Risk = Cost, Always
President Bush has decided to ask for allowances in federal programs to “protect” home owners. According to a recent MarketWatch article, the President’s plans include allowing stressed borrowers to refinance into government-insured loans, a related change to the tax code, the potential creation of a new government agency (the oddly New Deal-sounding “Reconstruction Mortgage Corporation”), and allowing government-sponsored mortgage giants Fannie Mae and Freddie Mac to provide greater liquidity in the mortgage markets. More proposals may be on the horizon.
One of the biggest problems facing contemporary economies is the public’s disassociation from the Free Market/Value/Risk/Return equation. It is a fundamental law of economics. In a way, it is the economic equivalent of forgetting that gravity works. If one is foolish enough to leap from the rooftop, nature will not care if you have neglected to study Newtonian physics—down you will go.
Feeling loss-risk of one's home or equity—or any loss really—reaffirms this vital principle (yes, I have personal experience). This is the same argument against most welfare policies in general. For example: The age-old principle of "If one does not work, one does not eat" has been worn down by the latent brand of American-style Socialism that is present in our society (yet is still somehow alien to our true selves). What we forget is that even if one does not work and We The People ensure that such still eats—someone somewhere is indeed still working to trade value for that service.
The danger here is well understood in the realms of economics. The Administration’s proposals would only serve to transfer risk from one party to another (us)—and substantial risk it is. To coin a phrase, Risk can be neither destroyed or denied—it can only be distributed or transferred. I dare say that, in reality, the home owner is not the intended party being protected. Rather, the home owner is the palatable "face" being placed in front of the media and teaming crowds to better protect the banks, hedge funds, and big-ticket investors.
It is important to understand those financial institutions and individuals we are thus protecting have been well compensated for the risk in that they have been paid higher interest rates than they otherwise would have, and the sub-prime loans at the center of today’s troubles carried significant, often onerous, fees and charges. The financial big-wigs were paid an amount commensurate with the chances of loss so that they freely accepted that risk in order to obtain the rich rewards that might have resulted.
They forgot that these rich rewards were not ever, in fact, guaranteed. Guaranteed rewards do not have the potential to generate large fees and interest payments.
It is my opinion that We The People are being prepared to swallow hard the incumbent risk (risk always = cost) to protect those who were aware of the risks and justly compensated for it—even if they are not so good at math or statistics. Funny how no one has suggested that the financial institutions return the interest rate premiums and other dollars they have collected in the mean time. As these spoiled and recalcitrant hedge funds dip their soiled hands into our collective coffers, they should well consider that a government willing to bail them out from such losses now will certainly return to collect a disproportionate share of the profits when the sun shines again. If we sell our souls for a little temporary financial stability now, we will all pay the price in freedom and tyranny later. This is another law of economics and politics.
I am glad that Milton Friedman and Ronald Reagan are not here to witness the GOP abdication of the principles which ushered in repeated Conservative political victories and decades of economic success.
Be well,
Huckleberry
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