Apparently our politicans’ behavior is rubbing off on us. Last week, The Wall Street Journal featured an article titled “American Dream 2: Default, Then Rent,” featuring Americans who had decided to stop paying on their mortgages and instead rent a house. This is a trend that is rapidly increasing in frequency across the nation as homeowners are realizing that their house wasn’t a particularly great investment. According to the article, analysts at Deutsche Bank Securities expect 21 million households in the U.S. to owe more than their mortgages are worth by the end of 2010.

With the collapse of American International Group last year, the government has worked feverishly to point their fingers at corporations and executives. Let’s clarify – AIG sold mortgage-backed securities, or investments which relied on the value of mortgages to stay afloat. As homeowners defaulting on their mortgages started to spike, the value of the securities plummeted. AIG suddenly owed far more than it could pay. Ultimately, foreclosed-upon homeowners lost. AIG and its employees and shareholders lost. Innocent American taxpayers lost.

Tragically, from taking out a loan to paying our taxes, we are all funding this behavior. Interest rates in part provide insurance for the lender. There will always be people defaulting on loans – the interest rate then builds in a little extra pad to compensate for those losses, and so we pay more to borrow. Additionally, many loans have been insured by the federal government, and that number is steeply increasing. The Federal Housing Administration now insures tens of millions of mortgages. If a homeowner defaults on an FHA loan, the American taxpayers foot the bill.

Here’s the kicker – AIG used part of its government bailout to award its executives multi-million-dollar bonuses, a luxury that, thanks to our representatives in Washington, was even specifically afforded to them in the bailout deal. We as a people are somehow furious with AIG but much less vocal about the politicians and other individuals who assisted in precipitating this disaster. Schoolteacher Shana Richey’s home in Palmdale, California, is now worth $200,000. Her monthly payment on her $430,000 mortgage was $3,700. Since deciding to default on her home and rent, Ms. Richey has used the extra money to buy season tickets for the family to Disneyland, plan a Carnival Cruise to Mexico, and purchase an $1,800 dining set [1].

Capitalism is a system built on risk-taking. Anyone who believes a commodity can inflate but not deflate is lying to himself. This has been noted by many other pundits, but privatizing reward while socializing risk only encourages more reckless behavior, leaving behind those of us forced to cover those losses. Our founders envisioned a nation based on personal responsibility.

1. “American Dream 2: Default, Then Rent,” The Wall Street Journal, December 10, 2009.

Our President can’t be serious. Really, this must be some sort of sick joke. On Monday, President Obama met with financial leaders from around the country in an effort to promote economic growth. The plan involved re-regulating banks and encouraging lenders to refinance mortgages and open credit to more businesses [1]. Certainly, the plan does have some advantages. However, there are still many concerns which still exist.

The mortgage bubble really began in 1977 with the Community Reinvestment Act which allowed the government to veto bank mergers and other major banking decisions. In the 1990s, Attorney General Janet Reno harassed banks into making more “community investments” through the use of studies aimed at proving racism in the lending market. However, the studies managed to only judge loans based on the borrower’s race, failing to factor credit scores as a part of the equation. Ultimately, banks were pressed to either make risky loans or be labeled as racists.

Then-President Clinton later began the bank-bail-out culture, from which Fannie Mae and Freddie Mac, formerly just housing assistance companies, were now free to make risky loans insured by you and me. As the government pushed creditors to lend through the 1990s and into the next millennium, more and more persons with poor credit were given high-value loans on low-value properties. Sadly, we all know what happened next – the market bubbled and collapsed and the taxpayers were left with the financial burden.

Yesterday, I talked about President Obama’s recent interview aired on CBS’s “60 Minutes” on Sunday night. The President aggressively blamed the banks for the financial mess, saying “[n]othing has been more frustrating to me this year than having to salvage a financial system at great expense to taxpayers that was precipitated, that was caused in part by completely irresponsible actions on Wall Street” [2]. While Wall Street did make some stupid moves, our government is the last institution which should be pointing fingers. It’s like Bernie Madoff calling someone unethical.

Unfortunately, beyond all comprehension, the President is – again – telling creditors to lend beyond their comfort level. Riddle me this: if the market bubbles – again – and we bail out creditors – again – will Obama – again – blame the lenders? Creditors don’t just sit on money if they could be lending it; lending is how they make their money. There’s a natural balance between risk and reward, and when that balance is disturbed, well, you know the rest of the story.

Moreover, no government has the right to force creditors to lend. President Obama certainly couldn’t walk up to your front door and say, “Hey there, Bob across the street needs help. He’s having financial problems, and I noticed you have $2,000 in your savings account. I know that amounts to your entire savings and that you have it set aside as a reserve in case you lose your job or have an accident, but you really need to think about Bob’s needs, too.” That would be silly, right? Banks are merely organized groups of people, and when they fail, real people (investors and employees) fail, and thanks to the government’s reckless actions, so do the taxpayers of the United States.

The writing is on the wall. When will we bother to read it?

