The Bailout Singularity
posted at 2:55 pm on August 8, 2010 by Doctor Zero
Reuters columnist James Pethokoukis tells us the markets are preparing for a fantastically expensive “August Surprise” from President Obama:
Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion… The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses.
This vote-buying scheme would come on top of $400 billion in taxpayer dollars already pumped into Fannie and Freddie… just a few years after Democrats assured us there was “no crisis at Freddie Mac, and particularly Fannie Mae” (Maxine Waters) and the corporations had no “safety and soundness problems” (Barney Frank.)
Fannie and Freddie are among many black holes gobbling up tax money these days. In the two years since Barack Obama took the bailout football from George W. Bush and ran it several trillion yards, the American economy has degenerated into a massive life support system for its most insolvent components. Financial institutions, auto companies, and “stimulus” targets have been infused with hundreds of billions taken from taxpayers. Each new, politically connected corporation declared “too big to fail” becomes a crushing burden on a nation too weary to hold them all up.
This “August Surprise,” presented to underwater mortgage holders by our children on behalf of the Democrat Party, detonates the current line of garbage from panicked liberals… who have been floating a new meme that rampant deficits are caused by insufficient tax revenue. Spending will always be the problem, because spending is easy.
Politicians like Obama will not hesitate to pile bricks of debt on the back of future generations, in order to buy votes today. This creates permanent entitlement obligations, which are the only thing today’s government can pass along to its successors. When each new Congress convenes, debt is its only inheritance. Democrats are still throwing more I.O.U.s onto a trillion-dollar deficit, even as the interest on our national debt approaches $300 billion per year.
No amount of additional tax income would slow this process down. For decades, the liberal State has proven that it sees increased income as an opportunity for even more spending. It never considers reducing its operations, and returning money to the taxpayers. Remember how all the Democrats magically transformed into deficit hawks when a federal budget surplus appeared in the 90s? There was never any question of reducing the size of government. The only alternatives they saw were “irresponsible tax cuts,” or keeping the surplus in a noble attempt to pay down the deficit they were suddenly obsessed with. This obsession ended the instant it conflicted with their spending urges. No politically expedient bout of fiscal responsibility will ever lead them to cut up the credit cards they have stolen from us.
Massive bailouts are an extreme form of irresponsible socialist spending. The proposed Fannie Mae giveaway would not improve the long-term health of the housing or financial industries. It will produce a very short-term political result, namely making the recipients feel gratitude toward their Democrat sugar daddies in November. The cost will be long-term, including an increase to those massive deficits, and the vampiric interest payments to service them. The cost will also be measured in further defaults from Fannie and Freddie clients, who have every reason to expect further write-downs, and in the bitterness of the poor chumps who took out responsible mortgages and made payments on time.
Bailouts produce the same effect on a national scale that welfare causes in individuals. The bailout subsidizes poor financial practices, and leads to long-term dependency. The high rollers seated in the boardrooms of companies officially classified as “too big to fail” are not likely to be responsible businessmen. Why should they be? They can look out from the boardroom windows and see streets teeming with the millions of saps who will cover their losses. They’ve purchased political insurance against accountability.
Bailouts also leave unsustainable business models running, like badly-tuned cars with bricks on the accelerator pedals. General Motors didn’t fail because it wasn’t making decent cars, or enjoying adequate sales. It failed because it had a ridiculous business model, with union labor costs completely divorced from reality. This model would have dissolved during normal bankruptcy proceedings. Instead, taxpayers were looted for billions to keep it afloat. None of the factors that killed it the first time have changed much.
These are the factors leading to the bailout singularity, in which the productive economy collapses beneath the pressure of feeding its ulcers and tumors. Every subsidy is a tax on those who don’t receive it. Risk, investment, and thrift dissipate when they become less rewarding than political connections to the leadership of a command economy. Expensive plans designed to deny the consequences of mistakes and crimes lead to the blindness of a system that learns nothing from its errors. A contracting economy will never generate enough blood to sustain an enormous State that knows no limits to its hunger, and refuses to give back anything it takes.
The blood feeding that State is not just money. It’s liberty. The individual citizen is given no way to refuse the demands of a government that can’t wait to subsidize favored constituencies. The right to save, invest, or spend the benefits of our working hours diminishes steadily. The next titanic bailouts will be for bankrupt states and union pension plans. I think they will break the system, because either the populace will resist them with absolute force, or the collapse into a lifeless singularity will be complete… and America is not ready to become lifeless yet.
Cross-posted at www.doczero.org.
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