I heard a great line once. “If the prefix ‘pro’ means the opposite of ‘con’, then what is the opposite of ‘pro’gress? . . . ‘con’gress.”
Okay, taking out loans to pay off debt, which is what this $700 billion bailout is, is a terribly bad plan! It’s not going to create any wealth, it’s not going to save the economy, and it’s not going to fix our problems. It’s a bad idea! It’s thinking like this that causes financial disasters, rather than cures them. Like financial guru Dave Ramsey often says, “If you do poor people stuff, you’ll be poor. If you do rich people stuff, you’ll be rich.” It’s not a matter of income, it’s a matter of being smart with what you’ve got. This bailout is “poor people stuff”. Poor people pay credit cards with credit cards. Why are they poor? Because they’re stupid with money! Congress is about to embrace stupid in a most Machiavellian way! If you divide 700 billion by the number of people living in the U.S. (270 million), you get $2593. That’s the amount that every man, woman, and child in America will owe to countries like China (yes, our government doesn’t have $700 billion in spare cash, so they’ll be borrowing it from other countries), as a result of this bailout. That means a family of six would owe, $15,558 plus interest, which could grow to be absolutely massive if the debt is not paid quickly! Historically, how good has congress been at paying off debt?
There are also some very real political, and social consequences to this bailout. Do we want the government to take over and run Multi-trillion-dollar private corporations? Remember what a big deal it was when Hugo Chávez took over, and nationalized the Venezuelan petroleum industry, and shut down their national broadcast media? Why was it such a bad thing when Hugo Chávez nationalized corporations, but if our own Congress devises similar plans here in America, it’s all daisies, and butterflies?
If we do this, it will be a huge step forward for socialism in America. And yes, this is a BAD thing! Think about it. Do you really want the government running private companies? Imagine your grocery store being like the D.M.V. or the Social Security Administration, or Medicaid? Holy cow, what a nightmare!
Let me try to explain what’s going on.
It all started back when with the collapses of Enron, Worldcom, Adelphia, and others which were using certain accounting procedures to artificially inflate the value of many of their assets. When they went bankrupt, their shareholders lost huge amounts of money. CEO’s went to jail, people got mad, congress got involved, and amidst all of this turmoil a new law called The Sarbanes-Oxley Act of 2002 was passed.
Sarbanes-Oxley is an attempt to legislate and regulate corporate ethics. (Generally, I don’t believe it’s possible to legislate ethical behavior, but I digress.)
Sarbanes-Oxley makes each company, each day, restate what their assets are worth. This is called “Mark to Market”. It keeps companies from having bloated balance sheets.
It’s also part of what’s causing the current banking meltdown. Here’s how:
A mortgage is basically a lien against a house. Banks have been issueing sub-prime mortgages like crazy, and then bundling them up together, and selling them as bonds to other banks/investors. This is how they get the money they need for financing all these new mortgages. The problem is that the economy has slowed, and many of these sub-prime mortgages are adjustable rate mortgages (ARM’s), and there is real risk that many of these mortgages will default as people become unable to afford their payments, both as a result of increasing rates, and escalating energy prices taking a big bite out of their budgets. Because of this, the mortgage bond market has slowed, and banks are having difficulty finding buyers for sub-prime mortgage bonds. In other words, the bonds have lost market value.
On of the things killing banks is that they now have to “Mark [down] to Market” the value of these bond assets. This is a huge problem, because the market value of these bonds is now much less than their real value. The real value of these bonds includes the value of all the houses included within them, which could be foreclosed and converted into real assets if the individual mortgages were to default. However, the market value of these bonds is very low due to the fact that no one wants to buy them right now. In other words, Sarbanes-Oxley accounting rules are making these banks look bankrupt on paper, which is preventing them from being able to entice enough investors to remain solvent.
Much better than congress buying up these bonds in a 700-billion-dollar bailout, would be to temporarily suspend the “Mark to Market” rule, in the case of sub-prime mortgage bonds, in order to allow banks to account for these bonds at their intrinsic value, rather than their market value. Instead of buying the bonds, the government could insure them (in the case of foreclosures) against losses. This should cost much less than the 700-billion-dollar bailout plan, and should help breathe some life back into the mortgage bond market, allowing distressed banks to solve some of these problems privately, without requiring the government expenditure of nearly a trillion American tax dollars, and the largest government takeover of private industry in our nations history.
Please, call your Congressman/woman and urge him/her not to support the bailout plan! Instead, urge them to look at the “Mark to Market” rule.
