Word on the street is that today, President Bush will speak to the nation, asking Congress to step up to the plate and try to help distressed American debtors. You know, the ones who bought at the real estate market top and took out terrible subprime loans -- even though plenty of people warned them not to? The ones who didn't bother worrying about resetting interest rates or future payments, because they figured they could always refinance later, or sell into what was then a red-hot, always-inflating market?
Memo to the president: You don't fix a deflating asset bubble by reinflating it. That's what expanding FHA insurance (reportedly, the brunt of the president's proposal) would do. When the government takes on the risk that lenders should hold, it lowers the cost of lending. And that, as recent history has shown, makes people do all sorts of silly things -- such as, say, sign up for terrible teaser-rate ARMs.
Still, there have been lots of headlines, so the politicians have to flip-flop. Thing is, the record shows that the "calamity" the press is reporting on so breathlessly isn't actually occurring. Sure, credit has gotten tighter. Credit markets do that. As I discussed yesterday, the economy is pushing along nicely. And today, we see that consumer spending has rebounded. Clearly, the problems from the housing bubble aren't pulling the rug out from under the entire country.
Who really rakes it in?
Besides, I've got a feeling that once Congress takes the handoff, this will turn out to be a big-money rescue mission masquerading as populist politics. The stump speeches will claim that the effort will "strengthen American homeownership" or some such nonsense. (They won't bother to mention that their bubblicious policies put the cost of homes out of reach of too many Americans, forcing some of them to resort to these dangerous, gimmicky loans in the first place.)
Want to know who'll really benefit? Just ask yourself, "Who really made money from the housing and subprime lending orgy?" The answer: Hedge funds; Wall Street facilitators like Moody's (NYSE:MCO), Goldman-Sachs (NYSE:GS), Bear Stearns (NYSE:BSC), Citigroup (NYSE:C), and Bank of America (NYSE:BAC); and homebuilders like Toll Brothers and KB Home (NYSE:KBH).
Who will reap the billions of dollars in benefits if U.S. taxpayers subsidize the risk on all those rapidly deteriorating mortgage-backed securities? Yup, these same millionaires and billionaires, like Robert Toll or Countrywide Financial (NYSE:CFC) CEO Angelo Mozilo, who dumped tens, even hundreds of millions of dollars worth of stock just ahead of the inferno, while they were still pouring kerosene on the kindling.
The other "victims"
I've no doubt that there are some "innocents" out there who are in over their heads because they got rooked by some fly-by-night lender. That's unfortunate. But a huge portion of the "victims" in this so-called calamity aren't victims at all. They were speculators motivated by greed and fueled by ignorance, and they deserve to take their drubbings. In the biggest bubble states, California, Florida, and Nevada, non-owner-occupied homes comprise up to one-third of defaults, even in the prime lending space.
In other words, these are exactly the people who should lose their money. Take this admission from a New Jersey speculator quoted in that Wall Street Journal story:
Sazzad Khandakar, 43 years old, an information-technology manager and father of three in Monroe Township, N.J., is among the nation's distressed home investors. In early 2005, he bought a $410,000 condominium and a $390,000 newly built single-family home, both in Orlando, Fla. "Everybody around me bought an investment home in Florida," Mr. Khandakar said. "Florida was all over the news; my friends were doing it. ... I didn't want to miss out."
Everybody did it. I didn't want to miss out. Besides helping Wall Street's millionaires and billionaires keep their yachts, that's the kind of moronic financial decision-making that a bailout will encourage.
Foolish final thought
Let's get back to real basics: There's risk in investing, any investing -- and I hesitate to put real estate speculation into that category. It's a vital, necessary part of the system, encouraging capital to be allocated to the most profitable enterprises, among other virtues.
The risk of losing your nest egg (or more, if you're using leverage) is the only thing that keeps asset prices sane. Sanity sometimes takes a long vacation, but when it comes back, it's pretty cranky. That spells hardship for those who got in late. However, that hardship is necessary to keep people from doing stupid things in the future. It's not government's -- nor the taxpayers' -- duty to cover for people whose bad bets don't come in, something Fed Chair Ben Bernanke, to judge by his remarks today, realizes. Let's hope the president and Congress get it through their heads, too. In the long run, government-sponsored price supports only make things worse.
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At the time of publication, Seth Jayson, a top-10 CAPS player, had no positions in any company mentioned here. See his latest CAPS blog commentary here. View his stock holdings and Fool profile here. Fool rules are here.
