They Rob You With a Fountain Pen

“As through this world I’ve wandered, I’ve seen lots of funny men;
Some will rob you with a gun; And some with a fountain pen.

Woody Guthrie

Look out folks, you’re about to get fleeced.  We’re getting sent the bill for the bankers’ bacchanalia.  They had the party, made off with the dough, and we’re going to end up paying the price.

Here’s a brief description.  Housing prices continue to fall.  Down some 8% last year; another 8% in the first quarter this year, with a long way to go.  By next year, experts predict one in four homes with a mortgage will be underwater – worth less than what is owed.

Rapacious bankers and investors drove this folly, inflating a housing bubble by huckstering mortgages to folks who couldn’t pay them or didn’t understand them, inventing exotic securities based on mortgages, marketing them widely, without a clue to their actual worth. Under the conservative hand of Alan Greenspan, the Federal Reserve sat idly by as the bankers had their predators’ ball.  Now the banks are in trouble.  Their basements are filled with securities that have no market.  They are scrambling to sell off assets, raise new capital, and unload the lousy paper.

Who gets stuck with that?  Check out the article by the invaluable Charles Morris from the Washington Independent, here [1]. Morris, a recovering banker himself, provides a peak behind the screen.

The Federal Reserve, he estimates, has traded the banks about $500 billion in Treasuries (US bonds, backed by the good faith of American taxpayers) in exchange for dubious instruments, about $200 billion for mortgage backed securities.  It is paying 98 cents on the dollar for securities that may be worth 60 cents, or may be worthless. 

Meanwhile, the government is considering a bailout of Freddie Mac and Fannie Mae, two private government sponsored entities that finance about ½ of the $12 trillion US housing market.  In the fourth quarter of last year and the first quarter this year, Morris reports, these entities have been financing mortgages at about twice the level of actual mortgage borrowing.  Where did the extra money go?  It went to take more of the worthless paper off the hands of banks and investors.

If Freddie and Fannie go belly up, the entire financial house of cards will collapse.  So, as John McCain promised yesterday, they won’t be allowed to fail.  But if the taxpayers end up bailing them out, then we’re looking at a staggering increase in US debt, and losses of hundreds of billions.

Trying to find a floor for housing prices makes a lot of sense.  Helping homeowners who got fleeced by making the banks eat their losses while allowing people to keep their homes either as renters or with affordable mortgages makes sense also. 

But remember one thing.  The bankers and investors are walking away with millions of dollars in private profits built upon reckless gambling, secure in their confidence that the federal government would not let them fail.  And now we’re getting the bill

The only sensible way for Americans to pay this bill would be to levy new taxes of the wealthiest Americans who profited from the folly.  Whenever you hear conservatives complain about taxes, whenever you hear them rail about waste in government, whenever you hear their spurious arguments justifying tax breaks for the wealthy, remember the above. 

The biggest waste in government is bailing out private follies.  The largest thievery comes from privatized companies making out like bandits.  The biggest crooks aren’t welfare moms; they are the guys who rob you with fountain pens.  And if we have to bail them out to limit the damage to the innocent, the least we can do is tax the money they made off with to pay the bill.