1. “Obama to Banks: ‘Rebuild Our Economy’,” money.cnn.com, November 14, 2009.
2. “Transcript: President Barack Obama,” cbsnews.com, November 13, 2009.

“Clear!” yells the President as he presses the defibrillator paddles to hundreds of thousands of bad loans. The button is pressed, the loans jump, but then slump back down. “Someone get me another $38 billion!” he yells in exasperation. The nurses – they know he needs to move on to the next patient, one who has a chance of being saved. But these bad loans got him elected, and he’s not about to give up. Unfortunately, we know how this story will end. The bad loans will never be revived and the opportunity to save the others will pass.

As the Chairman of the Federal Reserve, Ben Bernanke, proceeds through his reconfirmation hearings, one must wonder how people get into office with no real comprehension of how free markets work. There seems to be some great disconnect; few people seem to understand that a market that can go up, outpacing real output, can also go down. Even fewer understand that when a market sector does go down, it must be allowed to do so, lest it start dragging everything else down with it.

Refinancing overpriced mortgages isn’t a solution. Buying toxic assets at the cost of taxpayers isn’t a solution. There’s no point in shoring up a $440,000 mortgage on a 498 square foot house [1]. Economies are viewed the same way civilizations, ecosystems, and other systems are – cyclic environments through which there is always input and output. Waste must always exit or be broken down to provide for new growth. Forest fires are often seen as healthy, clearing the dead undergrowth which would normally choke out new trees, clearing the way for new life.

Strangely enough, though, our politicians and government officials have decided to detach the economy’s large intestine at the end and reconnect it at the esophagus. Such practices force these bad loans to be digested again as we wait for them to lose their toxicity. Recirculating all that waste, though, is sure to give anyone a terrible case of stomach rot. Let’s get real – who thinks that we’re going to start seeing 2-bedroom, 1-bathroom houses selling for $700,000 again any time soon?

We need to let go; we need to let the forest burn down to make way for new growth. We need to stop punishing the whole of America for the misguided actions of a few? Historically, recessions have been followed by dramatic recoveries. Do we really need any other explanation for why our recovery is ‘slow and fragile’ [2]? And maybe it’s just me, but I don’t believe that anyone who is either too corrupt or too incompetent to file his own taxes properly, even after being warned, should be governing our recovery tax policy, either [3].

1. “Real Homes of Genius: Today we Salute you Santa Ana. 498 Square Feet for $440,000, What a Deal!,” drhousingbubble.com, March 26, 2007.
2. “OECD: ‘Slow and Fragile’ Economic Recovery in Sight,” cnn.com, June 24, 2009.
3. “Geithner Tax Woes Examined,” npr.org, January 14, 2009.

We must be clinically insane. Albert Einstein once suggested insanity to be the act of “doing the same thing over and over again and expecting different results.” Democratic leaders are discussing yet another massive government expenditure in reaction to our economic problems, and this time, it’s focused on job creation [1].

Wait, what?

I’m sorry, but I could have sworn that job creation was a major component of the $787 stimulus bill that was passed earlier this year. Of course, I could be wrong; maybe the real purpose of that bill was a vehicle to which politicians could attach over 9000 earmarks [2]. President Obama had initially promised that earmarks wouldn’t be included in the stimulus bill [3], but we know by now that our commander in chief and congress have no problem reneging on their word or worse, outright lying to us.

Sarcasm and cynicism aside, the first stimulus was intended to save jobs, create jobs, and provide a “jolt” to the economy [4]. According to the government’s recovery.gov,, $159 billion has been awarded, but not even $37 billion has been paid out. It’s panned out such that the spending is trickling in, unemployment is still spiking, 2.2% higher than the highest level they promised it would go, and we have spent billions of dollars on thousands of earmarks which have resulted in no net assistance to employment. Why would anyone in their right mind believe that this time the government will make good on their promises?

Furthermore, methods of funding being considered for this next bill include use of TARP repayments and a tax on internet gaming [1]. The TARP repayments were originally intended to go back to the taxpayers as the program was a loan, not an expenditure. And the internet tax amazingly flies in the face of the administration’s push for net neutrality, a policy which aims to keep companies from restricting or charging extra for access to any site or sector of the internet [5].

Ultimately, in the case of the TARP payments, the government is taking money it promised to return. In the case of an internet gaming tax, the government is trying to tell private business not to control customer internet behavior while pushing to do it themselves. Washington may as well ask for scuba equipment for Christmas for fear of drowning in their own hypocrisy.

1. “House Leaders Push for Jobs Bill,” The Wall Street Journal, November 18, 2009.
2. “Earmark Reform? Stimulus Bill Contains 9000,” cleveland.com, February 22, 2009.
3. “Obama Will Ban Earmarks from Stimulus Bill,” cnn.com, January 6, 2009.
4. “Obama Presses for Quick Jolt to the Economy,” nytimes.com, January 23, 2009.
5. “Fed Mulls Rules, Fees to Spur Net Access,” The Wall Street Journal, November 18, 2009.