulson bailout policies.  From the beginning, Obama advisors took the middle of the road policy to continue the bailouts.  As voters and participants in a democracy, we can now see the missing piece in this scenario. President Obama owed the public an explanation of this policy choice.  My guess is that his advisers warned against candor.  I would further conjecture these advisers felt that candor would have made the crisis worse.  Elites always worry about scaring the masses. This was confirmed at today’s Congressional hearings on AIG.  AIG was viewed by both Timothy Geithner and Henry Paulson, as the “end of the financial world as we knew it.”  The Administration and we are now suffering the consequences of this subterfuge.

Back to the Future

President Obama could have made a few simple points that would have educated the public, built a consensus for his policy choice and left open future policy options if the bailout approach failed.

President Obama could have made these simple and direct points:

  • We are facing the greatest financial crisis since the Great Depression
  • We got into this problem by borrowing too much, and producing and saving too little
  • At the center of this crisis are the large money center banks and Wall Street investment firms
  • Using inappropriate levels of borrowing and creating non-transparent products, derivatives, which could not be accurately valued or traded, these banks and firms gambled with our money.
  • Banks, however, are the transmission mechanism for getting money into the economy through check clearing, making loans and other services.
  • We are going to provide enough support for the banks to continue their necessary and transparent functions.
  • There will be a consequence to any bank for needing this ad hoc and unusual government support.
  • Shareholders and creditors of the banks must share in some of the losses.
  • Bank employee bonuses will be severely limited or eliminated until the banks recover.
  • The government will take part ownership in the banks until they return to financial health.
  • I have asked my Attorney General to investigate whether these institutions committed any crimes.  I will ask him to hold indictments in abeyance until we are on our way to recovery.
  • Let me assure you that the government will punish wrongdoing.

We Build Prisons of our Own Making

We know this fictional address to the public did not take place.  The Obama Administration now owns the policies of failed bailouts.  The recovery is precarious and now the government asserts that the health of the stock market hinges on re-appointing Ben Bernanke as Federal Reserve Chairman.  The Massachusetts senatorial election was a wakeup call that the middle class is “mad as hell and isn’t going to take it anymore.” See The President Wakes Up and Smells the Election Results.

In tonight’s State of the Union Address, President Obama scratched the surface of candor. He stated that he hated helping the banks, but that failure to do so would have led to greater unemployment, business closure and lost homes.  President Obama, it is not too late for complete candor. It is not too late to commence investigations and prosecutions.

Col. Jessep was wrong: the American public can handle the truth!

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American Society / Banking / British Society / Financial / Political — 0 Comments
31
Dec 09

Shredding the Social Fabric

A continuing barrage of headlines reveals even more government bailouts of private enterprise:

  • GMAC received bailout funds of an additional $3.8b on top of $13.5. (See BBC News report)
  • The Obama Administration on Christmas Eve gave Fannie Mae and Freddie Mac, two government sponsored enterprises, a “blank check.” Previously each of their bailout levels had been capped at $200b.  The New American reported that these two GSEs now have unlimited Treasury bailout funds until 2012.
  • After a fourth bailout this year, AIG received $180b from the Treasury.

Private enterprise awards of obscene amounts of money from the Treasury are indefensible.  No amount of government spin can mask this truth:  private businesses which made massive mistakes in lending and insurance practices are now being given unlimited access to taxpayer funds.  Why “unlimited” bailout funds?  And worse is the Administration’s unknowing and ambivalent response as to future bailouts: “we sure hope not.” This is Viet Nam war thinking applied to the current financial crisis: “We are so far into the bailout now, how can we stop?”

Harbingers of Social Mood

Issac Newton theorized: “to every action there is an equal and opposite reaction.”   Societies function because a broad consensus agrees upon accepted modes of behavior.  Importantly, these behaviors are mostly voluntary rather than state coerced.  The best example in the United States is the payment of taxes, as we have a largely voluntary compliance system, as the IRS cannot audit everyone. Two recent examples rips in the social fabric have appeared:

  • Shoplifting – Father Tim Jones, a parish priest in York, England, encouraged the poor among his congregation to shoplift to feed their families:

‘My advice, as a Christian priest, is to shoplift,’ he said. ‘I do not offer such advice because I think that stealing is a good thing, or because I think it is harmless, for it is neither.’

But he said it was less harmful that prostitution, burglary, or robbery; he further said that the desperate should target large stores rather than small businesses, and take nothing they do not need. He wasn’t, I think, trying to set off a crime wave in his native York. If he resembled any other thoughtful vicar I have known, he was just trying to dramatise the plight of the local, unglamorous poor for a congregation which might prefer the objects of his charity to be on another continent.  See The Guardian

  • Jingle Mail – Jingle mail is the new jargon describing a homeowner’s strategic default and abandonment of his home, in essence mailing his keys back to the bank. Much has been written about mortgage foreclosures.  For 2009 experts project 4.5 million mortgage foreclosures, with 1.5 million of these foreclosures from strategic defaulters.   When a homeowner realizes that the value of his house is significantly below the amount of the mortgage, walking away may be the best financial option.  This strategy would be even more appealing in non-recourse states like California. See Richard Benson, “Jingle Mail, Jingle Mail“

Consequences

Americans will not idly watch without reaction the bailout of private corporations at taxpayer expense.  The preferred reaction would be through electoral changes in November.  But even electoral changes can be subverted through lobbying and financial clout of big, politically connected corporations.  And neither Republicans nor Democrats are immunized against the lobbying disease. Just examine the bi-partisan lobbying of insurance, pharmaceutical companies and financial companies in the health care and financial reform debates.

Hopelessness forces individuals to undertake self-help remedies. Today it is jingle mail and shoplifting.  Tomorrow it could be refusals to pay taxes or credit card bills.  Perpetual institutional bailouts can only be a path to further rips in the social fabric and ultimately to, anarchy.

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