Organizing for America | Grimes' Blog: Federally Bailing Out

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Federally Bailing Out

By Grimey - Oct 7th, 2008 at 6:20 pm EDT

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In the debate over the federal bailout of the finance industry in response to the subprime mortage debacle, there is a clear and pervasive conflict which has, in my purview, gone entirely unremarked upon. This is, in all likelihood, because it is such an old and staid and archaic conflict that it seems entirely out of place in what feels like a much different world than that which bore the conflict originally. That conflict is between the property-owner and the person who cannot afford property. In fact the very nature of the subprime mortage crisis was the injection of the lenders into the void between the two groups, wherein lending organizations offered home loans to those who could not afford them in order to fill the housing market with billions of imaginary, speculative dollars, so as to inflate the values of all real estate. Property owners benefited from this, as they saw the value of the property which they already owned rise, blissfully unaware that at the heart of the increase was phantom money injected by people who already owned the properties. For home values to have actually risen in accord with the stated value, real income for the vast majority of Americans would have had to have risen enough that the millions of recipients of subprime loans could have earned enough to pay off the debts. Given the trajectory of the rest of the economy, especially the selling off of the American manufacturing sector and the erosion of the middle class, this was clearly a flawed assumption. The situation was predicated on the charming but dated myth that income growth was possible in America, which it no longer is. Aside from the upper echelon of earners, wages and opportunities are shrinking, and there are, in fact, fewer and fewer people who can afford to shift from renters to owners. Population growth, which drives demand for real estate, is dwindling, and immigrants, the one group with the manpower to drive up real estate prices, are never given an opportunity to earn enough to own property. If anything, real estate prices should have been shrinking, or at most growing in line with inflation. The ability to make the transition to owner from renter, one which lies at the heart of the “American Dream”, is falling further and further away.

   So it was, in a sense, reassuring to see the reluctance with which Congress approached the bailout plan. What it does, essentially, is entitle the federal government to spend the accrued and projected tax wealth of all Americans for the next twenty years on buying all of the properties which were bought with subprime mortgages at something along the lines of 120% to over 200% of their real current worth. They are doing this so that the people who already own property don’t have to see the value of their homes drop by some 20% on average, down to what the market would actually bear. Who gets hurt by this? It’s the legion of tax-paying renters in the world who have to see real estate values hover well beyond what they can afford, well beyond what they are or will ever be capable of achieving, so that the already landed gentry don’t have to be sad when they see that their home values have depreciated, or that they borrowed more money against their house than their house was actually worth. If real estate values were allowed to fall to what a correctly functioning market would actually support, it would enable many renters to make that transition to ownership without the assistance of predatory and short-sighted lending institutions. What the bailout does is keep this possibility out of their reach. It exacerbates the chasm between the haves and the have-nots, which is exactly what caused this disaster in the first place. The have-nots are paying the government, and will continue to pay the government for some time, to keep them disenfranchised.

   What else are we buying with our $700 billion dollar investment? Aside from the inflation that will naturally follow an injection of that much cash into the market (directly into the hands of the people who got us into this disaster in the first place,) the government is buying “mortgage-backed securities,” which is a fancy way of saying “houses.” Houses and houses and houses. Thousands of them. I haven’t seen any numbers yet, but on the uneducated assumption that the average mortgage purchased by the government is in the neighborhood of $250,000, that $700 billion dollars will buy some 2,800,000 houses. So congratulations, tax-paying renters of America, you are now a partial owner of almost three million houses which you will never be able to actually afford. No one has described what the government plans to do with these houses. The talk has been about keeping their mortgages as securities, which would mean that the original lending institutions will probably buy them back from the government for less than what they were sold for, and the lending institutions will begin anew their quest to inflate real estate prices in the interest of short-term profiteering. Obviously, I think this is the worst plan imaginable.

The most equitable solution would be to offer the properties at auction to people who do not already own property or own, at most, one piece of real estate. The government would lose money, but it has already resigned itself to this fate. Non-owners could offer their services as shills for real-estate groups, and would therefore have the opportunity to profit nicely, if not actually make the transition to land owner.   Whatever it does it should act quickly, as the alternative will be the federal government trying to pay for the maintenance of three million houses that will otherwise fall into disrepair and depreciate in value even further. The other alternative would be to move the ownership of the houses under the purview of the Secretary of Housing and Urban Development, and for the government to rent the houses directly to renters with the ultimate goal of selling the house to the renters. This is not preferable, however, as it attaches a dramatic burden to a government which is already overburdened.

There are interesting opportunities which this massive land grab offers, however. There are entire suburban developments of foreclosed houses, such as those outside of cities like Phoenix, whose values have deteriorated even further due to the dramatic rise in the price of oil, which makes their remoteness a liability. What is the government supposed to do with an entire barren subdivision that no one wants? Army base? Artist’s enclave? If it were really interested in boosting the value of the these real estate groupings it now owns, it would concentrate in developing infrastructure such as high-speed rail lines to these developments; undertaking tasks which only it has the ability to accomplish, and which now have the potential to earn dramatically greater returns on its investments than it would have were it limited to collecting the taxes on those properties. In this sense it would be similar to what is going on in Dubai, where the government is also a developer, an arrangement which has produced dramatic results, even if their long-term efficacy has yet to be determined.

Even worse off now than the tax-paying renters are municipalities which depend upon property taxes for their income. Their revenues and, in turn, spending, were based upon projections that saw a line going up and anticipated its going up ad nauseum. Now almost every city in America is bankrupt, and the result will be a dramatic decline in city services, such as police, sanitation, and transit. This is a travesty, as the single most effective tool the government could have used to forestall or mitigate this crisis would have been to dramatically increase the money it gave to city governments for the hiring of additional municipal workers at wages that allowed them to purchase homes. If the $700 billion dollars had been disbursed thusly, to people working directly for the betterment of their environs, they would have seen an actual increase in the value of the homes in those areas, as access to and the quality of city services is one of the most influential factors in determining a home’s value. Home prices would not deteriorate so calamitously, as there would be a dramatic increase in people who could actually afford to purchase homes. And, most importantly, maybe our cities would see a renewed interest in domestic industrial and manufacturing investment as improved civil services, coupled with the rising cost of international production due to the rise in transportation costs, make such investments competitive. Job growth spurred by domestic manufacturing investments would increase the earnings and, in turn, the spending power of Americans, which would in turn grow the economy and spur demand which would in turn result in investment and so on and we would find ourselves and a positive growth cycle, as opposed to the negative growth cycle in which we are currently mired.

As for how this relates to the current presidential election; McCain has absolutely no idea about any of this. I would not expect him to understand any of this. He has never ever in his entire life demonstrated any competency any addressing this sort of situation, and his influences on economic policy are the people who ushered in this disaster in the first place. Obama hasn’t impressed me much in many of his previous prescribed panaceas (Ethanol? Really?) but I feel like he at least understands that the solution must come from the bottom up, and that growth has to come by giving as many people money as possible, not by allowing the continued hoarding of it by a privileged few. What mystifies me more than anything is the reticence of wealthy people to recognize that he wants to grow the entire economy, not just redistribute wealth, but that the single largest impediment to economic growth at the moment is the concentration of wealth, and the lack of spending power by the vast majority of Americans. So I will say it now, despite however counter-intuitive it may seem: rich people, the only way for you to get richer is to give up some of your money. The economy is broken, and that is the only way to fix it.

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