Friday, March 21, 2008

Banks bailed out, homeowners sinking,CST-EDT-jesse18.article

Banks bailed out, homeowners sinking
March 18, 2008

The economy is sinking. Two million homeowners are in or headed to foreclosure. One in 10 homes is "under water," worth less than its mortgage. Gas and food prices are soaring. Jobs are down; incomes have never recovered. The subprime mortgage collapse has turned into a global credit crisis.

So last week, to reassure "hard-working Americans," President Bush traveled up to Manhattan to speak to the New York Economic Club, an audience of bankers and investors terrified that the bottom is falling out of the credit markets.

Bush allowed that the economy was entering into a "rough patch," but warned against "overcorrection." He spent most of his time talking about what he opposed doing for the economy, including any effort to compel banks to renegotiate mortgages that are in trouble. For homeowners generally, no bailout was possible; we have to let the market work.

For the bankers, however, it was a different story. Bush praised the Federal Reserve and the Treasury for their "strong action" to "promote stability in our markets." He was hailing the $400 billion bailout the Fed has begun to help banks with their sinking subprime mortgage loans, including the dramatic overnight deal to save Bear Stearns, an investment house that was about to go belly up. Bear Stearns, it was decided, was simply too large to fail.

A bailout for the bankers who caused the problem, and nothing for the homeowners that are its victims? Homeowners didn't create the subprime mortgage market. They didn't create the system that rewarded brokers for making loans without any concern of whether they could be repaid or not. They didn't profit from the predatory lending scams, the hidden clauses, accelerating interest rates, etc. Buccaneer bankers and hedge-fund operators created the Ponzi scheme -- and profited from it big-time.

Both the borrowers and the lenders made the same bet -- that home prices would continue to go up. Now as they crater, both are in trouble. And the administration is saying they'll bail out the bankers but provide little beyond counseling for the homeowners. That is not right.

And it is not clear it will solve the problem. Foreclosures are driving down housing prices in neighborhoods across the country. If the water keeps coming in the bottom of the boat, then no matter how much the Federal Reserve keeps bailing out the luxury suites, the whole ship may still sink.

The cost of the Bear Stearns bailout is not disclosed. There is no word about any agreement with executives to take pay cuts or return multimillion-dollar bonuses. Once more, the Federal Reserve is sending a clear message to Wall Street. You are playing with the House's money. What you win is yours to keep; we'll cover the losses. No wonder the gambling gets more and more frenzied.

Congress needs to step up here. First, we need legislation that will enable homeowners to negotiate lower principle and payments to avoid foreclosure. Investors should have to take the loss for loans that should never have been made.

Second, it is clearly time to renovate and strengthen the rules for banks and investment houses. No bank or investment house can be too big to fail without having its activities regulated, its gambles limited, its balance sheets inspected.

After his speech, Bush went on to headline a $1.4 million, $20,000-a-plate fund-raiser for the Republican National Committee. It was held, the Washington Post reports, in a posh co-op that was completed a month before the 1929 stock market crash that ushered in the Great Depression. You couldn't make this stuff up.

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